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Earlier this week on The AI Counsel Blog, I wrote about the 9th Circuit’s decision to strike down part of California’s climate disclosure statutes on First Amendment grounds. At least one prominent commenter argues that, if followed to its logical conclusion, this decision could have broad implications for the federal securities laws’ disclosure regime.

The Court upheld California’s Scope 1 and 2 disclosure requirements on the grounds that they constituted commercial speech subject to intermediate scrutiny under the First Amendment. However, it concluded that the Scope 3 disclosure requirements and those modeled on the Task Force on Climate-Related Financial Disclosures (TCFD) framework didn’t qualify as commercial speech. Consequently, those disclosure requirements were subject to strict scrutiny, which they could not withstand.

In a recent Business Law Prof Blog post, Prof. Ann Lipton was kind of blown away by the Court’s approach to the First Amendment issues:

The Ninth Circuit determined that Scope 3 determinations “compel[] companies to collect, synthesize, and report information about the conduct of independent actors across complex commercial networks, including suppliers, customers, distributors, and other third parties throughout the value chain. Because Scope 3 disclosures concern diffuse third-party conduct in the value chain, they are insufficiently tethered to the reporting entity’s own operations and capital transactions to qualify as commercial speech.”

From there, the court determined – essentially categorically – that they are too inherently uncertain to be of much use to investors.

As for the TCFD disclosures, the court concluded they were “noncommercial speech” that include “subjective ideological assessments,” such as identifying the transitional and physical risks of climate change, and the process for identifying and managing these risks. The court explained, “SB 261 requires companies to opine on whether climate change poses financial risks to their operations and business model, thereby making predictive judgments about uncertain future conditions. Companies must also analyze and disclose whether mitigating those risks is worth the cost, requiring them to make normative assessments about competing priorities and values….SB 261 ‘would require [a covered entity] to convey the company’s policy views on intensely debated and politically fraught topics….’” Thus, they were not commercial speech.

Reader, my jaw dropped.

The securities laws today require companies to make numerous assessments about the risks and their mitigation efforts (check out disclosures required about cybersecurity). I can’t even imagine what the world would look like if regulators had to make fine-tuned judgments about whether a required disclosure concerned “diffuse third-party conduct,” let alone “subjective ideological assessments” of risk.

Ann asks if the 9th Cir. is saying that all risk-related securities disclosures are unconstitutional, or that it’s merely the politicized nature of climate change that makes this disclosure requirement cross the line? She points out that the Court accepts the fact that climate change is real and that it has real economic effects on business, and says that if this is the baseline, “does the mere fact that some people continue to dispute the reality of climate change turn it into a politicized topic on which the government cannot compel speech to investors?”

– John Jenkins