Law360 Expert Analysis: SEC’s Climate Rule Is Compatible With The 1st Amendment
By Rebecca Tushnet, Ellen Goodman and Samara Spence
July 29, 2022
The public comment period recently closed on the U.S. Securities and Exchange Commission’s proposed rule that would require public companies to disclose, in their registration statements and annual reports, certain climate-related risks — including how they are accounting for, and preparing for, those risks, what they are doing to meet any publicly proclaimed climate goals, and what their greenhouse gas emissions are.
We, along with other scholars, submitted a comment to the SEC in support of the proposed rule. The rule is good for the functioning of financial markets. As climate change progresses, companies face unique and systemic risks from catastrophic weather events, supply chain disruptions, demand changes, and regulatory and energy transition costs.
Recent studies show that the world’s biggest companies have nearly $1 trillion at risk from climate impacts likely to hit within the next five years. The U.S. suffered $1 billion in economic damage from weather events in the last two years alone.
How companies expect climate costs to change their businesses — and what they plan to do about it — is of central concern to shareholders, as attested to by the groups that pushed for SEC disclosure.
Notwithstanding the SEC’s mandate to ensure investors have risk information, some have argued that the proposed disclosure requirements would violate public companies’ First Amendment rights. That position is legally incorrect and misguided. In fact, the proposed rule is consistent with settled First Amendment principles, which value the public’s right to know important, relevant information.
Rules of the kind proposed — securities disclosure requirements deemed “necessary or appropriate in the public interest or
for the protection of investors”— do not normally trigger First Amendment review. In fact, many activities that might be considered speech are not protected by the First Amendment at all, particularly where an economic or other relationship of trust exists between the speaker and listener.
For example, contracting parties generally cannot lie — that’s fraud. A doctor generally cannot mislead a patient — that’s malpractice. Likewise, required securities-related disclosure requirements have traditionally been treated as outside First Amendment review. The U.S. Supreme Court will consider categories of speech exempt where there is what it referred to as a “long-settled tradition of subjecting [the] speech to regulation” in its 2010 decision in U.S. v. Stevens — a description that certainly applies to securities-related compelled disclosures. American securities disclosure mandates go back at least to the 1800s.
Even if the proposed disclosure requirements constituted protected First Amendment speech, they would only warrant treatment as commercial communications, to which the “Constitution …accords a lesser protection” than other forms of expression, as the high court said in its 1980 decision in Central Hudson Gas & Electric Corporation v. Public Service Commission of New York. This is all the more true when the rule requires additional speech, instead of suppressing speech.
The Supreme Court’s 1985 opinion in Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio held that the government may compel a commercial disclosure that is “factual and uncontroversial…as long as disclosure requirements are reasonably related to the [government] interest” at issue, and are not unduly burdensome on further speech. Under Zauderer, a commercial speaker’s constitutional interest in nondisclosure is minimal. The proposed SEC disclosure requirements would easily survive Zauderer review.
First, the proposed rule would mandate disclosure of purely factual information about business operations, such as an issuer’s own estimates of its climate-related risks. And because the mandated statements would be purely factual, they are considered
uncontroversial for Zauderer purposes. The disclosures here would not force companies to take a position on the regulation of greenhouse gas emissions, endorse any ideological position on climate change or make any moral statements. The issue of climate change may provoke disagreement, but climate disclosures reflect objective realities affecting businesses.
Controversiality under Zauderer is not established because people dispute the value of the information or because it can be tied in some way to a controversial issue. Such a rule would render every disclosure mandate infirm as soon as someone challenged it. Second, the proposed disclosure requirements would protect investors — a purpose squarely within the SEC’s mandate. Thousands of investors managing hundreds of trillions of dollars have called for more and better disclosure of climate-related information. This is not merely to support so-called ethical investing. Climate-related risks pose risks to
Some companies already disclose climate-related information under existing materiality requirements, but companies do not currently provide consistent, comparable information that is decision-useful to investors. Indeed, growing evidence suggests the lack of sufficient information has prevented climate risks from being accurately incorporated into asset prices.
Finally, the proposed disclosure requirements are not unduly burdensome within the meaning of Zauderer, which requires a burden on speech. Companies would be free to supplement their statements, claim that they do not face climate-related risks, or even identify climate-related opportunities. The difficulty or cost of gathering information is not a constitutionally salient burden under Zauderer, so long as the disclosure of the information, once gathered, does not burden further speech.
For example, in American Meat Institute v. U.S. Department of Agriculture, the U.S. Court of Appeals for the D.C. Circuit held in 2014 that meat country-of-origin labeling requirements were permissible, despite the substantial investment that would be required to create new supply chain records — including documenting where the animal was born, raised and slaughtered.
Likewise, in New York State Restaurant Association v. New York City Board of Health, the U.S. Court of Appeals for the Second Circuit concluded in 2009 that a requirement that restaurants disclose calorie content on menus passed constitutional muster, even though that might require them to measure and calculate the figures.
In any case, the burden on companies would be reasonable under the circumstances. Most of the proposed requirements would mandate disclosure of information that the company already has — risks it has identified, and progress on actions it has promised. The information on emissions might have to be newly generated, but is based on a preexisting accounting system already used under the Greenhouse Gas Protocol.
Reasonable people can debate whether the proposed rule should be modified for other reasons. But the First Amendment provides no basis for modification or rejection.
Full piece with citations available here.