Clearing the Air: SEC's Authority to Mandate Climate Disclosure
By Daniel Lee/ Edited By Grace Park
In May 2024, the Securities and Exchange Commission (SEC) finalized its landmark climate disclosure rule, essentially requiring publicly traded companies to report their greenhouse gas emissions and climate-related risks. Within days, industry groups and Republican lawmakers sued to block it. A few months later, the SEC voluntarily stayed its own rule pending the outcome of that litigation. Exactly one year later, the SEC voted to end the defense of the rule. State and private parties have grouped together in opposition, presenting the question of whether the SEC has legitimate legal authority to enact this ban. But when analyzing legal precedents and the agency’s statutory mandate, the SEC does, in fact, possess the authority to do so, with the ongoing resistance resulting more from collective corporate interests than the actual law itself.
The SEC was created by Congress under the Securities Exchange Act of 1934. Formed after the 1929 stock market crash, its primary purpose was to protect investors, help maintain a fair market and the public’s confidence in it, and raise more capital. The SEC’s authority to require disclosures hinges on whether a reasonable investor would consider a certain piece of information important in making an investment decision. Under this framework, the SEC currently requires companies to disclose everything, from how they pay executives to how they handle cybersecurity.
In a similar fashion, climate risk should be regarded as important information to inform investment decisions. According to a 2021 report from the Commodity Futures Trading Commission, climate change is a systemic risk to the U.S. financial industry. As a result, investors, especially large firms with trillions of dollars in Assets Under Management, have long demanded standardized climate data. Giant firms, such as BlackRock, have publicly advocated for stricter climate disclosures. Corporations like these that center their entire mission and identity around investing and writing big checks think that climate-related information is imperative to making sound investment decisions. It should then follow that the SEC mandating these climate-related disclosures is not overreaching its authority.
In Business Roundtable v. SEC (2011), the D.C. Circuit Court of Appeals struck down an SEC rule that would have allowed shareholders to nominate their own board candidates through company proxy materials. This case is often cited by critics of the 2024 rule, as the court in 2011 found that the SEC had done a poor job of weighing the rules' costs against their benefits. Although a loss, Business Roundtable did not confirm the SEC’s lack of authority to regulate in new areas and just said that the agency had to strengthen its cost-benefit analysis. This advice was well-taken, as the 2024 climate rule was essentially the product of years of economic analysis and public commenting, with the SEC receiving over 24,000 comments during the rulemaking process. Although the Business Roundtable is cited to disparage the 2024 rule, if its ruling is understood in context, it may shed even more light on the lack of sufficient evidence that the SEC lacks legitimate authority.
The Major Questions Doctrine holds that when an agency claims authority to make decisions with large economic and political significance, it must require clear congressional authorization. It can’t be ambiguous or some sort of plausible reading of a broad, general statute. In the Supreme Court’s 2022 decision in West Virginia v. EPA (2022), MQD was utilized to strike down the Environmental Protection Agency’s (EPA) attempt to regulate carbon emissions at a system level.
It figures those who oppose the SEC’s rule are making the same argument that Congress never gave the SEC the specific authority over environmental regulations, and that mandating emissions disclosures is too big an effect on the political economy to be left to the SEC. However, there are dissimilarities between the two scenarios. The EPA in West Virginia tried to restructure the entire American energy grid, while the SEC is only asking companies to provide information that already exists to investors. There is no creation of materials requested of the companies. The SEC is not setting an emissions cap or any sort of tangible regulation. It simply is continuing to do what it has been doing for the past century: protecting investors and providing them with accurate information that they can then use to create wealth. It is the SEC’s responsibility to do so, and disclosure regulation is well within its sphere of authority.
An interesting dynamic in this argument is the gap between what large institutional investors want and what corporate lobbying groups are advocating for. Large firms that care about system climate risks, such as major asset managers and pension funds, have shown support for such standardized disclosure requirements. Opposition has typically come from fossil fuel companies, smaller businesses, and trade associations, like the U.S. Chamber of Commerce.
This debate is, in many ways, one between those active in the corporate world. Companies that have voluntarily adopted many climate-related disclosures, like the Task Force on Climate-related Financial Disclosures, have found that transparency actually strengthens investor confidence. When dozens of Fortune 500 companies are already making mandatory disclosures when they don't have to, the argument that all mandatory disclosures are burdens with no upside unravels.
However, the cost concerns have merit. The original 2022 proposed rule included the emissions from a company’s supply chain and product use. This faced major pushback, and the SEC was ultimately forced to strip it from the final 2024 rule. The final 2024 rule ended up focusing on other types of emissions (Scopes 1 and 2). This was a concession the SEC was willing to make to increase the likelihood that the 2024 rule would create positive change. Although workable disclosure requirements have already been laid out, there is a lack of political agency to get them successfully through the courts.
Ultimately, this is an argument about the purpose of securities laws and how they serve the market and the public. If you say that the SEC only exists to prevent fraud in a more narrow sense, then sure, the agency has no place in the climate policy space. However, securities laws stretch far and wide, never being that narrow in the first place. The SEC already requires disclosures about various aspects of companies, not as a result of Congress but because of investors’ need for disclosures to add value to the markets. How climate-related information is not included as one of those important pieces of information is surprising, especially given the recent focus on ESG and sustainability.
Climate change is not a problem for future generations. It is a world-threatening disaster that has every right to be addressed through one of the U.S.’s largest industries, the financial sector. Additionally, it presents major financial risks that already negatively affect asset valuations, insurance costs, and supply chains. Even in a practical sense, the SEC should require these disclosures to make that risk known to investors considering getting involved.
