Major Questions Doctrine Could Thwart SEC Climate Fraud Fight

A pending lawsuit against the Securities and Exchange Commission threatens to reverse course on 100 years of investor protection laws.

In that lawsuit, fossil fuel companies and other powerful business interests filed briefs in court arguing that the SEC’s new disclosure rule about the financial risks of climate change is illegal—because, in their view, climate change is controversial.

The petitioners argue that the rule runs afoul of the major questions doctrine that the Supreme Court embraced two years ago, which says federal agencies can’t regulate issues of economic or political importance—i.e., controversial topics—without express authorization from Congress.

Following this course could put us in the dark about the economic impact of climate change, while also barring the SEC from disclosure rules about anything opponents deem “controversial.” Do we really want that?

Many companies have made big claims about cutting emissions and moving towards more sustainable practices. But companies have an incentive to exaggerate environmental credentials and their statements often can’t be verified.

At the same time, investors want to know whether a company is preparing for regulatory changes that require emissions cuts, which could affect investment returns. They also want to know whether a company is preparing to face the impacts of climate change.

If a company is engaged in greenwashing—making misleading claims about a company’s environmental practices—it could face significant legal risks that might affect its financial position. Unfortunately, regulators have fallen behind in responding to these kinds of fraud.

The SEC recently issued a disclosure rule designed to fix these problems. Fossil fuel firms and other trade groups filed nine lawsuits against this rule. These kinds of lawsuits have become routine as conservative groups challenge everything from rules about board diversity to investment duties. But the new cases against climate risk disclosure threaten the foundation of our modern financial markets in a starkly new way.

Petitioners in the litigation challenging the SEC’s climate rule claim the agency can’t issue this genre of regulation because climate change is too controversial under the major questions doctrine.

In practice, this new doctrine is open to interpretation. An NYU School of Law study released a year after the case decision shows that courts apply it selectively as a “grab bag” of factors that support outcomes aligned with the judge’s political affiliation. If opponents of the climate risk disclosure rule win, and the court finds the SEC can’t regulate in any area deemed “controversial,” the agency’s ability to safeguard investors against fraud would be significantly hampered.

Without the SEC’s comprehensive disclosure requirements, states would be free to choose whether to mandate disclosures, leaving investors vulnerable. For many, access to information about certain financial risks associated with their investments would cease too.

While states already have anti-fraud laws and blue sky laws that play a role in the securities market, removing the federal floor for disclosure requirements is like what happened in the wake of the Supreme Court’s decision in Dobbs, which reversed the Roe v. Wade decision. Now a woman’s ability to access abortion healthcare is determined by the state she lives in and, significantly, her financial position.

We already see a similar divergence in state investor protection laws, as conservative states pass “anti-ESG” laws that restrict access to environmental risk analysis and cost taxpayers money, while more progressive states pass conflicting climate disclosure requirements. This kind of regional disparity in the financial markets is costly and destabilizing, creating compliance headaches for companies that do business in multiple states and threatening retirement accounts.

Congress established the SEC in response to widespread fraud during the Great Depression, passing two acts nearly 100 years ago. Over the years, the SEC has followed Congress’s instructions to regulate fraud in new products and technologies. Take the emerging challenge of cryptocurrency: a valuable currency that exists exclusively in a digital format and is untethered to any central bank. The SEC has been able to take meaningful regulatory and enforcement actions to reign in cryptocurrency asset abuses and market manipulation.

The SEC’s efforts have enjoyed bipartisan support. For example, it issued initial cybersecurity disclosure guidelines during the Trump administration, with then-Chairman Jay Clayton and a unanimous group of Commissioners releasing a statement and interpretive guidance.

More recently, in 2023, the commission finalized a rule to enhance and standardize cybersecurity disclosures. The details of this rule have been met with conservative resistance, but the underlying risk from cybersecurity is recognized by liberals and conservatives alike, as Clayton made clear in 2017.

The ability to require adequate disclosures for important areas of risk, even controversial ones, is critical. Climate-related risks, for example, can have a significant impact on a corporation’s bottom line. In 2023 alone, federal research shows that climate events cost the US over $92 billion. Information about how a corporation is handling these risks is important to investors and yet difficult for them to access.

While opponents claim that climate-related risk disclosures are controversial and beyond the scope of the SEC’s authority, the SEC has required environmentally related disclosures since the 1970s, as this 1979 release about environmental compliance expenses shows.

There are certain areas in our lives where we rely on the government for protection: airplanes, schools, trains—and our bank accounts. Agencies are often tasked with putting the rules into place that protect us.

The Supreme Court’s most recent cases about administrative agencies—Loper Bright Enterprises v. Raimondo and Securities and Exchange Commission v. Jarkesy—damage the ability of an agency to implement its statutes. The SEC lawsuit could extend this harm, with particular ramifications that could threaten your savings and ours.

The SEC’s mandate is to ensure efficient, transparent, and fraud-free markets. Tying its hand in the instance of climate-related financial risk threatens the entire disclosure scheme that protects our savings.

The case is State of Iowa, et al v. SEC, 8th Cir, No. 24-01522.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Cynthia Hanawalt is director of climate finance and regulation at Columbia University’s Sabin Center for Climate Change Law, and was chief of the Investor Protection Bureau for the New York State Office of the Attorney General.

Bethany Davis Noll is executive director of the State Energy & Environmental Impact Center at NYU School of Law, and was Assistant Solicitor General in the New York State Office of the Attorney General.

Write for Us: Author Guidelines