Does The SEC Have The Authority To Mandate Company Climate Disclosures?

The U.S. Securities and Exchange Commission (SEC) is expected to release new regulations in October that would mandate that public companies release climate change-related disclosures. The rules then would be finalized over the next year.

The SEC already has received hundreds of public comments on the matter, and in a recent article Winston & Strawn partner Jonathan D. Brightbill and associate Jennifer P. Porter examined arguments against the SEC’s move toward additional disclosures.

Brightbill and Porter report that many of the comments the SEC already has received oppose more mandatory regulations. Opponents include corporations, states, and nonprofit organizations. A group of state attorneys general asked that the SEC to “remain focused on its historic mission and role rather than seeking to expand its congressional mandate into unrelated social matters — particularly where companies are showing themselves adept to provide the type of information that customers and investors actually demand in this area.”

Policy groups like the Competitive Enterprise Institute argued the First Amendment’s compelled-speech doctrine means that the government cannot force an individual, group, or corporation to express specific beliefs and that these rules would be forcing them to do so. If corporations are required to comply with disclosure requirements, opponents argue, some corporations would be forced to make remarks about their operations that are subjective or disparaging.

Porter and Brightbill argue, “When promulgating any climate-related disclosures regulations, the SEC will need to tread carefully.” They noted that the U.S. Court of Appeals for the District of Columbia Circuit already has addressed a similar issue. In National Association of Manufacturers v. SEC, the court partially invalidated the Dodd-Frank Act’s conflict minerals disclosure requirement on compelled-speech grounds. The court found that the compelled speech did not sufficiently advance the SEC’s mission of “preventing consumer deception.” (As readers will recall, MSCI opposed the SEC’s conflict minerals regulations.)

According to Brightbill and Porter, another issue is whether the SEC’s existing statutory authority is sufficient to require detailed disclosure of climate-related metrics. This argument also was at issue in the conflict minerals litigation. The two lawyers conclude, therefore, that to justify mandatory disclosures “the SEC will need to demonstrate how particular requirements will ‘advance the purposes of the securities laws’ and ‘promote efficiency, competition, and capital formation.’”

Read the full article, and stay tuned to Connecting the Dots as the SEC’s process moves forward.