The SEC’s proposed rule on climate disclosures could run afoul of the First Amendment.
Climate change threatens nearly every corner of human life and may structurally change the global financial system. To prepare, investors have increasingly demanded information about how climate change may impact their investments.
Recognizing these demands, the U.S. Securities and Exchange Commission (SEC) earlier this year proposed a rule that would require registered companies to disclose certain climate-related information in their financial statements and annual reports. But some critics argue that requiring companies to disclose climate-related information violates the First Amendment.
This argument specifically challenges the SEC’s proposed method for measuring greenhouse-gas emissions, which is based on a framework developed by the World Resources Institute and the World Business Council for Sustainable Development. Under this framework, the SEC defines three “scopes” to delineate companies’ direct and indirect emissions.
Scope 1 comprises direct emissions that occur from sources that the company owns or controls.
Scope 2 accounts for emissions produced by the generation of electricity that the company purchases.
Scope 3 emissions result from a company’s activities “but occur from sources not owned or controlled by the company.” For example, an automobile manufacturer’s Scope 3 emissions include tailpipe emissions produced by consumers driving the company’s vehicles.
The SEC proposes to require registrants to disclose all Scope 1 and Scope 2 emissions. Registrants would have to disclose Scope 3 emissions only if “material” or if the company set an “emissions reduction target or goal that includes its Scope 3 emissions.” The proposed rule would also require companies to disclose other climate-related information, including the company’s processes for identifying and managing climate-related financial risks.
The Securities Act of 1933 and the Securities Exchange Act of 1934 grant the SEC broad authority to require registered companies to disclose information that is “necessary or appropriate in the public interest or for the protection of investors.” To meet this standard, the SEC carefully framed its proposed climate rule as providing information necessary for investors to protect their financial interests.
But a growing chorus of critics challenges the proposed rule on constitutional grounds. SEC Commissioner Hester Pierce expressed concerns that the proposed climate rule “may not comport with the First Amendment.” Pierce’s comments come a year after West Virginia Attorney General Patrick Morrisey threatened to sue the SEC if it issued regulations that compelled companies to disclose information about their climate-related risks.
The First Amendment protects “the right to speak freely and the right to refrain from speaking at all.” From flag salutes to political advertisements, the U.S. Supreme Court has repeatedly held that the First Amendment prohibits the government from compelling private actors to speak.
On the other hand, commercial speech—which involves commercial transactions or relates solely to economic interests—typically receives less constitutional protection. In a 1985 decision, Zauderer v. Office of Disciplinary Counsel, the Court held that the government can compel commercial speech that is “reasonably related to the State’s interest in preventing the deception of customers.”
Over the last decade, however, the Court has appeared willing to entertain First Amendment challenges to regulatory disclosures.
In the 2015 case of Reed v. Town of Gilbert, the Court invalidated a municipal code that restricted how citizens could display outdoor signs. Because the code regulated signs based on the information that they displayed, the Court treated the code as a “content-based” speech regulation subject to strict scrutiny. As the Court later explained, content-based regulations “single out” topics or viewpoints “for differential treatment.”
Three years later, in National Institute of Family and Life Advocates v. Becerra, the Court applied the same reasoning to strike down a California law that required crisis pregnancy centers to display notices about the availability of abortion services. Despite the notices’ apparent status as commercial speech, the Court declined to apply Zauderer’s more lenient standard because it determined that the notices were not “purely factual and uncontroversial.”
The SEC’s proposed rule could encounter similar difficulties. The Court has previously identified climate change as a “controversial” subject, which suggests that Zauderer would not apply. If true, the climate disclosures would face the Court’s rule from Reed and Becerra that all content-based speech regulations receive strict scrutiny.
The Court doubled down on this approach two years ago in Barr v. American Association of Political Consultants, where it struck down a federal law that excepted debt-collection calls from the Communication Act of 1934’s prohibition on robocalls. Determining that the law “impermissibly favored debt-collection speech” over other speech, the Court held that the law violated the First Amendment. Justice Brett Kavanaugh’s plurality opinion reiterated that “content-based laws are subject to strict scrutiny” but claimed that its decision was not intended to “affect traditional or ordinary economic regulation of commercial activity.”
Despite these assurances, the Court’s compelled-speech doctrine could doom the SEC’s proposed climate rule. Dissenting from Barr, Justice Stephen Breyer decried the plurality’s sweeping approach that “reflexively applies strict scrutiny to all content-based speech distinctions.” Breyer noted that faithful application of the plurality’s rule—the same one originating in Reed and Becerra—would invalidate a vast array of regulations based on speech content, including drug labeling, false advertising, and workplace safety warnings. Climate-related securities disclosures may also qualify.
In light of these potential challenges, the SEC will likely need to proceed carefully if it hopes to establish a successful and lasting rule that responds to investors’ demands for more information on companies’ climate-related financial risks.
