The Securities and Exchange Commission is planning to propose new mandatory disclosure rules on climate change and other topics in the environmental, social, and governance area (ESG). This is a priority for its chair and other commissioners, but they have not paid sufficient attention to the question of the SEC’s legal authority to impose the disclosure obligations.
Supporters of climate-change disclosures either simply assume that the SEC has the necessary power — or misunderstand the rules the SEC must follow to order new disclosures. The rules that supporters cite are taken out of context or are vague and relatively easily satisfied.
The Supreme Court’s normal and straightforward method of determining an agency’s rulemaking power is to read the words of the relevant statute in their context and with a view to their place in the overall statutory scheme. The complete statutory picture shows that the SEC does not currently have the power to require climate-change disclosures.
The two main securities acts limit the SEC’s power to issue disclosure rules to specific types of information closely related to the disclosing company’s value and prospects for financial success. The disclosures originally required in a registration statement for a public offer are an example of the subjects Congress wanted to cover. Congress listed 32 disclosure items, covering topics such as the business of the company selling the securities, the management, capital structure, financial statements, and the use of proceeds.
When naming the information a company should disclose under the securities laws, Congress consistently has restricted the subjects to areas such as those. Legislative history explained that Congress deliberately enumerated categories of information for company disclosure and did not give the SEC or its predecessor a general power to order disclosures. It did not want the SEC to have “unconfined authority to elicit any information whatsoever.”
Climate-change disclosure rules would be different from the kind of disclosure requirements Congress permitted the SEC to write. First, the subject matter would be different. The common denominator of a new set of disclosure obligations for climate-change would be climate and environmental issues rather than the features of the company bearing on financial performance.
Second, the objective of SEC climate-change disclosures would be to use the securities disclosure system to advance a public policy goal extraneous to the federal securities laws without congressional approval. The truth is that the aim of climate-change disclosures is predominately the policy goal of combating the causes of climate change and reducing fossil fuel emissions.
Some climate-change disclosure rules could be written to fall within the subject headings Congress has specified, but such additional disclosure rules would not be necessary. The current public disclosure rules for companies comprehensively cover the areas of company information of interest to investors. When global warming or other environmental issues affect the operations or financial performance of a specific company, many of the existing disclosure rules require discussion of the effects.
Contemplated climate-change disclosures also would be different because, at least under some proposals, they would demand companies to produce lengthy and complicated reports in addition to the already extensive set of disclosures. Climate-change information would become a second, separate body of disclosures, and that is another reason to question the SEC’s current legal authority.
Whether the SEC acts with or without proper statutory power might sound like an arid question, but it matters.
How the SEC proceeds bears on our form of self-government and on the accountability of government officials to the voters. Congress has members directly elected by voters and is charged with deciding on national policies and enacting them into law. Federal agencies such as the SEC do not have elected officials and have responsibility for executing the laws that Congress passes. An agency that adopts a regulation outside its statutory authority acts on the personal views of a small number of people and creates an unacceptable risk of implementing an arbitrary and subjective policy choice as law.
To preserve the legitimacy and accountability of the lawmaking function, the SEC should respect the role of Congress in setting national policy and direction. Disclosure of climate-change information might be a good idea or a bad idea as a matter of public policy — this column does not take a position on the desirability of such disclosures — but what is indisputable is that Congress should make that decision and not the SEC on its own.
Andrew N. Vollmer is a senior affiliated scholar with the Mercatus Center at George Mason University. He is former professor of law, general faculty, University of Virginia School of Law; and former deputy general counsel of the Securities and Exchange Commission.