Part 3: Briefs Supporting the SEC Climate-Change Disclosure Rules Commit Serious Errors
Part 3: Briefs Supporting the SEC Climate-Change Disclosure Rules Commit Serious Errors
Using the 1970s Environmental Disclosures to Demonstrate Authority Omits Contrary Background
This is my third post discussing significant errors in the briefs supporting the SEC in the case in the Eighth Circuit challenging the SEC’s climate-change disclosure rules (“Climate Disclosures”). The first post is here and the second post is here.
This post discusses the statements and actions from the SEC on environmental disclosure rules issued in the 1970s. Several briefs from supporters of the Climate Disclosures made consequential mistakes when they cited and relied on the disclosure rules from the 1970s as evidence that the SEC had legal authority to adopt the new disclosures. See the SEC brief 9-10, 34-35; Former SEC Officials and Scholars of Law, Finance, and Economics Amicus 14-21; Americans for Financial Reform Education Fund Amicus 7-13.
My amicus brief explained that the SEC’s actions on environmental disclosures in the 1970s argued against rather than in favor of finding statutory authority for the SEC’s Climate Disclosures (16-20). Together, my amicus brief and the discussion below make the following points:
In 1975, the SEC said it lacked the power to order environmental disclosures under the Securities Act and the Securities Exchange Act. The SEC confirmed that conclusion in 2016.
The SEC required a few, narrow environmental disclosures in the 1970s but did so because it had a specific statutory mandate from Congress, the National Environmental Policy Act of 1969. The SEC did not have special statutory authority for the Climate Disclosures.
Notwithstanding the specific statutory mandate from Congress, the SEC in the 1970s was deeply resistant to and skeptical of ordering issuing and reporting companies to disclose information on environmental matters. A fair minded reading of a long explanation of the SEC’s thinking in 1975 makes this clear. In addition, the SEC fought in court for six years against an effort to compel broad environmental disclosures.
Both the SEC brief and an amicus brief sought to extract something favorable about the SEC’s disclosure authority from the environmental proceedings in the 1970s, but the arguments in the briefs were materially incomplete. The environmental rulemakings in the 1970s were overwhelmingly harmful to the arguments supporting the SEC’s authority to require the Climate Disclosures.
Both the SEC brief and an amicus brief exaggerated the legal significance of the SEC’s 2010 Guidance on climate-change disclosures.
Arguments of the SEC and Supporters
The SEC’s position is that the 1970s environmental disclosures are precedent establishing that the SEC had power to issue the Climate Disclosures. In the SEC’s statement explaining the adoption of the new rules (“Adopting Release”), the SEC discussed its statutory authority and argued that the text and “broader context” of the statutes authorized the SEC “to ensure that public company disclosures provide investors with information important to making informed investment and voting decisions.”[1] A major example given in the Adopting Release was that “the Commission for the last fifty years has also required disclosure about various environmental matters.” (Adopting Release 21685; see also id. 21670)
In its brief to the Eighth Circuit, the SEC made the same point. The brief told the Court that the SEC had and used power under the main securities acts to require environmental disclosures as far back as the 1970s (9-10, 33-35). The SEC brief did concede that, in 1975, the SEC declined to adopt rules that would have required comprehensive disclosure of environmental effects. The brief explained that, in 1975, the SEC had authority to order disclosure of information important to a reasonable investor but made the “choice” not to require comprehensive environmental disclosures because, “on the record before the agency at the time,” the information was not of use or interest to investors (35).
Amicus briefs supporting the SEC also argued that the 1970s environmental disclosures evidenced the SEC’s statutory power to adopt the new climate-change disclosure rules. The Former SEC Officials and Scholars of Law, Finance, and Economics Amicus brief asserted that the SEC used authority in the Securities Act and the Exchange Act “to mandate disclosure on environmental matters since the Nixon Administration” (“Scholars Amicus Brief” 1; also 2, 14, 21). The response brief from states intervening to support the SEC said the new climate-change disclosure rules built on decades of SEC regulations, including disclosure of certain environmental-related risks since the early 1970s (5, 45).
The Eighth Circuit briefs on the SEC side therefore viewed the 1970s environmental disclosures as helpful on the authority issue, but a complete and fair-minded reading of the record from the 1970s about environmental disclosures tells a different story. The dominant themes from the SEC at the time were doubts about its powers and dubiousness about the wisdom of SEC-mandated environmental disclosures, even though the long SEC statement in 1975 had some back and forth about reasons for and against requiring broad environmental disclosures. The statements and actions from the SEC in the 1970s establish the following key points.
No Legal Authority Under the Securities Act and the Securities Exchange Act
In 1975, the SEC said it lacked the power to order environmental disclosures under the Securities Act and the Securities Exchange Act. The SEC had the “view that the discretion vested in the Commission under the Securities Act and the Securities Exchange Act to require disclosure which is necessary or to consider appropriate ‘in the public interest’ does not generally permit the Commission to require disclosure for the sole purpose of promoting social goals unrelated to those underlying these Acts.” SEC, Environmental and Social Disclosure, 40 Fed. Reg. 51656, 51660 (Nov. 6, 1975) (“1975 Statement”). Disclosures under the Acts were to be limited to information about the financial condition of and matters of economic significance to the disclosing company. Id. 51658. Congress decided that “the primary interest of investors is economic.” People invest in securities “to obtain a return.” Id. 51664.
As recently as 2016, a different set of SEC commissioners reconsidered and confirmed the 1975 conclusion. In 2016, the SEC again looked at its legal power to require disclosures on environmental and social issues. The SEC had received comments recommending increased disclosure on those topics.
The SEC summarized its 1975 conclusion on lack of power and said the relevant statutes had not changed:
In 1975, the Commission considered a variety of “environmental and social” disclosure matters, as well as its own authority and responsibilities to require disclosure under the federal securities laws. Following extensive proceedings on these topics, the Commission concluded that it generally is not authorized to consider the promotion of goals unrelated to the objectives of the federal securities laws when promulgating disclosure requirements, although such considerations would be appropriate to further a specific congressional mandate.
Business and Financial Disclosure Required by Regulation S-K, 81 Fed. Reg. 23916, 23971 (Apr. 22, 2016) (concept release) (footnote omitted). The SEC noted that Congress had not given new statutory authority for disclosures in these areas. Id. 23971 (“The current statutory framework for adopting disclosure requirements remains generally consistent with the framework that the Commission considered in 1975.”). Nonetheless, the SEC requested comment on, among other things, whether disclosure requirements on sustainability or public policy issues “would be consistent with the Commission’s rulemaking authority.” Id. 23973.
Specific Statutory Mandate for the 1970s Environmental Disclosures
Given the disclaimer of authority under the Securities Act and the Exchange Act, why did the 1970s SEC require some environmental disclosures (see below) and what is different between then and now? The critical difference between the early 1970s and now, as I said in my first post on briefs in the case, is that, in the 1970s, the SEC had a specific statutory mandate from Congress for the environmental disclosures, the National Environmental Policy Act of 1969. The SEC did not have special statutory authority for the Climate Disclosures and relied on disclosure statutes that were in the original Securities Act and Securities Exchange Act for them.
In 1975, the SEC said it would not have issued any rules on environmental disclosures if Congress had not enacted NEPA. The Commission concluded that “although it is generally not authorized to consider the promotion of social goals unrelated to the objectives of the federal securities laws, it is authorized and required by the National Environmental Policy Act of 1969 (NEPA) to consider the promotion of environmental protection as a factor in exercising its rulemaking authority under the” Securities Act and Exchange Act. 1975 Statement 51656; see also id. 51662, 51663. NEPA was essential to the SEC’s environmental rulemaking in the 1970s, yet, in a case about statutory authority, the SEC never mentioned NEPA in the brief to the Eighth Circuit.
The SEC Resisted the Congressional Directive
The SEC brief and amicus briefs on its side did not convey the deep aversion the SEC had in the 1970s to ordering environmental disclosures. The SEC strongly resisted the congressional directive, but both the SEC brief and the Scholars Amicus Brief sought to depict the 1970s proceedings in a positive light.
As noted, in the 1970s, the SEC believed environmental disclosures were outside the scope of its role. It applied NEPA in a narrow way to preserve the areas of SEC expertise: “we believe that NEPA authorizes and requires the Commission to consider the promotion of environmental protection along with other considerations in determining whether to require affirmative disclosures by registrants under the Securities Act and the Securities Exchange Act.” “NEPA does not require any specific disclosures ….” 1975 Statement 51661-62 (quotation marks and footnote omitted).
The SEC rejected nearly every proposed environmental disclosure obligation made to it during proceedings in the 1970s. Requiring disclosure of all information that might be of interest to some investor would result in excessive and confusing detail and less useful disclosure. Id. 51659-60. The costs of broad environmental disclosures would exceed the benefit to investors, id. 51660, 51662, would insert the SEC into environmental programs not closely connected to the SEC’s statutory activities, id. 51661-62, and would be “voluminous, subjective and costly,” id. 51662. NEPA mainly addressed the actions of the federal government affecting the environment. Construing it to require disclosures from private corporations would be inappropriate because NEPA was not intended to create wide-ranging environmental control over the private sector. Id. 51661-62.
Investors that supported environmental disclosures in the 1970s told the SEC that the information would have economic significance and would be relevant to an investment decision. The SEC took those comments into account but found that those investors would use the information more in voting on shareholder proposals or negotiating policy changes with corporate management than in making a decision to buy or sell a security. Id. 51664-65.
In the end, the SEC concluded that NEPA required only three narrow and specific adjustments to required securities disclosures. See SEC, Disclosure with Respect to Compliance with Environmental Requirements and Other Matters, 38 Fed. Reg. 12100 (May 9, 1973) (adopting (1) disclosure of material effects that compliance with laws on the protection of environment may have on capital expenditures, earnings, and competitive position of disclosing company and (2) disclosure of any material legal proceeding to enforce laws relating to the protection of the environment and disclosure of any environmental legal proceeding brought or known to be contemplated by government authorities even if not material for a private case); SEC, Conclusions and Final Action on Rulemaking Proposals Relating to Environmental Disclosure, 41 Fed. Reg. 21632 (May 27, 1976) (adopting rule on disclosure of capital expenditures for environmental control facilities).
During this same period, the SEC vigorously litigated for years against an effort by the Natural Resources Defense Council to have the agency require extensive environmental disclosure rules. The D.C. Circuit resolved the litigation and traced its history. NRDC v. SEC, 606 F.2d 1031, 1036-40, 1062 (D.C. Cir. 1979). The court of appeals said that the NRDC filed a broad petition for environmental disclosure rules in June 1971. In early 1972, the SEC declined to propose the rules desired by the NRDC but proposed more limited forms of corporate disclosure. The NRDC sued the SEC in March 1973. In April 1973, the SEC adopted some of the proposed disclosure rules, but the NRDC remained unsatisfied and supplemented the lawsuit. In December 1974, the D.C. district court agreed with the NRDC that the SEC rulemaking proceedings had been inadequate. The SEC re-opened its rulemaking proceedings to fulfill the district court’s remand instructions but, after receiving comments, announced that it would not adopt the disclosure rules proposed by the NRDC or various alternatives. One announcement was the 1975 Statement; another occurred in 1976. Conclusions and Final Action on Rulemaking Proposals Relating to Environmental Disclosure, 41 Fed. Reg. 21632 (May 27, 1976). After these SEC statements and decisions, the NRDC moved for summary judgment in the litigation, and the district court granted the motion. The SEC appealed to the D.C. Circuit, which reversed the district court and ordered it to dismiss the NRDC complaint.
Materially Incomplete Descriptions of the SEC’s Considerations in the 1970s
The SEC brief on page 35 had a paragraph about the 1975 Statement that was nearly totally wrong. The brief said the 1975 SEC made a decision not to order comprehensive disclosure of environmental effects as a “choice … based on the record evidence.” The SEC brief said the 1975 SEC had a choice because it recognized it had legal authority to require broad environmental disclosures: “Congress had authorized the agency to require disclosure of ‘such information as the Commission believes is important to the reasonable investor’” (citing 1975 Statement 51660). The 1975 SEC decided not to order the disclosures because of the lack of record evidence on use and interest to investors. See also SEC brief 44-45.
The errors in the paragraph are almost too many to list.
Contrary to the SEC brief, the 1975 SEC said several times it was “generally not authorized to consider the promotion of social goals unrelated to the objectives of the federal securities laws.” In the absence of NEPA, the SEC could not require disclosure of environmental matters even if the SEC believed the information was important to investors.
The page of the 1975 Statement that the brief cited did not make the claim about authority granted by Congress for disclosure rules. The passage quoted from the 1975 Statement about authority to require disclosure of information “important” to investors was actually about a discretionary policy applied by the SEC to require only “material” information to be disclosed when it balanced “various competing considerations” concerning a proposed new disclosure. 1975 Statement 51660.
In 1975, the SEC did not say importance to investors or investor interest was sufficient for a disclosure rule. It said the opposite: “We have serious reservations as to whether Commission rulemaking can be premised upon an attempt to quantify investor interest ….” 1975 Statement 51663. The 1975 SEC then discussed investor interest because the district court handling litigation about the SEC’s environmental disclosures wanted the SEC to address investor interest. Id.; see also id. 51657.
The SEC in 1975 did not ground its decisions on a record that was not adequate but that might be sufficiently developed in the future to permit comprehensive environmental disclosures. The record at the time was bulging, id. 51657, and the SEC reached a final conclusion to reject ordering such disclosures “for a number of reasons” and rejected a modification of the proposal because “the additional costs and burdens … greatly outweigh resulting benefits to investors.” Id. 51662.
The paragraph in the brief was an effort by the current SEC to extract something favorable about its disclosure authority from the 1975 Statement when the proceedings in the 1970s were actually overwhelmingly harmful to the arguments in the SEC brief.
The paragraph in the brief and the excuse of an inadequate record, repeated on 44-45 of the brief, is contradicted by the SEC’s reaffirmation in 2016 of its lack of disclosure power on environmental and social issues, which did not refer to an insufficient record in the 1970s.
The SEC brief did not inform the Eighth Circuit that, as of 2016, the agency remained of the view that “it generally is not authorized to consider the promotion of goals unrelated to the objectives of the federal securities laws when promulgating disclosure requirements.” The failure to bring that reconfirmation to the attention of the Court is difficult to understand.
The Scholars Amicus Brief also found much in the environmental disclosure requirements from the 1970s to support the SEC’s adoption of the Climate Disclosures (14-21). The brief had several important omissions:
The brief concluded this argument with a “note for the Court that the Commission has, for fifty years, continuously exercised its authority under the 1933 and 1934 Acts to require disclosures related to the environment” (21). The note omitted mention of NEPA as essential statutory authority for the 1970s environmental disclosures even though parts of the brief leading to the note had acknowledged the role of NEPA.
The Scholars Amicus Brief did not bother the Court with the detail that the SEC in 1975 took a strong position that its disclosure authority in the Securities Act and the Exchange Act did not permit disclosures on environmental or social policies. The brief did not say that in 2016 the SEC confirmed this lack of authority.
The brief did not inform the Court that, with only a few exceptions, the SEC in the 1970s rejected nearly every proposal for environmental disclosure rules and was generally antagonistic to environmental disclosures.
Regulation of Effects on the Environment versus Disclosures of Effects on a Company
The SEC brief argued (44-45) that the Court could ignore the statements by the 1975 SEC that the agency lacked authority to require disclosures to promote environmental and social goals. The new Climate Disclosures were predicated on a different view of SEC authority. In 1975, the SEC considered disclosures about a company’s effect on the environment – a social goal not related to the objectives of the securities laws -- and in 2024 considered the effects of climate-change risks on a company’s business and financial position – a traditional objective of the securities laws.
That argument omitted important, contrary information. In 1975, the SEC explicitly recognized that commenters claimed to want environmental and social disclosures for economic and investment reasons. Noncompliance with environmental laws could lead to extensive corporate costs or liabilities, and the ability to avoid those costs was an index of management quality. 1975 Statement 51664.
Commenters also had other reasons for wanting the disclosures, leading a realistic SEC to conclude that investors interested in environmental and social disclosures would use the information more in voting on shareholder proposals or influencing management policies than in making investment decisions. Id. 51664-65. The interest among investors for comprehensive disclosure of environmental effects of corporate activities “appears to be primarily in whether corporations are acting in an environmentally unacceptable manner.” Id. 51662. The Commission also stated that it “may not require disclosure solely” for the purpose of having “some indirect effect on corporate conduct.” Id. 51660
The Climate Disclosures reflect a similar dynamic. To stay within the usual scope of SEC rulemaking, supporting commenters knew they should assert a desire to have the information for standard investment purposes, but the singular focus of the Climate Disclosures on climate change, greenhouse gas emissions, and the structure of companies to respond to climate effects revealed interests in the information to achieve policy goals related to climate-change concerns. Commissioner Uyeda refused to support the Climate Disclosures, calling them “climate regulation promulgated under the Commission’s seal.” Commissioner Peirce similarly said: “We lack the expertise to oversee these special interest disclosures, and only a mandate from Congress should put us in the business of facilitating the disclosure of information not clearly related to financial returns.” In the 1970s, the SEC saw through the gambit of connecting social policy disclosures to financial and investment uses while in 2024 the SEC just went along.
The SEC’s 2010 Guidance
Both the SEC brief and the Scholars Amicus Brief exaggerated the legal significance of the 2010 Guidance. In 2010, the SEC published a discussion of how climate effects on a particular company could be covered by the SEC’s existing disclosure rules.
The SEC brief attempted to portray the Guidance as an exercise of statutory authority to require climate change disclosures (35-36). At the end of the paragraph on the Guidance, the SEC brief concluded: “Accordingly, the Commission’s approach to climate-related information has been consistent with its longstanding interpretation of its statutory authority: the Securities Act and the Exchange Act authorize the Commission to mandate disclosures that protect investors by facilitating informed investment and voting decisions” (36). The brief’s passing reference to existing disclosure requirements was not sufficient to correct the impression that the Guidance created new disclosure rules under the statutes of the main securities acts.
The Scholars Amici Brief characterized the 2010 Guidance in a way to create the false impression that it embraced new, independent mandates to disclose environmental and climate matters (19-20). The brief mentioned that the Guidance dealt with obligations under existing securities laws but painted the Guidance as proof “that the SEC has authority to mandate environmental-related disclosures.”
The Guidance does not stand for the authority of the SEC to issue a new set of binding disclosure rules on climate-change or any other topic. The Guidance was an interpretation, not an enforceable rule. Interpretations do not have the force of law. The Guidance did not add new disclosure mandates. It applied rules already in effect that had the form of the disclosures Congress specified for business and financial traits of the reporting company.
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When taken in full, the SEC’s consideration of environmental disclosures in the 1970s provides little to no support for the authority of the SEC to adopt the new Climate Disclosures.
[1] SEC, The Enhancement and Standardization of Climate-Related Disclosures for Investors, 89 Fed. Reg. 21668, 21683 (Mar. 28, 2024).
Andrew N. Vollmer is a distinguished senior fellow with the Mercatus Center at George Mason University; former deputy general counsel of the Securities and Exchange Commission; former professor of law, general faculty, at the University of Virginia School of Law; former partner in the securities enforcement group of Wilmer Cutler Pickering Hale and Dorr LLP.