The Securities and Exchange Commission (SEC) has revised its climate reporting requirements under pressure from politicians and the business community. Whilst the mandatory scope 3 reporting from Europe – necessitating large and publicly traded companies to report their total CO2 emissions – has been abandoned by the SEC, it still encounters a barrage of legal challenges.
Oil and gas supplier Liberty Energy and Nomad Proppant Services, a firm specialising in sand delivery, have jointly filed a lawsuit. The US Chamber of Commerce and ten states have also entered the fray. They argue that the securities regulator was never given authorisation by Congress to demand climate information, even in a diluted form.
Moreover, the plaintiffs claim that the SEC is violating the First Amendment of the US Constitution, which guarantees freedom of speech.
‘Limitation of freedom of speech’
Patrick Morrisey, Attorney General of West Virginia and one of the plaintiffs, argues that the SEC is enforcing what is known in the United States as “compelled speech”, where companies are made to make statements they would not otherwise choose to make. Sean Griffith, Professor of Law at Fordham University in New York, shares this view.
Griffith argues that the SEC cannot demonstrate that its reporting requirements are designed to protect the interests of consumers or investors, a legal necessity.
He suspects that the climate regulations are motivated either by the desire to impose a political viewpoint or to benefit institutional asset managers. These cannot be said to follow “uncontroversially” from the rationale of investor protection, he asserts.
That Europe has shown scant reaction to similar, and even stricter, climate reporting regulations such as the Corporate Sustainability Reporting Directive (CSRD), might be due to the absence of avenues to contest these regulations, or, alternatively, Europeans are less concerned when their rights are infringed upon, he suggests.
Success not guaranteed
The First Amendment argument is a familiar approach to challenging SEC disclosure rules in US courts. In 2014, the SEC was admonished by a US court for requiring a “conflict-free label” from traders of minerals from conflict zones such as The Democratic Republic of Congo. Despite the label’s intention to prevent trade in blood diamonds, the court nonetheless viewed it as “compelled speech”.
Despite the previous success of the First Amendment argument, its effectiveness this time is not universally accepted.
Cynthia Williams, Professor of Law at the University of Indiana, argues that the SEC is merely requesting factual information about business operations and an estimate of climate-related risks. According to her, the disclosures requested are no more controversial than standard reporting requirements.
Williams suggests that the opposition to the climate regulations is part of a broader deregulation strategy by American oil and gas companies, akin to the resistance against investors incorporating ESG factors into their decisions or voting with sustainable shareholder proposals.
Other disclosure rules also at risk
A court that invalidates the SEC rule on the basis of the First Amendment risks seriously undermining other disclosure rules, according to Sarah Haan, Visiting Professor of Law at the University of Virginia.
“Any disclosure that companies prefer not to make will be contested under the First Amendment, and I expect some will be overturned,” Haan stated.
Haan believes that both investors and corporate managers will lose valuable information if courts decide to apply levels of scrutiny to securities regulations that have never before been required.
“This is precisely why Congress had to enact the original securities laws in the 1930s. Companies do not voluntarily disclose all the information investors desire. We simply cannot rely solely on voluntary information,” Haan remarked.