Republicans and business interests are laying the groundwork for litigation against the SEC over any new mandates for companies to report climate risks and make other environmental, social, and governance disclosures.
Several Republican attorneys general, the American Petroleum Institute,
The SEC is considering mandatory disclosures on greenhouse gas emissions, climate risks, and commitments to combat climate change. The agency would allow “mission creep” by requiring climate disclosures and other ESG reporting that have the potential to violate companies’ First Amendment rights, West Virginia Attorney General Patrick Morrisey has told the commission.
“There is no doubt that the Commission has an important job to safeguard public trading, but ESG is not part of that,” Morrisey said in a statement to Bloomberg Law. “So it is hard to see how the SEC is fulfilling its legal mandate by focusing on climate change.”
Morrisey told the SEC in March that West Virginia is willing to fight it in court if climate disclosures aren’t kept voluntary, previewing litigation the agency is likely to face if it pulls the trigger on mandatory reporting. A group of 15 Republican attorneys general then joined Morrisey earlier this month in telling the SEC that climate reporting would go beyond its investor protection duties under Section 13(a) of the Exchange Act.
An SEC representative didn’t respond to requests for comment.
‘Name and Shame’
Requiring corporate disclosures beyond what average investors deem important conflicts with companies’ First Amendment rights, according to some business interests.
The American Petroleum Institute and U-Haul have argued climate disclosures aren’t always material to normal investors, showing the SEC doesn’t have a compelling interest to demand the reporting.
The SEC doesn’t violate the First Amendment when it requires companies to provide truthful and material information to protect investors from fraud and deception, API told the agency in a letter. But the SEC could infringe on it if the commission directs companies to report immaterial information that could be unavoidably inaccurate, controversial, or “subject to honest debate,” the oil and gas industry trade group said.
Mandatory ESG reporting that isn’t material would be an “unconstitutional ‘name and shame,’” U-Haul added in another letter to the SEC.
Gensler has pushed back against concerns about the materiality of ESG disclosures, saying reasonable investors are looking for the information. The SEC has received several supportive letters from investment managers and pension funds, including BlackRock Inc., The Vanguard Group Inc., and the California Public Employees’ Retirement System.
Comply or Explain
The SEC could avoid a First Amendment fight by requiring companies to either make climate disclosures, or explain why they can’t, the Natural Resources Defense Council said in a letter to the agency. Such a rule isn’t ideal, but could be deployed sparingly for disclosures like climate scenario analyses, according to the environmental group. The NRDC unsuccessfully petitioned the SEC for corporate environmental disclosures in the 1970s.
The SEC already allows “comply or explain” flexibility when companies report their code of ethics for senior financial officers, for example. The agency is currently reviewing Nasdaq Inc.'s plans to require companies listed on the exchange to have diverse board members—or explain why they don’t.
Using the option on climate disclosures is unlikely to give investors the information they need, Ciara Torres-Spelliscy, a professor at Stetson University College of Law, told Bloomberg Law. The SEC doesn’t need the “comply or explain” tool to avoid running afoul of the First Amendment, she said.
“It’s a rather extreme position to say that issuers have a First Amendment right to deceive investors on the matter of climate,”said Torres-Spelliscy, who lectures on constitutional law and corporate governance. “Investors are clearly interested in ESG disclosures.”
Watching and Waiting
Businesses aren’t necessarily opposed to making climate disclosures. Many voluntarily release sustainability reports that disclose their greenhouse gas emissions and other environmental information.
API and others have advocated for this flexibility with the SEC. The oil and trade group last week released a template that
The organization hasn’t decided whether it will sue the SEC over any climate disclosures it mandates, API senior vice president Frank Macchiarola said in response to a question from Bloomberg Law during a call with reporters.
API has previously alleged the SEC infringed on companies’ First Amendment rights and won in court. The U.S. District Court for the District of Columbia in 2013 vacated the initial version of an agency rule requiring oil, gas, and mining companies to disclose payments to foreign governments after API challenged it. The agency ultimately adopted weaker rules in 2020.
“We’ll wait to see what the SEC ends up proposing,” Macchiarola said.