Tuesday, June 7, 2022
Comment Letter of Securities Law Scholars on the SEC’s Authority to Pursue Climate-Related Disclosure
This post alerts everyone to a comment letter, drafted by Jill Fisch, George Georgiev, Donna Nagy, and Cindy Williams (signed by the four of them and 26 other securities law scholars, including yours truly and Ann Lipton), affirming that the Securities and Exchange Commission’s recent proposal related to the enhancement and standardization of climate-related disclosures for investors is within its rulemaking authority. The letter was filed with the Commission yesterday and has been posted to SSRN. The SSRN abstract is included below.
This Comment Letter, signed by 30 securities law scholars, responds to the SEC’s request for comment on its March 2022 proposed rules for the “Enhancement and Standardization of Climate-Related Disclosures for Investors” (the “Proposal”). The letter focuses on a single question—whether the Proposal is within the SEC’s rulemaking authority—and answers this question in the affirmative.
The SEC’s authority for the Proposal is grounded in the text, legislative history, and judicial interpretation of the federal securities laws. The letter explains the objectives of federal regulation and demonstrates that the Proposal’s requirements are properly understood as core capital markets disclosure in the service of those objectives. The statutory framework requires the SEC to adjust and update the content of the federal securities disclosure regime in response to the evolution of the economy and markets, and, in recent decades, the SEC has done so to require disclosures on a variety of subjects from Y2K readiness, to cybersecurity, to human capital management, to the effects of the Covid-19 pandemic. Rules mandating climate-related disclosure fit with this pattern of iterative modernization. Such rules do not represent a foray into new and uncharted territory, since the SEC has a long history of requiring disclosure on environmental and climate-related topics dating back more than 50 years. Finally, the federal securities laws do not impose a materiality constraint on the SEC’s authority to promulgate climate-related disclosure requirements.
The Comment Letter therefore concludes that the SEC has the statutory authority to promulgate the Proposal, and that the climate-related disclosure rules under consideration are consistent with close to nine decades of regulatory practice at the federal level and with statutory authority dating back to 1933 that has been repeatedly reaffirmed by Congress and the courts.
There is more that has been, can, and will be said about the Commission's rulemaking proposal as a matter of process and substance. But I will leave that for another day. For now, we just wanted you to know about the filing of the letter and offer you an easy way to find it and review it.
Thanks for this comment, Paul. I hope to find time to post on this issue, since I have an abiding interest in free speech and a respect for Sean's work. I will just say here that the compelled speech debate vis-a-vis the SEC's mandatory disclosure regime as authorized by Congress has existed throughout the development of that regime. I did write a bit about this fifteen years ago in my article "Personal Facts About Executive Officers: A Proposal for Tailored Disclosures to Encourage Reasonable Investor Behavior" (42 Wake Forest L. Rev. 749, 779 (2007)). The brief discussions in that piece and others, read together with Sean's article on the current tensions around climate-related disclosures, tee up a number of points for further discussion. More to come!
Posted by: joanheminway | Jun 8, 2022 7:45:59 AM
Thanks for calling attention to your letter. It presents broad general points I agree with, including the structure of the SEC’s statutory mandate, the required updating of its regulations to market conditions, its previous guidance on environmental disclosures, and the absence of a statutory materiality requirement.
My concern is with the actual proposal the SEC has put forth, which the letter does not much engage with as far as I could see. I think I could concede pretty much all your letter’s points and still find the proposal as written invalid.
For one example, the SEC cites investor demand as the primary source of its investor protection thesis, yet offers evidence from an elite global subset of environmental activists and asset managers, many of which are based outside the U.S. The SEC would do well to poll of American investors to determine whether they prioritize climate change information before asserting such "investor demand." The existing polls cast doubt about the SEC's impressions.
For another, the SEC’s cost-benefit analysis assumes that the disclosure is somehow limited but in fact it contains no limiting principle. Your letter explains that there is no materiality requirement in the statutes. But rules without such a requirement are clearly far more costly, yet the proposal seems blissfully unaware of its unlimited costs. For that matter, there is no principled limit on what the SEC can compel companies to disclose, so long as it can cite “investor demand.”
As you know, a different group of law and finance professors (for which I am the coordinating author) have detailed these problems with the proposal that the SEC has put forth. (It is also posted on ssrn: https://papers.ssrn.com/abstract_id=4109278.) For the sake of the SEC’s hard-working staff, I hope the Commissioners will take these detailed criticisms seriously. I would hate to see their hard work go poof in federal court.
Posted by: Lawrence Cunningham | Jun 8, 2022 9:54:35 AM
Thanks, Larry, for chiming in here. The letter expressly limits itself to the authority question, explicitly noting that the signatories "do not all agree on the policy issues facing the Commission with respect to the optimal scope of environmental, social and governance (ESG) disclosure, including climate-related disclosure." That's where the analyses you frame and allude to in your comment come in! Your letter raises some nice points and I expect they will result in actions and responses. I do hope that, in this space and in others, we engage those (and many other) issues as the proposal continues to receive analysis and thought. For many, it seems, some--but not all--of the proposal holds promise in providing better investor protection, maintaining market integrity, and fostering capital formation. But a lot remains to be seen.
Posted by: joanheminway | Jun 8, 2022 10:11:27 AM
FWIW, Paul, my problem with Sean's article is that his premise is that climate change is debatable, rather than an established fact, and his reasoning proceeds from there. I do not think climate change is debatable (nor do I think it's debatable that it's attributable to human behavior).
Posted by: Ann Lipton | Jun 10, 2022 10:47:28 AM
While I would advise Professor Griffith to remove the section of his draft that cites looney tune climate deniers to show that climate change is controversial, that’s not how I read his main argument. What’s controversial about the proposed rule is that it claims to address investor protection but actually doesn’t, because a) the required disclosure is not directly concerned with pecuniary consequences; b) the disclosure interests (but doesn’t protect) only a subset of investors, namely large asset managers. I have two questions about that: first, hasn’t the SEC long addressed certain groups of investors in its rulemaking, for example 144-a or the Commission’s focus on “Main Street” investors? Second, and a much larger issue, climate change if left unchecked will eventually have pecuniary consequences for the global economy, hence all assets in all markets, and therefore is directly a subject for investor protection. But the SEC has never addressed the effect of systemic climate risk on investors. How can we get their attention in that regard?
Posted by: Paul Rissman | Jun 11, 2022 6:16:20 AM
Hi Paul. I agree with you there's nothing unusual about targeting disclosure to large asset managers - that's why we have S-3 - but I disagree with you about the importance of climate change denialism to his argument. His premise is that because climate change itself is in doubt (as well as its causes), there is reason to suspect that the SEC is not in fact imposing these requirements for financial/pecuniary reasons. So I don't think that the rejection of climate change science can be read out of the paper. Once you accept that climate change is real, then,as you say, the financial consequences are obvious, and it's harder to argue the SEC is acting for nonfinancial reasons.
Posted by: Ann Lipton | Jun 11, 2022 3:37:48 PM
Sean's content on pages 57-58 of his fine paper really has nothing to do with the First Amendment issue that he is addressing or the argument that he makes, that the proposed disclosures are compelled speech in violation of the First Amend. So, the inclusion of that content continues to mystify me and I would love to see him delete it from his next draft.
Posted by: Bernard S. Sharfman | Jun 13, 2022 2:47:22 PM
Probably worth quoting Sean in order to avoid getting distracted by straw men:
The proposed climate-based disclosure rules proceed from a set of premises. These are: (1) that the earth’s climate is changing in ways that are infelicitous to human habitation, (2) that those changes are the result of human actions, principally relating to carbon dioxide emissions, to which businesses contribute, and (3) that human action to limit carbon dioxide emissions could halt the infelicitous consequences of climate change. Each of these premises is necessary to support mandatory climate disclosures…. Moreover, the SEC insists that it is acting to protect investors, not merely the environment. Therefore, we must add a fourth premise: (4) that corporate climate practices influence corporate economic performance. Without the fourth premise, there is no necessary link between the proposed climate disclosures and investor protection, a linkage which is necessary in order for the SEC to have rulemaking authority. Each of these four premises is contested.
Posted by: Stefan Padfield | Jun 17, 2022 11:14:40 AM
Another relevant quote from Sean, over at the Harvard Corp Gov Blog today:
"rest assured that seeing the SEC’s climate rules as political does not mean you are a climate denier"
Posted by: Stefan Padfield | Jun 17, 2022 11:27:14 AM
Thanks, Paul, Ann, Bernie, and Stefan. These comments extend beyond the limited scope of the letter but are all interesting in their own right. I know we all will keep the conversation going! And I appreciate that.
Posted by: joanheminway | Jun 17, 2022 11:34:30 AM
I’m wondering what the scholars think about the compelled commercial speech angle, such as elaborated in Professor Griffith’s article?
Posted by: Paul Rissman | Jun 8, 2022 3:17:07 AM