Following the Supreme Court’s decision in West Virginia vs. Environmental Protection Agency (EPA) to limit the agency’s authority to act on climate change, opponents of the Securities and Exchange Commission’s (SEC) forthcoming climate disclosure rule have unequivocally declared that the opinion dooms it, too.
Nothing could be further from the truth.
In the recent EPA ruling, the Supreme Court held that the so-called “major questions doctrine” applies when a court determines an agency has taken on new, extensive power that vastly expands its ability to address extraordinary policy questions. According to the Supreme Court, under this doctrine, it will only strike down regulations if agencies make an “unprecedented” departure from past interpretations of legal authority or “assert highly consequential power beyond what Congress could reasonably be understood to have granted.” To that end, one scholar argued that the doctrine should instead be named the “extraordinary questions doctrine,” as agency actions can be major yet permissible.
The SEC’s proposed climate disclosure rule does not fit this description. With this proposed rule, the SEC would merely require the same types of financial risk disclosures that it has required since the agency’s founding in 1934, following the Great Stock Market Crash of 1929. Without accurate information of issuers’ financial health and risks, the Roaring ‘20s were a time of frenzied speculation, in which uninformed investors took out loans in order to invest in companies and ride the wave of riding valuations. Companies with the best advertising, rather than opportunities for future success, received investments. After the bubble burst and caused widespread economic harm, Congress created the SEC to mandate and enforce financial disclosures for the protection of investors and maintenance of fair, orderly and efficient markets. The SEC has spent the past nine decades requiring public companies (known as issuers) to disclose their financial-related risks and other information relevant to their valuation — from cash flows and cybersecurity strategies to other environmentally related risks.
Building on this long history and the understanding that climate change poses significant financial risks and opportunities for issuers, the SEC in March proposed requiring these firms to disclose the expected effects of climate change on their operations. With this information — including whether climate change has affected or is expected to affect the issuer’s business, whether the issuer has adopted a transition plan or set climate-related targets, and whether the issuer would be at risk from changes in consumer preferences — investors could better assess the value of the investment and would be able to decide whether to invest in a particular stock or bond, based on their own risk tolerance. As the SEC stated, the proposal would provide investors with “decision-useful” information “to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.”
The SEC’s proposal does not violate any of the tests the Supreme Court has newly defined as part of its major questions doctrine. The SEC has not reinterpreted its statutes to find “an unheralded power.” It has not proposed a “transformative expansion in its regulatory authority.” It has not regulated “beyond what Congress could reasonably be understood to have granted.” Instead, the SEC is relying on long-standing interpretations of statutes authorizing it to require issuers to disclose information that is helpful to investors — just as Congress intended.
In order to justify their argument that the SEC’s proposal violates the court’s major questions doctrine, opponents of the proposal have been forced to obfuscate, stretch and imagine. They claim that the SEC’s proposal “would tee up shifts of capital from fossil-fuel-based industries … toward industries that are supposedly greener” or that the rule would “transform” the SEC into an “environmental regulator.” Nothing could be further from the truth.
Recognizing that it has not been charged by Congress with addressing climate change nor does it have the expertise to do so, the SEC’s proposal does not require issuers to reduce greenhouse gas emissions or develop climate-related transition plans. In fact, the proposal does not require issuers to change any management practice at all. Instead, the proposed rule simply recognizes that investors are hungry for information about issuers’ climate-related risks and opportunities and requires issuers to provide investors with that information, reducing information asymmetries between issuers and investors and allowing capital markets to function effectively and efficiently.
The simple truth is this: In finalizing the climate disclosure rule, the SEC would not be violating the major questions doctrine but would instead be fulfilling its congressional mandate of ensuring members of the public have the information they need to make informed investing decisions.Todd Phillips is the director of financial regulation and corporate governance at the Center for American Progress.