March 28, 2022

Climate Change Proposal: What Will the Legal Challenges Look Like?

One thing about the SEC’s climate change rule proposal seems pretty certain – if the rules are adopted in their current form, they are going to face legal challenges. On what grounds might the validity of the SEC’s climate change rules be subject to attack? This excerpt from Davis Polk’s recent blog on the rule proposal provides some insights:

Challenges to the SEC’s statutory authority. Nothing in the federal securities laws expressly authorizes the SEC to require the disclosures contemplated by the proposal. Instead, these laws generally permit the SEC to require disclosure that is “necessary or appropriate in the public interest or for the protection of investors.”

One of the SEC’s central arguments in support of its authority is that many investors—including certain large institutional investors—have expressed a desire to receive climate-related disclosure. However, public interest alone may not be enough to meet the statutory threshold, if a hypothetical “reasonable investor” would not find the required disclosure necessary for investment or voting purposes. This may also make it more difficult for the SEC to demonstrate that it has met its obligation to show that the benefits of the new requirements outweigh their costs.

This challenge is likely to be bolstered by the “major questions” doctrine, which provides that agency rules of major significance be the subject of a clear delegation of Congressional authority (and was relied on by the Supreme Court to nix the Biden Administration’s COVID-19 vaccine and eviction moratorium policies).

First Amendment challenges. The proposal is also likely to be challenged as violating the First Amendment, by compelling speech. This topic has received close scrutiny by the Supreme Court in recent years in other cases involving corporate speech.

If you’re looking for more information on the “major questions” doctrine, check out this Arent Fox Schiff memo.  As to the First Amendment issues, Liz blogged last year about a letter from West Virginia’s AG threatening to bring an action on that basis against any ESG-related rulemaking by the SEC and you can check that out for more details on the First Amendment argument. Meanwhile, this post on the Business Law Prof Blog lays out an argument supporting the validity of the proposed rules.

John Jenkins