The good news is that after months of internal debate, the Securities and Exchange Commission has finally proposed rules mandating that publicly traded corporations address climate change.
The proposals are expansive. They require companies to make dozens of complicated subjective and objective determinations. They're about as controversial as can be, and have already provoked heated arguments about the SEC’s role in setting climate policy. But it’s unlikely the agency's final rules will be so aggressive. Seasoned hands understand that these are negotiating positions that will evolve through the comment process. A detailed, informed and important debate can now begin.
The bad news, and it is very bad news, is that even if the commission’s final rules are entirely reasonable, and even if they gain broad support from investors and securities issuers, they will probably never fully take effect. Why? Because courts could easily conclude that the SEC lacks statutory authority to mandate greenhouse gas (GHG) disclosures. That authority might instead belong to the Environmental Protection Agency.
The logic supporting this conclusion is simple. Not a word in federal securities law — or in the legislative history of those laws — speaks to climate disclosures. The SEC’s authority to mandate disclosures relies entirely on inference from those sources. Those inferences are solid, strong and sensible, and would likely carry the day but for one uncomfortable fact that the commission’s proposal assiduously ignores: In 1974, Congress passed the Clean Air Act, which expressly delegates authority to the EPA to mandate GHG emission disclosures.
The EPA has exercised that authority to create its Greenhouse Gas Reporting Program, which already measures and publicly discloses the sources of 85% to 90% of U.S.-based emissions. The federal government thus already requires public reporting of GHG emissions, but through the EPA, not the SEC.
The U.S. Supreme Court has explained that more recent legislation that speaks with precision supersedes prior laws that address the same matter more generally. Applying this rule could make it easy for courts to conclude that the Clean Air Act’s more-precise, more-recent delegation to the EPA divests the SEC of whatever GHG disclosure authority it can otherwise claim under vaguer, older securities statutes.
The rule’s opponents might also invoke the controversial “major questions doctrine” under which courts “expect Congress to speak clearly” when delegating decisions that have “vast economic and political significance.” As the Supreme Court has explained, Congress doesn't “hide elephants in mouseholes."
Here, the SEC's own words will be turned against it. Several commissioners are on record expressing profound concern over climate change’s economic and political consequences. They are, in my view, entirely correct about the climate threat. But the same commissioners can’t, with a straight face, now claim that climate change doesn’t have “vast economic and political significance.” Nor can they claim that Congress clearly authorized the SEC to mandate climate emissions disclosures. Those claims are even harder to assert when the Clean Air Act shows that Congress knew how to structure unambiguous climate-related delegations. Ignoring this foundational question of statutory authority is like trying to hide a herd of elephants in a vanishingly tiny mousehole and hoping that no one notices.
The Supreme Court relied on the major questions doctrine to vacate the Biden administration’s vaccine mandates and its Covid-19 eviction moratorium. And, as Justice Neil Gorsuch has observed, “far less consequential agency rules have run afoul of the major questions doctrine.” It's hardly a stretch to see the doctrine invoked to reject the SEC’s authority to mandate quantitative GHG disclosures.
But the news gets even worse, because this predictable regulatory train wreck is entirely avoidable. The Biden administration calls for a “whole of government” approach to the climate crisis. This principle could support a collaborative, two-stage effort involving both the EPA and SEC that would dramatically reduce the risk that the courts will cut the legs out from under an improved quantitative GHG disclosure program.
The first stage of such a cooperative process could simply have the EPA use its Clean Air Act authority to adjust its existing reporting regime to more cleanly integrate with the SEC’s reporting process. The SEC could then separately mandate that all publicly traded companies provide their EPA reports in conjunction with their periodic SEC filings. This largely mechanical task would greatly help inform investors and the public at very low cost.
Climate advocates would predictably and understandably complain that the EPA’s current disclosure requirements, although they already capture as much as 90% of certain emissions, are too limited. Fair enough. That’s where the second stage of the process kicks in. The EPA could then consider more expansive GHG reporting requirements that would capture more emissions data from more sources. These expanded EPA disclosures would also be on forms that easily integrate with SEC reporting requirements.
This cooperative approach generates important additional benefits. The SEC can only regulate publicly traded firms, and disclosure rules that apply only to those companies incentivize them to sell polluting assets to privately held firms. That’s already happening. Methane traps much more heat than carbon dioxide, and half the industry’s top 10 emitters of methane are little-known oil and gas producers that escape public scrutiny, according to a New York Times investigation. SEC rules can only accelerate the move of the worst polluting assets to the most hidden parts of the market. EPA rules apply economy-wide and don’t contribute as aggressively to this trend.
Climate advocates should therefore be concerned that the Biden administration stands on the cusp of an avoidable regulatory tragedy. By pushing the SEC, but not the EPA, to adopt sensible GHG disclosure rules, and by not advocating for a coordinated EPA-SEC reporting regime, the Biden administration fails to deliver on its “whole of government” promise and risks having the SEC adopt climate rules that are a bridge to nowhere.
The goal shouldn’t be for administrative agencies to appease political constituencies by adopting rules that are later overturned by the courts. The SEC’s rules, carefully crafted as they might be, can’t overcome the foundational problem of the lack of statutory authority. Having the SEC coordinate with the EPA on climate disclosure regulation is a more rational solution to that problem that involves much lower litigation risk for investors and for the economy alike. It isn’t too late to change the game plan and to craft a regulatory strategy more likely to survive the legal onslaught that is sure to come.
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