“E” Doesn’t Stand for Environment
The Securities and Exchange Commission’s proposed climate-disclosure rules exceed its statutory authority.
The Securities and Exchange Commission is nearing a decision on a proposed rule that would require publicly traded companies to indicate how their investments affect the climate and to disclose any climate-related financial risks pertinent to their investment decisions. The rule would force public companies to pay billions in extra annual costs, all while exceeding the commission’s statutory authority—as reports that the SEC is considering a relaxation of its original proposal are an encouraging sign.
The Enhancement and Standardization of Climate-Related Disclosures for Investors rule was proposed back in March 2022. Under its terms, companies would have to disclose not only their direct greenhouse-gas emissions but also indirect emissions from purchased electricity or other forms of energy, as well as emissions produced by third parties with which they do business. That translates to billions of dollars in extra regulatory filing costs, as firms hire the lawyers, accountants, and policy consultants needed to ensure compliance.
Such a massive drain of resources would distract from companies’ corporate missions and capital-development goals. Already, companies have begun to beef up their finance teams, and analysts have noted concern about the difficulty and cost of finding external consulting. The SEC itself estimates that total annual disclosure costs for affected firms will surge from $3.8 billion to just over $10.2 billion, a 250 percent increase. The added burden could prove devastating for smaller businesses.
The intention, of course, is to motivate the private sector to shift investments away from fossil-fuel companies. Potential investors will be hesitant to invest in companies deemed by the agency to pose high-level climate risks.
Yet neither the Securities and Exchange Act of 1934 nor the Securities Act of 1933 actually licenses the commission to compel financial disclosures based on climate risk. The rule will therefore face legal challenges on the grounds that it constitutes overreach of the SEC’s statutory authority. And the SEC will be hard-pressed to explain in court how its rules advance the mission of protecting investors and ensuring fairness in capital markets.
According to former SEC commissioner Joe Grundfest, the agency is acting as an unofficial enforcer of environmental policy in place of the Environmental Protection Agency, under the guise of assessing material financial risks. “The federal government . . . already requires public reporting of GHG emissions, but through the EPA, not the SEC,” Grundfest explains. “The U.S. Supreme Court has explained that more recent legislation that speaks with precision supersedes prior laws that address the same matter more generally. Applying this rule could make it easy for courts to conclude that the Clean Air Act’s more-precise, more-recent delegation to the EPA divests the SEC of whatever GHG disclosure authority it can otherwise claim under vaguer, older securities statutes.”
Even if the climate disclosure rule were successfully implemented, a recent Supreme Court ruling may hamstring the SEC’s capacity to bring enforcement actions against companies that choose to ignore the rule or that, according to the agency, pose a substantial environmental risk. The Court ruled in Jarkesy v. SEC that the SEC can no longer choose to bring enforcement action within its own in-house courts, where it wields a substantial advantage. The Court deemed such a power to be legislative in nature and therefore unconstitutional. Jarkesy forced the SEC to relinquish its discretionary ability to adjudicate its cases in-house before an administrative law judge, giving litigants leverage to appeal their challenges against the SEC before federal courts.
Parties contesting the SEC’s climate-disclosure rule in court will surely cite the “major questions doctrine” in constitutional law. That principle holds that unless Congress has given an agency clear statutory authorization to make rules on subjects of “vast economic and political significance,” then such rulemaking is unlawful. Last year, in a 6–3 opinion, the Court argued in West Virginia v. EPA that the EPA lacked the statutory authorization and therefore the authority to regulate carbon dioxide emissions in existing power plants. That does not bode well for the SEC climate rule.
The SEC shouldn’t abandon its original administrative focus. Whether the agency finalizes its rule in April may depend on how serious it deems the legal challenges that will probably result. Playing the role of an enforcer of environmental policy is outside of the agency’s statutory purview.
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