San Diego Law Review

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The Securities and Exchange Commission (SEC or Commission) has proposed a rule that addresses the disclosure needs of investors with respect to climate change. The proposal would require that public companies tell investors about the risks to their business associated with climate change and explain the system and strategy of governance for monitoring those risks. In addition, the proposal would mandate the disclosure of certain greenhouse gas emissions.

The SEC’s proposal arrived contemporaneously with the Supreme Court’s announcement of the “major questions” doctrine. A deliberate attempt to limit the authority of the executive branch, the doctrine would restrict agencies from adopting rules on politically or economically important topics unless “clearly” authorized by Congress. The doctrine in part arises out of a deep-seated suspicion of agency motivations for regulatory action in politically sensitive areas. While still under construction, the fundamental tenet of the doctrine is that certain policy decisions are reserved for Congress unless specifically given to agencies.

Some have raised concerns that the efforts by the SEC to regulate climate change disclosure amount to a “major question” that requires explicit authorization by Congress. To the extent the exercise of authority is characterized as novel, the SEC will need, in order to withstand a challenge under the major questions doctrine, to establish sufficient limiting principles. These arise less form the particular topic and more from the need for, and purpose of, the rule. Instead, they arise out of the purpose of the Securities Exchange Act of 1934. Congress adopted the legislation in order to address an existing inadequate system of corporate disclosure. The system did not sufficiently protect investors and resulted in the misallocation of capital. The SEC was expected not to devise an entirely new system of disclosure but to fix one already in place.

In the case of climate change disclosure, most of the issuer-oriented information comes from voluntary disclosure in the form of sustainability and other types of reports not filed with the SEC. The system has yielded a voluminous amount of information that, from the investor perspective, is inconsistent, non-comparable and unreliable. Issuers, for example, routinely disclose emission reduction targets. The SEC’s climate change proposal is designed to address these failings. Indeed, inactivity would amount to a policy decision to push investors towards a largely unregulated disclosure environment in a manner inconsistent with what Congress intended in adopting the Exchange Act.

This article will briefly discuss the “major questions” doctrine then look at the history of the Exchange Act and the disclosure regime that existed prior to the adoption of the legislation. The problems associated with climate change disclosure strongly resemble those that existed when Congress acted during the Great Depression. Whatever limits may or may not exist on the authority to require disclosure in the first instance, the SEC was given the authority to ensure the efficacy of disclosure regimes arising from private ordering that failed to meet the needs of investors and caused a misallocation of capital.

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