Center for American Progress: SEC has broad legal authority to require climate and ESG disclosure.

A legal analysis report released by the Center for American Progress argues that the U.S. Securities and Exchange Commission (SEC) has broad legal authority to require listed companies to disclose information related to climate change and environmental, social, and governance (ESG) matters, and that its regulatory authority is not limited to the "financial materiality" standard.

Report Background: SEC Advancing Climate and ESG Disclosure Rules

The report reviews the SEC's relevant policy process. On March 15, 2021, the SEC issued a request for public comment on whether and how to require companies to disclose matters related to climate risk and ESG. In May 2021, SEC Chair Gary Gensler confirmed that staff were developing enhanced climate-related disclosure rules and "human capital management" disclosure rules.

Some companies and business representatives have challenged the SEC's statutory authority to mandate disclosure on ESG topics, arguing that the scope of disclosure should be limited to information of financial materiality. The Center for American Progress points out that this view may weaken rather than strengthen the information disclosure system and fails to respond to market participants' actual demand for high-quality non-financial information.

Legal Analysis: Authority Derived from Congressional Authorization and the SEC Mission

The report states that more than 80 years have passed since the U.S. Congress enacted the federal securities laws, and the original legislative intent was to protect investors through full disclosure and to prevent the "arbitrary misdirection" of capital market resources. The SEC was established and operates based on three missions: protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.

In analyzing the SEC's legal authority, the report argues that both the Securities Act of 1933 and the Securities Exchange Act of 1934 grant the Commission the power to require information disclosure in the public interest or for the protection of investors. Neither the relevant statutory provisions nor the legislative history limits the SEC's disclosure authority to "financial materiality."

Limitations of the Current Principles-Based Disclosure Approach

The report argues that the SEC's past principles-based approach to climate and human capital disclosure has notable deficiencies. In 2010, the SEC provided guidance on climate information disclosure but did not establish uniform disclosure items, such as standards for greenhouse gas emissions or assets located in areas at high risk of flooding or wildfires. The 2020 rules similarly only required companies to describe their human capital resources, without specifying concrete metrics such as employee headcount, compensation and benefits, occupational health and safety measures, union density, or training investment.

This disclosure system, which relies on management's own judgment, tends to make disclosure content reflect management preferences rather than investor needs, while also lacking consistency and comparability across companies. Even if investors push for disclosure of specific topics through shareholder proposals and other "proxy voting procedures," it is difficult to bring about systematic rule improvements at the overall market level.

ConclusionThe Center for American Progress emphasized that the SEC has both the authority and the responsibility to require companies to disclose "reliable, consistent, and comparable" climate and ESG information, in order to support the business decisions of market participants such as investors, lenders, suppliers, employees, and regulators. The Center urged the SEC to continue exercising its disclosure authority in accordance with the law, to develop clear, detailed, and enforceable disclosure standards, and to avoid weakening investor protection through the mechanical application of the concept of "materiality."

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Source: Center for American Progress, "The SEC Has Broad Authority To Require Climate and Other ESG Disclosures." The original article was written by Alex Thornton and Tyler Gellasch.