Washington, D.C. (March 13, 2024) - On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) released its long-awaited final climate-related disclosure rule for U.S. public companies. This groundbreaking regulation mandates that publicly traded companies provide information in their annual reports and registration statements regarding the climate risks they face, their plans to address those risks, the financial impact of severe weather events, and, in certain circumstances, greenhouse gas emissions originating from their operations.
While the rule marks a significant shift in disclosure requirements for publicly traded companies in the United States, it reflects a marked retreat from the more maximalist requirements of the SEC's initial proposal. Notably, the final rule eliminates the proposed—and highly controversial—requirement for companies to report on emissions from third-party suppliers or vendors outside the direct control of the corporation but within their corporate value chains; so-called "Scope 3" emissions.
The rule is in line with a multi-jurisdictional trend towards increased mandatory disclosure regimes in the ESG (Environmental, Social, and Governance) and DEI (Diversity, Equity, and Inclusion) spaces. But the implications of environmental and social disclosures are far-reaching, particularly when they intersect political controversies of the day, such as environmental policy, corporate responsibility, free speech, and the scope of the government's role in regulating business activities.
Despite its more restricted scope, the new rule is already sparking contentious legal and policy debates. Almost before the ink was dry on the final rule, a coalition of ten Republican-led states filed a lawsuit challenging the SEC's climate disclosure rules in the U.S. Court of Appeals for the Eleventh Circuit. The claimaints say they "will show" the new rule "exceeds the agency's statutory authority and otherwise is arbitrary, capricious, an abuse of discretion, and not in accordance with law." In a press conference, West Virginia Attorney General Patrick Morrisey, one of the leaders of the suit, stated that he believes the "rule also appears to have some serious First Amendment problems," and specifically referenced "concerns with compelled speech" under the rule.
The SEC dismissed First Amendment concerns in its discussion of the final rule, stating that it "disagree[s] with commenters [on the proposed rules] who raised objections to the proposed rules on First Amendment grounds" because the rules "advance crucial interests" and the information being disclosed would be in line with what "companies routinely disclose when seeking investments from the public."
Meanwhile, the Sierra Club announced that it may attack the rule from the other side of the political-environmental divide, stating that it was"considering challenging the SEC's arbitrary removal of key provisions," including requirements to disclose Scope 3 emissions, while also defending in principle the SEC's authority to issue such rules.
These lawsuits, and others likely to follow, raise crucial questions about the intersection of mandatory corporate disclosures with the First Amendment's freedom of speech protections, notwithstanding the SEC's attempt to preempt this issue. Mandatory corporate disclosure provisions occupy a shifting and somewhat uncomfortable space in First Amendment jurisprudence.
As the legal proceedings unfold and debates surrounding the implications of increased disclosure requirements continue to grow, it is increasingly evident that the intersection of ESG disclosures—like the SEC's climate change final rule—with constitutional and legal protections is an essential and evolving area of regulatory and legal scrutiny. The outcomes of this legal battle will provide critical insights into the permissible limits of mandatory corporate disclosures and their implications for free speech, corporate accountability, and the regulatory landscape as a whole.
These lawsuits, and others likely to follow, raise crucial questions about the intersection of mandatory corporate disclosures with the First Amendment's freedom of speech protections, notwithstanding the SEC's attempt to preempt this issue. Mandatory corporate disclosure provisions occupy a shifting and somewhat uncomfortable space in First Amendment jurisprudence. For a fuller discussion of this issue, see this previous article by the co-authors.
Co-authored with Colin Pohlman, J.D. Recipient - Lewis & Clark Law School
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