Can We Talk Climate? The SEC Disclosure Rule and Compelled Commercial Speech

• Date: 01 December 2023
• Author: Michael M. Choi and Michael Barsa

Copyright © 2023 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. CAN WE TALK CLIMATE? THE SEC DISCLOSURE RULE AND COMPELLED COMMERCIAL SPEECH by Michael M. Choi and Michael Barsa Michael M. Choi is a Law Clerk with Cravath, Swaine & Moore LLP. Michael Barsa is Professor of Practice and Co-Director of the Environmental Law Concentration at Northwestern Pritzker School of Law. SUMMAR Y The Securities and Exchange Commission’s (SEC’s) Climate Disclosure Rule has provoked heated controversy on many fronts. Several commenters have argued that the First Amendment precludes the SEC from demanding climate-related disclosures. This Article grapples with the unsettled state of “compelled commercial speech” doctrine, arguing that the rule’s constitutionality should be scrutinized using the prevailing rational basis test, and that even under the intermediate scrutiny test, the rule should be upheld. The SEC has proffered copious evidence of the anticipated benef‌its, and has narrowly tailored the rule to achieve only the interests it asserts. Nevertheless, the Commission should be prepared to proffer additional justif‌ication for certain disclosure items, such as the scope 3 emissions reporting requirement and scenario analysis recommendation, to bolster the odds of the overall regulatory scheme being upheld. Larry Fink, the chairman and chief executive oicer (CEO) of BlackRock, the largest asset manager in the world with more than $10 trillion U.S. dollars of assets under management (AUM) as of early 2022, 1 famously declared in his 2020 letter to CEOs that “climate risk is investment risk.” 2 Fink recognized early on that the various physical and transitional risks associated with climate change will inevitably and signiicantly impact investment returns. 3 hree years have passed since publication of the letter, but Fink still insists that companies Authors’ Note: This Article was written while Michael Choi was a law student at Northwestern Pritzker School of Law, and does not ref‌lect the views of Cravath, Swaine & Moore LLP or any member thereof. Choi would like to thank Prof. Michael Barsa for his continuous guidance on the Article, Prof. Mark Finn for his insights on sustainability reporting, and Rohun Reddy for introducing him to the world of First Amendment law. He would also like to express his love and gratitude to his friends and family, who have been a source of unwavering support from the Article’s conception to its publication. 4. See BlackRock, Larry Fink’s 2022 Letter to CEOs: he Power of Capitalism , https://www.blackrock.com/corporate/investor-relations/larry-ink-ceo-letter (last visited Oct. 20, 2023) (Fink speciically notes the importance of meeting greenhouse gas reduction targets and issuing sustainability reports consistent with the recommendations of the Task Force on Climate-Related Financial Disclosures); see also BlackRock, Larry Fink’s Annual Chairman’s Letter to Investors , https://www.blackrock.com/corporate/investor-relations/ larry-ink-annual-chairmans-letter (last visited Oct. 20, 2023) (In his letter published in 2023, Fink appears to have scaled back on his position for ESG investing, but still insists on his view that climate risk is an investment risk, especially as it relates to various impending transition risks that issuers will confront in the near future). 5. Press Release, As You Sow, Record Breaking Year for Environmental, Social, and Sustainable Governance Shareholder Resolutions (June 24, 2021), https://www.asyousow.org/press-releases/2021/6/24/record-breaking-year-for-environmental-social-and-sustainable-governance-shareholder-resolutions. 6. See, e.g. , United Nations Department of Economic and Social Afairs, Transforming Our World: he 2030 Agenda for Sustainable Development , https:// sdgs.un.org/2030agenda (last visited Oct. 5, 2023). 1. BlackRock, 2022 Proxy Statement: Notice of Annual Meeting 8 (2022). 2. BlackRock, Larry Fink’s 2020 Letter to CEOs: A Fundamental Reshaping of Finance , https://www.blackrock.com/corporate/investor-relations/2020-larry-ink-ceo-letter (last visited Oct. 5, 2023). 3. Id . relect upon their businesses with an eye toward climate risks and provide more robust climate-related disclosures to their investors. 4 his sentiment has also resonated with the shareholders of public companies, evidenced by the most recent proxy season showing a meaningful uptick in shareholder proposals related to climate and other environmental, social, and governance (ESG) matters. 5 Global and domestic interests in sustainable development and investment have also been on the rise. 6 As of December 2022, the United Nations-supported Principles for Responsible Investment (PRI) had 5,319 signa-tories representing $121.3 trillion U.S. dollars of AUM, 53 ELR 10934 ENVIRONMENTAL LAW REPORTER 12-2023 Copyright © 2023 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. whose commitment involves integrating ESG factors into their investment and ownership decisions. 7 Moreover, in alignment with global trends to mitigate the harmful efects of climate change and bolster sustainable development through global partnerships, the United States rejoined the Paris Agreement on January 20, 2021, after having briely left the agreement during the Donald Trump Administration. 8 On May 20, 2021, President Joseph Biden issued Executive Order No. 14030 on Climate-Related Financial Risk, which recognized the intensifying impacts of the physical and transition risks associated with climate change and the dangers to the competitiveness of U.S. companies and markets imposed by the failure to adequately assess such risks. 9 In response to the Executive Order, the Financial Stability Oversight Council released a report that identiied climate change as an emerging and increasing threat to U.S. inancial stability for the irst time since the creation of the council. 10 It further urged its member agencies, including the Securities and Exchange Commission (SEC), to take new actions on climate change data, disclosure, and scenario analysis. 11 Against this backdrop of inancial and regulatory impetus toward a better understanding of climate-related risks, the SEC published in March 2022 a rule titled “he Enhancement and Standardization of Climate-Related Disclosures for Investors” (the Climate Disclosure Rule) that would require registrants to disclose various climate-related data associated with their business operations. 12 In accordance with the Commission’s core mandate to protect investors, maintain fair, orderly, and eicient markets, and promote capital formation, the Climate Disclosure Rule seeks to promote “consistent, comparable, and reliable disclosures” among issuers that investors can use to assess material climate-related risks when making investment and 7. See PRI, Signatory Update: October to December 2022 (2023), https://www.unpri.org/download?ac=18057. 8. Press Statement, Secretary of State Antony J. Blinken, he United States Oicially Rejoins the Paris Agreement (Feb. 19, 2021), https://www.state. gov/the-united-states-oicially-rejoins-the-paris-agreement/. 9. Exec. Order No. 14030, 86 Fed. Reg. 27967 (May 20, 2021). 10. Press Release, U.S. Department of the Treasury, Financial Stability Oversight Council Identiies Climate Change as an Emerging and Increasing hreat to Financial Stability (Oct. 21, 2021), https://home.treasury.gov/ news/press-releases/jy0426. 11. Id . 12. See he Enhancement and Standardization of Climate-Related Disclosures for Investors, Securities Act Release No. 11042, Exchange Act Release No. 94478, 87 Fed. Reg. 21334 (proposed Mar. 21, 2022) [hereinafter Climate Disclosure Rule]; see also Richard Vanderford, SEC Chair Gensler Declines to Give Timeline for Final Climate Disclosure Rule , Wall St. J. (Sept. 12, 2023), https://www.wsj.com/articles/sec-chair-gensler-declines-to-give-timelinefor-inal-climate-disclosure-rule-bd7028e0 (he SEC has yet to conirm the exact timeline for the inal version of the Climate Disclosure Rule, but SEC Chair Gary Gensler has noted that the treatment of scope 3 greenhouse gas emissions has been an important issue for the SEC team); see also Client Memo, Cravath, Swaine & Moore LLP, California Legislature Passes and Governor Newsom Signs Landmark California Climate Bills (Oct. 9, 2023), https://www.cravath.com/a/web/six3CK8DdTjuJVQw19UvHP/8bGHSh/ california-legislature-passes-and-governor-newsom-signs-landmark-california-climate-bills.pdf (In the meantime, California has passed two new climate bills that are comparable to the SEC Climate Disclosure Rule, and a similar law is in the pipeline at the New York state legislature). voting decisions. 13 he rule, details of which will be discussed later, builds upon existing disclosure requirements under Regulations S-K and S-X, whereby a registrant must disclose various climate-related data—both qualitative and quantitative—speciic to its business as part of its regular iling obligations with the SEC. 14 Many critics, including a former commissioner of the SEC, have criticized the Climate Disclosure Rule as being the result of the Commission’s overbroad interpretation of its core mandate despite its lack of expertise in the ield of climate change. 15 Notwithstanding such criticisms, under the leadership of Chair Gary Gensler and former Commissioner Allison Herren Lee, the SEC moved forward with proposing the Climate Disclosure Rule based on the irm belief that climate change will generate inancial consequences relevant for investors, 16 and that the existing voluntary disclosure regime that relies on “materiality” in the context of securities laws does not accurately capture decision-useful climate data for investors. 17 Many commenters iled their comments with the SEC in response to former Commissioner Lee’s invitation in March 2021 for public input on the...