Deep Dive Episode 264 – The SEC’s ESG Reporting Rule: Understanding the Debate over Climate-Risk Disclosure Requirements

In March 2022, the Securities and Exchange Commission proposed a new rule that would establish climate-risk disclosure requirements for public companies. The 490-page proposal includes requirements for disclosing direct greenhouse gas emissions (scope 1) and indirect emissions related to use of electricity or other forms of energy (scope 2). While supporters hailed the proposed rule’s effort to standardize the disclosures many ESG-focused funds have been making, others zeroed in on a requirement that would obligate larger companies to disclose GHG emissions from upstream suppliers and downstream customers (scope 3).

After receiving thousands of comments favoring and opposing the proposal, the SEC postponed its target date for finalizing the rule to spring 2023. Much of the debate centers on the scope of the SEC’s authority to mandate climate risk disclosure, an issue that took on additional dimensions after the Supreme Court’s June 2022 decision in West Virginia v. EPA, which struck down an EPA rule regulating GHG emissions under the Clean Air Act as contrary to the “major questions doctrine.” Many predict that the final ESG rule will be litigated regardless of what changes the SEC may make to address issues that commenters raised.

With the SEC ESG final rule expected soon, this program brings together distinguished speakers who outline the arguments for and against the SEC’s effort to regulate in this area.

  • Paul Ray leads The Heritage Foundation’s work on regulatory and economic policy as Director of the Thomas A. Roe Institute for Economic Policy Studies, building on his previous experience as Senate-confirmed Administrator of the Office of Information and Regulatory Affairs at the Office of Management and Budget. He has written widely on a number of regulatory issues, including the SEC’s authority to set corporate climate policy.
  • George Georgiev is an Associate Professor of Law at Emory University Law School, focusing on Business Law, Corporate Governance, Securities Regulation, Mergers & Acquisitions, Corporate Finance, and Executive Compensation. Professor Georgiev co-authored an analysis affirming the SEC’s authority to adopt climate-related disclosure rules, and filed comments in the rulemaking.

The panel was moderated by Jane Luxton, Managing Partner of the Washington, DC office of Lewis Brisbois Bisgaard & Smith, and co-chair of the firm’s Administrative Law & Regulatory Practice.


Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.

[Music and Narration]


Introduction:  Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker. 


On May 2nd, 2023, The Federalist Society’s Regulatory Transparency Project hosted a virtual event titled “The SEC’s ESG Reporting Rule: Understanding the Debate over Climate-Risk Disclosure Requirements.” The following is the audio from the event.


Colton Graub:  Good afternoon, and welcome to this Regulatory Transparency Project Webinar.  My name is Colton Graub. I’m the deputy director of RTP. As always, please note that all expressions of opinion are those of the guest speakers on today’s webinar.  If you would like to learn more about each of our speakers and their work, you can visit where we have their full bios. After the discussion between our panelists, we will go to audience Q&A. So please enter any questions you have into the Q&A function at the bottom of your Zoom window. This afternoon, we’re pleased to host a discussion on the SEC’s proposed rule regarding mandating climate disclosures. We’re very thankful to Jane, who is managing partner of Lewis Brisbois’ D.C. office for moderating today’s conversation. Jane, I’ll pass it off to you to introduce Paul and George and kick things off.


Jane Luxton:  Thank you, Colton, and welcome everyone. This panel discussion is, we think, timely. The rule was proposed in March 2022. First, was expected that we would have a final rule in the fall of last year. The next set of predictions were any day now in 2023, and I just read a clip that SEC former commissioner Robert Jackson is now predicting fall 2023. Why so much time? Well, Chairman Gensler was recently quoted as saying “The SEC is weighing adjustments to the rule.” 


Thousands of comments came in on this proposed rule and very strong views on both sides. On the pro side, commenters say it standardizes reporting in a new area of the law which has a full range of methods people are using and no standardized techniques. On the pro side of the debate is that the rule is well within the SEC’s powers, and we will be hearing more about that side of the case later in this panel discussion. On the other side, major questions about the SEC’s jurisdiction to promulgate rules in this area and charges of regulatory overreach and also the major questions doctrine which recently became a hot topic after the case last year — the Supreme Court decision in West Virginia v. EPA


One of the things that makes the rule so controversial is the three scopes of disclosures that it would require. First, direct greenhouse gas emissions by parties who are required to report. Second, indirect greenhouse gas emissions which covers the use of electricity and energy inputs to the production process. But scope three is the one that’s generated a lot of comment. Larger companies would be required also to investigate and report to the extent possible on the climate change emissions of their suppliers and customers up and down the supply chain. So that has, as I mentioned, caused quite a bit of comment. In the meantime, while this rule has been awaiting a final version, you can read a recent Wall Street Journal article saying that many companies are getting ready for it and believe that it will regularize what they are already trying to do as a result of customer demand and peer competition. So many interesting factors at work in this debate. 


And we welcome today two eminent speakers who will bring to life some of the important questions that are covered by the comments and in their own writing. First, Paul Ray will start us off. He is the director of the Thomas Roe Institute for Economic Policy Studies at The Heritage Foundation. Formerly, he served as Administrator of the Office of Information and Regulatory Affairs or OIRA at OMB and he has written on this role among many others. Second, Professor George Georgiev is an Associate Professor of Law at Emory University Law School focusing on Business Law, Corporate Governance, Securities Regulation, Mergers & Acquisitions, Corporate Finance, and Executive Compensation. Professor Georgiev co-authored an analysis affirming the SEC’s authority to adopt climate-related disclosure rules and filed comments in the rulemaking. 


What we plan to do today is first have opening comments from Paul Ray and then Professor Georgiev will follow. After that, we will allow each of the panelists to respond to the comments the other has made, and then we’ll take a short part of the discussion where I’ve come up with some questions I’d like to hear the answers to. And we’ll direct their attention to those questions while we accumulate questions and answers from the listeners on this panel discussion. So with that, let’s get started. And Paul if you would give us your opening comments, please.


Paul J. Ray:  Gladly. Well, Jane, thank you for moderating and organizing this panel. And George, good to see you, and thank you to everyone online with us for joining us. So today, I’d like to argue that the SEC’s rule, as it’s been proposed in any event, would violate the major questions doctrine and that therefore it may not lawfully be finalized. I’m also going to argue that this barrier to issuance is something we should all support regardless of our positions on the merits of the policy behind the proposal. Perhaps a counterintuitive claim but I hope to make a case for it. 


So I expect many of the folks on this call are familiar with the major questions doctrine. I would argue it’s existed for several decades, appearing for the first time in MCI v. ATT in ’94. But of course, the history of the doctrine is itself the subject of pretty acrimonious dispute. What is beyond dispute is that last year the Supreme Court really made waves when it found that the Clean Power Plan was out of bounds because it violated the major questions doctrine. Basically, the holding was that the Clean Power Plan was an attempt to resolve a fundamental question that Congress could not plausibly have tasked out for resolution without saying so clearly. 


Now, the major questions doctrine is fuzzy at the edges, but its core is reasonably clear. It prevents agencies from repurposing statutory authorities to resolve the gravest questions that were not on Congress’s radar when it enacted the authorities at issue. And it seems to me that the SEC’s climate rule, as proposed, would suffer from a similar defect. It shares many striking similarities with the Clean Power Plan. In the first place, the SEC’s rule would work vast economic changes. The Clean Power Plan would’ve forced US electric generation to shift from fossil fuels to renewable resources and the SEC’s proposal would similarly tee up shifts of capital in fossil fuel intensive industries such as fuels production and heavy manufacturing toward greener alternatives. Both of these economic shifts would affect countless businesses large and small as well as potentially every American consumer and worker. 


Second, both rules lie beyond the expertise of the issuing agencies. In the Clean Power Plan, the EPA tried to regulate the nation’s power generation and transmission mix, a topic far outside its field of knowledge. So too for the SEC’s proposal. After all, the condition lacks expertise in climate science. Third, the SEC’s proposal, just like the Clean Power Plan, would assert a new understanding of an old statute to justify itself. In the West Virginia case, the court found it highly probative the fact that the interpretation on which the Clean Power Plan turned was at odds with EPA’s longstanding interpretation of its statute. Likewise, the SEC’s proposal relies on a new interpretation of the Securities Act and the Exchange Act which date back to the 1930s. In nearly every past case in which the SEC has demanded disclosures under these statutes, it has claimed to do so because the required information was material. But the climate proposal does not even attempt to show that all its proposed disclosures are material. 


Fourth, both rules would vastly expand their agency’s regulatory authority. The Clean Air Act gave EPA power to set emission standards for particular plants based on the emission controls the plants can implement. The Clean Power Plan would have fundamentally changed that regulatory scheme by allowing EPA to set limits for the grid as a whole with little limit to the kind of changes EPA could force. So too with the SEC’s proposal. The commission’s departure from the materiality standard would set the SEC up to compel whatever disclosures it likes at its sole discretion without any standards against which the need for disclosures may be measured. Fifth and finally, the SEC’s proposal, like the Clean Power Plan, would adopt a measure that Congress has already considered and rejected. As with the Cap-and-Trade scheme at issue in the Clean Power Plan, Congress has already considered but declined to enact legislation directing the commission to adopt new climate disclosure requirements. 


So that’s the first part of my argument. Now, I’d like to turn to the second and explain why, again, regardless of our views of whether new climate focused disclosures are a good idea, we should be glad for the impediment that the major questions doctrine raises. To understand why, we need to turn for a moment away from the SEC and to the white house. Now, my thesis is this. The major questions doctrine helpfully responds to the most important recent development in executive practice which is the growth of presidential control and coordination of the regulatory apparatus. With these new powers of control and coordination, presidents can and do resolve the most critical and hotly contested political issues of the day without congressional input. The SEC’s proposal is an example of this. And the major questions doctrine is aptly drawn to restraining its power. 


In her famous article, “Presidential Administration,” now Justice Kagan explains some of the ways President Clinton exercised control of the agencies. In her article, Justice Kagan explains that, unlike for previous presidents, for President Clinton, the agencies were neither autonomous competing powers nor distant provinces tenuously held in subjection by OIRA review. Rather, President Clinton made the agencies part of his own team. By giving them direction and by taking public credit for their successes, President Clinton injected his own priorities into the regulatory process and identified the outcomes of that process as part of his own legacy. Each president since Clinton has continued the same approach and I think strengthened it. To be sure, presidential control of rulemaking is far from complete but over the main policy questions involved in significant rulemakings, president exercises considerable control. 


This control allows the president to require that the agencies, whenever they happen to regulate, act consistently with his views and values. But he can go further. He can identify a policy priority and then go hunting for agencies and authorities to implement it. This is how much presidential direction to the agencies occurs. Let’s think about the Clean Power Plan. I find it pretty hard to believe that President Obama one day called EPA administrator McCarthy and said, “You know, I just happened to review Clean Air Act section 111 for fun last night and I think EPA has been misinterpreting the phrase ‘best system of admission reduction.’ Don’t you think generation shifting — I don’t know — could qualify as a best system?” No, that would be absurd, right? Instead, certainly President Obama would’ve identified fighting climate change is a priority and then asked his senior team to find agencies and authorities that could be used to address that broad goal. 


Because federal agencies are many, because Congress has given them many authorities over the last century and has rarely reviewed these grants, and because many of these grants are open ended or can become so with the help of Chevron deference, presidents can very often find some regulatory path to further their policy goals sometimes in unexpected quarters. Now, the president’s control means he can coordinate among the agencies. He doesn’t merely direct initiatives at EPA and separately at interior and separately again at energy but also directs government wide initiatives across multiple agencies. We see this cross-agency application of authority point explicitly at executive orders of presidential memoranda which often begin with a section or two laying out overall policy goals and then several sections that give due outs in pursuit of those goals to various agencies. 


In recent years, the orders themselves have begun to refer to this tactic as a “whole of government approach.” Examples include, of course, the very rulemaking we are here to discuss which occurs pursuant to an executive order on climate related financial risk and FSoc’s implementation of that order. The SEC is not alone in addressing such risks. It’s certainly not alone in addressing climate policy more broadly. Yet the contrary President Biden has adopted a vast multi prong approach to climate with actions by EPA, labor, the far counsel, and just about every other agency. To be sure, the SEC is an independent agency but through its appointment power and the various kinds of political support the president can provide and an agency like the SEC needs, the president can nevertheless exert considerable influence over the commission, integrating it into this whole of government climate initiative. 


As the proposal before us shows, presidents have the ability not just to inject their priorities and values into the administration of federal programs but also to become regulatory entrepreneurs reorienting these programs to converge upon and resolve the most politically important questions of the day. Especially over the last decade, presidential control over agencies with broad powers combined with congressional intransigence or dysfunction has given presidents strong incentives to pursue vast domestic policy agendas relying mostly or exclusively on their regulatory powers and presidents have acted on those incentives. 


Presidential regulatory entrepreneurship should concern even those of us who, like myself, take a strong view of presidential authority over the agencies. It’s one thing to say that when our agencies must make discretionary decisions in implementing the statutes, the president’s priorities rather than those of unelected officials or judges should control. Even if we dislike the scope of discretion Congress requires agencies to exercise implementing the programs, surely, it’s better for someone politically accountable to make decisions that must in any event be made by someone. It’s quite another thing to say that the president should have the additional power of settling the most important questions of the day through the creative combined use of authorities designed without those very questions in mind. For unlike run of the mill discretionary decisions which would be made by unaccountable agency staff or judges, the president doesn’t make them, regulatory entrepreneurship as I have described it is something no one has to do. 


So if we find it troubling that a single human being has power to decide some of the most fundamental political controversies of our day or that decisions about these matters should flip back and forth every four or eight years, and I think we should all find both of these things very, very troubling indeed, then we should deny the president this power. To do so we need a legal doctrine that recognizes regulatory entrepreneurship and raises barriers to it. This is just what the major questions doctrine does. For it limits the president’s ability to direct agencies with dispirit missions and authorities to a pressing policy goal that Congress did not have in mind when it created the agencies. 


Under the major questions doctrine, the president has, for instance, control over the labor policy that the labor department sets and the contracting policy that the far council sets as well as influence over the securities trading policy that the SEC sets. You just cannot redirect and coordinate all these agencies and others toward resolving the greatest questions in climate policy. The major questions doctrine thus targets just the kind of presidential power that enables regulatory entrepreneurship the ability to reorient agencies toward new objectives outside their core statutory missions. In short, the major questions doctrine conserves a valuable response to the evolution of presidential administrative power over the course of the last decades and that is something for which we should all be grateful regardless of our views of how any particular policy questions should come out. All right. George, I suppose over to you now.


Jane Luxton:  Yup. Thank you, Paul. And Professor Georgiev, George, please carry on.


George Georgiev:  Thank you, Jane, for having me and thank you, Paul, for this insightful introduction and those remarks. I’ll engage with the questions of the major questions doctrine in my response but first, I would just offer some introductory remarks. I will say that there is a lot to like about the major questions doctrine. So I think we’ll find as is often the case that we probably agree on more than we disagree. So I would like to talk about four different things and four different questions here. 


First, I’d like to maybe address the broad and scary term climate change regulation and climate change policy and maybe disambiguate it a little bit. Second, I’d like to talk about what the SEC is actually trying to do here because I think there is a lot of misunderstanding about that and admittedly it’s a complex rule. The world of securities regulation and complexity is apparently second only to tax or so I hear. And third, I’d like to ask the question well, have we seen this before? Has the SEC done any of this before? And fourth, is this how we should be spending our time in the interest of regulatory efficiency and regulatory transparency? 


And so starting with the question of climate change policy and climate change regulation, is this what the SEC is doing here? Now, I would submit to you that there is a wide range of interventions that have an impact on climate. We can talk about outright prohibitions, we can talk about limits, we can talk about more market-based interventions such as taxes, such as incentives, and indeed, and credits, R&D credits, and indeed we saw that with the Inflation Reduction Act and two other bipartisan interventions, the CHIPS Act and the Infrastructure Act last year which both contained climate related provisions. The SEC rule doesn’t try to do any of that. It’s really about putting forward an information generating framework to provide investors and markets with information about the risk that is the material risk, the transition to a carbon modified economy — carbon neutral — whatever you want to call it has been termed the greatest economic transition since the industrial revolution. 


So this is happening without any government intervention in the United States. It would happen because it’s happening in Europe, it’s happening in the rest of the world, but we actually also have those interventions that do exactly what Paul is saying, reallocate capital in the guise of those three congressional acts, two of them bipartisan, last year. But the SEC doesn’t try to do any of this. It’s merely about the provision of information and I’ve read the 500 page rule several times over and I don’t see anything that reflects a so-called double materiality approach or anything that seeks to reallocate capital or to influence the allocation of capital. Now and admittedly, certain disclosure provisions do have secondary effects just like any type of regulation does but this is not what the SEC is doing here. 


And in the words of the SEC — most recent prior SEC chair Jay Clayton, the SEC’s disclosure regime is powerful, far reaching, dynamic, and ever evolving — emphasis on ever evolving. So we have had this process of iterative modernization of the SEC disclosure regime to adjust for the challenges of the time and this is something that the SEC as an expert agency has been doing and has the capacity to do and we would want it to do because Congress does not have the expertise to do that. To say that the SEC is really influencing climate policy here would be to say that when the SEC last year required companies to provide more [inaudible 0:22:56] disclosure about the impact of Russia’s war on Ukraine that would be the SEC conducting foreign policy. Well, no. This was just the SEC directing companies — public companies that have chosen to go public and subject themselves to this regulatory framework to provide enhanced information that investors and markets need. 


Same with the effects of Covid. The SEC under the chairmanship of Jay Clayton required companies to provide more enhanced information about the effects of Covid. So to say that the SEC is here directing climate policy or trying to “solve” climate change would be tantamount to saying that in 2020, the SEC was trying to solve the Covid 19 crisis. Of course, the SEC was not trying to do that. Same with Y2K.  Those of us who are a little bit older will probably remember that as well. So if the SEC is not trying to do all these things, then what is the SEC trying to do here? Well, the SEC has been very clear that it’s trying to provide, as I said, an information generating framework that focuses on climate related risks and their actual likely material impact on a firm’s operations business and outlook. The governance of climate related risks and relevant risks pertaining to management processes, greenhouse gas emissions, which we can talk about scope one two and three later on — I agree that’s an important topic — certain climate related financial statement metrics, and then information about climate related targets and goals and transition plans if any. 


So the SEC — so this is a good actually example of how the SEC is not trying to tell companies well, you should have a climate transition plan, or you should have climate targets, or you should have contingency planning. It’s just saying, if you have that — if you have made some statements that you have that to investors, please, provide the information in a more standardized way so that investors can compare and decide where to allocate money. And so a climate agnostic or a climate skeptic investor would be perfectly justified then in relying on that disclosure that a company doesn’t have any transition plans, isn’t spending money on this climate transition, and then they would be perfectly — that would be actually helpful information for them so they can direct the climate agnostic or climate skeptic investor can direct their money towards that company. 


Has the SEC done this before? Yes. The SEC has been — the third question — the SEC has been doing this for nine decades since the 1930s. Some of the mandates and the disclosure framework, and we’ve had over a hundred SEC disclosure rules — the disclosure framework has been reformed time and time again. Congress over those nine decades has not stepped in a single time to repeal an SEC disclosure though at certain times Congress has stepped in to require additional disclosures but never has Congress repealed an SEC disclosure rule or toned down the reach of the SEC disclosure framework. And so we’ve had congressionally mandated rules as well as rules that the SEC has pursued out of its own initiative, rules related to asset backed securities, executive compensation, stock buy backs, and other matters of importance. 


So this is just bread and butter SEC disclosure rule making and since the Nixon administration actually we’ve had the SEC promulgate disclosure rules related to climate and the environment — environment subsequently climate. But even in 2010, when the SEC issued a concept release that talked about — directed companies on how to comply with existing requirements, there were two republican appointed or affiliated commissioners who dissented but neither one of them, notably, neither one of them actually argued that the SEC doesn’t have the authority to direct companies to disclose information about climate related risks and climate related impacts. They just said that the SEC — that companies already know how to do it, companies already know how to do it. This was the argument from Commissioner Kathleen Casey and Troy Paredes. 


And then finally, is this where we should be spending our time in the interest of regulatory transparency and regulatory efficiency? And I would argue that no, this is not where we should be spending our time because this SEC rule has received a lot of attention, and of course, I like talking about disclosure and the SEC disclosure regime and things like that, but it is not as extraordinary as it is being made out to be. And in fact, it’s being challenged on constitutional and administrative law grounds where — basically arguing that the SEC doesn’t have the authority to proceed with this rule whereas, I would argue that industry and advocates should be focusing more attention on actually trying to make the rule the best that it can be in terms of minimizing the compliance burdens, in terms of maybe allowing for some reciprocity with similar rules that are being considered in Europe and in the United Kingdom. The corporate sustainability reporting directive arguably would apply to 10,000 companies — non-EU companies — which includes by the way both EU and — both public and non-public companies. So private companies in the U.S., if they do any significant business in the EU would have to comply with the requirements of the CSRD. 


So how can we make sure that U.S. firms public and private are not burdened by these international rules which they have to comply with if they want to do business internationally and how can we make sure that the rule maybe contains liability carve outs or maybe deferred implementation or maybe a tiered approach. Like, there are all sorts of really specific questions that we can address that will mitigate the impact of the rule rather than focusing on some of these bigger broader constitutional challenges which I’m happy to talk about in my kind of second response, but now I’ll turn it over to Jane and Paul.


Jane Luxton:  Okay. Well — and Paul, you have an opportunity now to respond to comments that George has made and let’s hear what you have to say to that.


Paul J. Ray:  Great. Well, George, thank you for those insightful remarks. I think you’re right. I think we do agree on an awful lot and maybe we’ll find even more room for agreement as we go along. So the point you made that gave me the greatest pause I would say is this. I do not view the current proposal as limited to requiring just material disclosures. And I’m keen to hear what you would say about this. There are a few significant places in which the current proposal seems to me to overshoot traditional notions of materiality. But I think you can see it most easily in the requirement for disclosures of scopes one and two and in comparing those requirements to the requirements for disclosure under scope three. The rule’s clear that scope three emissions must be disclosed if material for a given year. But it does not contain that conditional for scopes one and two. 


So as I understand it, there are two ways to interpret what the commission proposes to do with respect to scope one and two. One is that it does not believe itself to be requiring just material disclosures. That is to say, it intends to compel disclosure of scopes one and two information that it believes is not material or two, it is deeming all scopes — it is deeming scope one and two information material for all registered companies. Now, either way, the commission’s approach is quite extraordinary. It would be — to pick up one of your examples, George — it would be tantamount to saying we are deeming material for all companies all armed conflict ever, right? Anywhere in the world, right? But of course, the commission doesn’t do that. It issues more targeted guidance, and you mentioned the Ukraine example, right? 


It would be quite extraordinary to adopt the kind of broad-brush approach to either — to deeming climate related risk scopes one and two information material to all registrants or even more extraordinary to depart from materiality standards with respect to scopes one and two. So there are other ways in which I think the rule likely exceeds traditional notions of materiality. But this is a sort of pretty probative example, I think. So it’s precisely because the SEC seems to depart in one way or another from its traditional position with respect to materiality in favor of what I can best describe as advancing either climate policy or at the very least, disclosures related to climate risk that I think the SEC is doing something here that’s not just bread and butter disclosure regulation. It seems to be placing a special focus on climate-related disclosures. So I’ll stop there, and yeah, see what you think about that.


Jane Luxton:  Okay. George, back to you.


George Georgiev:  That’s excellent. Thank you, Paul. I love talking about materiality. Jane, I think I only have what, four minutes for this? I’ll really try to restrain myself because —


Jane Luxton:  We’ll give you a little more —


George Georgiev:  Yeah.


Jane Luxton:  — because I was going to touch on materiality in one of my questions. So we can spill over into that.


George Georgiev:  Okay. All right. Well, I think materiality is one of the most misunderstood doctrines in securities law because it is very challenging and tries to do multiple things in the disclosure regime. There are multiple definitions of materiality. The Supreme Court has spoken about materiality in a kind of very general way. It’s a pithy definition of materiality that often gets repeated, but it actually doesn’t tell you how to determine whether or not something is material. And so many times we’ll see the Supreme Court’s definition of materiality quoted and that just tells us what the question is. Doesn’t give us the answer, unfortunately. And so it’s very much a facts and circumstances analysis. 


And by the way, the Supreme Court has spoken about materiality only in the context of ex post liability termination. So here what we’re dealing with is an ex-ante determination by an expert agency about what would be material to a reasonable investor or what would be relevant to a reasonable investor. So the Supreme Court’s definition of materiality is only about ex post liability. And even there by the way when courts — it’s a determination for the trier of fact — and courts struggle with this. They look at price impact — do not look at price impact prospectively. And so it’s a very difficult thing to read the tea leaves about materiality. 


Now, one thing — so that’s one. The second thing that I think we really have to keep in mind is that the SEC is not constrained by materiality in the way the Supreme Court has spoken about liability determinations. The SEC is not constrained by that version of materiality in its rule making. So Schedule A to the Securities Act which contains the original disclosure requirements that Congress put out qualified sound disclosure requirements by materiality many others it did not. And so Congress was aware in the 1930s of the concept of materiality but didn’t condition SEC rulemaking on materiality. And time and time again, the SEC has required relevant information but hasn’t required materiality testing which I think is what you are — kind of particularized materiality testing which is what you are referring to in terms of, you know, that’s what’s going to happen potentially with scope three. Companies would have to test whether scope three emissions are material and then decide whether or not to disclose that. But then with scope one or two, they don’t have to perform that test. 


And I would actually submit to you that — and I know that because I was a corporate lawyer for six years. It’s actually very time consuming and expensive to perform those materiality tests. So in many cases, companies would much prefer to know that they have to disclose scope one and two period and then only perform the materiality test for scope three. So that’s kind of another point that we can make here. And the final thing I’ll say is that the SEC has always deemed certain matters — and Congress by the way — to be presumptively material. So related party transactions above a certain amount, 120 — a very low amount — a threshold of 120 thousand dollars, have to be disclosed. Companies have to disclose the number of employees that they have regardless of whether that’s material or not. A number of executive compensation information has to be disclosed without materiality testing, asset backed securities, and everything — virtually everything in the financial statements, by the way. It’s a line item so, you know, you can put zero there or a small amount, but you don’t test it in terms of filling out the form with materiality. 


Now, there are materiality things throughout the process that we can talk about, and I’ll just end here with an analogy which is, when you think about our tax forms, right? And so we have to provide information to the IRS in terms of line items. The IRS doesn’t require us to do materiality testing. If it’s material or not, you just put in the amount. And then for certain other things, you may file schedules. So if it’s material, you would provide it, but for certain things, they’re so basic or in the interest of saving time, efficiency, you just — we are required to disclose them. So that’s on the materiality front. The only other point that, in the interest of time, that I would like to touch on is on the expertise point which is that the SEC doesn’t have expertise on climate. And the SEC doesn’t have expertise on executive compensation per se. It doesn’t have expertise on matters of foreign policy. It doesn’t have expertise on matters of technology. It doesn’t have expertise on cyber security — multiple things that companies end up having to disclose and yet — but the SEC does have expertise on matters of generating a framework that ensures comparable disclosures with appropriate input. 


And so many, many federal agencies including the Department of Defense, by the way, are actually spending a lot of time and money on climate mitigation, climate adaptation, and that’s being not confined to this administration. And so the expertise critique — if you carry it forward, I think the only agencies that would be exempt from it would be the EPA and maybe the NOAA. So that is — the SEC is not a climate agency, but we have to look at what the SEC is actually trying to do here and whether it’s required some more very kind of technical disclosures in the past. So let me end here on this kind of segment, and then I welcome further engagement.


Jane Luxton:  Okay. We have, I think, a number of really intriguing points that maybe you both will want to respond to each other on but let me start the next section by returning to the major questions doctrine and particularly since George didn’t have a chance to speak on that subject. But Paul, I’ll start with you. The major questions doctrine right now is kind of the issue du jour and every regulation that somebody doesn’t like is — people are saying well, Congress left a gap there and they can’t just fill it by regulatory action that then has to be deferred to under Chevron at least until the next Supreme Court argument in that case on that issue. But what kind of limits are there, Paul, to the major questions doctrine. And then George, we’ll give you a chance to weigh in and speak more broadly because I know it was the subject you were thinking you wanted to address.


Paul J. Ray:  Yeah. Great question, Jane. As you were speaking, I saw that Alex Volokh sent in a question saying there’s too much agreement here about the major questions doctrine. So we’ll try to mix it up a little bit.


Jane Luxton:  All right. Let’s go for it.


Paul J. Ray:  Yeah. So the major questions doctrine, as I said, I don’t believe is a new doctrine, but it has achieved new prominence. It has not been systematized. So it is a doctrine that is in development at present. I think we know a great deal more about its core than we know about its edges. That is to say, it’s pretty easy to say that some kinds of questions are major questions. It’s also pretty easy to say that some kinds of questions are certainly not major questions. But there are a lot of edge cases right now that we just don’t have a lot of clarity on. So we’re going to see a lot of definition given by the courts of appeals and I’m sure by the Supreme Court over the next several terms. 


If I were to describe the core of the doctrine, I would say it is meant to exclude from the agency’s purview absent a clear statement. The resolution of questions that are basically the most fundamental political questions, the kinds of questions that we would think any self-respecting legislative body would feel the need to resolve for itself, right? Kristin Hickman had a very good formulation that I’m not doing quite justice to but it’s similar to what I just described. That’s the core. I think you see in some of the prior cases before West Virginia you see perhaps even clearer applications than in the Clean Power Plan itself. So for instance, the Brown & Williamson case is a classic major questions case. In that case, the assertion was that Congress had allowed the FDA to regulate tobacco but had not done so explicitly. It just allowed it to extend its jurisdiction to cover tobacco through the standard definitions in the Food and Drug Act. 


So I think, I guess, I’m fighting the question a little bit here, Jane, but I think the core is easier to define than the edges and that is what the core is. Now, if I may, to take up Alex’s question while I’m on the subject and justify a little bit more why we should favor the major questions doctrine or at least favor the core of it as I have described it. I think it is — what I’d like to do is defend the major questions doctrine as a substantive principle of administrative law. That is to say, we should desire a set or a body of administrative law that includes a principle like the major questions doctrine. We may not like the major questions doctrine as a matter of statutory interpretation. 


That would be a sensible objection to the West Virginia decision itself, of course, because that decision was advancing a principle of statutory interpretation, but one might favor the doctrine as a substantive principle of administrative law without caring for the provenance of it. That is to say, you might wish that Congress would enact something like the major questions doctrine or that it would come from some source even if you don’t think that the Court’s interpretive methodology was sound in the case. I’m not taking that position myself. My point is just that I would urge everyone to tease apart those questions a bit, to ask the important questions about statutory interpretation but also think seriously about the kinds of principles we would like our administrative law to consist of. And for the reasons I gave in my opening remarks, it seems to me that — well, at least if we think that one of the core functions of administrative law is to prevent the U.S. from lapsing into one man rule, that the major questions doctrine does important work as a substantive principle in administrative law.


Jane Luxton:  Okay. George, your turn.


George Georgiev:  Right. So much to say here and one can go in so many different directions but maybe I can emphasize something that is another core principle of modern governance which is market efficiency and free markets. And so the entire purpose of the SEC disclosure regime is to ensure that commerce can flourish, and that market prices and asset prices reflect the available information and so that we don’t have bubbles — asset bubbles. And this is really where the SEC’s effort comes in. 


So just a couple of weeks ago, Fitch, a rating agency announced that it will potentially downgrade 160 firms based on their exposure to climate impacts. And it is actually actively investigating information about how they will be exposed to the effects of climate change to revise its rankings. And so this just — ratings — so this just gives you an idea that the marketplace, market analysts, investors, retail investors including, do not have sufficient information and this information isn’t priced into market prices, stock prices, bond prices, asset prices and we can talk about buying and selling securities and investment preferences but truly the most basic term in any securities transaction is the price. And so if the price is overvalued, then that’s a very significant problem. And I think this is what the SEC has always tried to do, and I think this is what the SEC is trying to do here, make sure that market prices reflect the relevant information. 


So I think that’s a very important efficiency — market efficiency — a very important value that hopefully we can all agree on. And this isn’t command and control regulation along the lines of what some of the prior major questions doctrine cases contained. The SEC isn’t stepping in to regulate climate. On the point that Paul made that if it’s a political question, Congress should make a clear statement, I think parts of the effects of climate are political questions but information about what is happening out there in the world — objective information about what is happening out there in the world and what companies are doing should not be political, right? I mean, it can be politicized but investors need information, and the market prices need to reflect what is happening. And so certainly, parts of climate policy are political, but I think not everything about just the effects of climate is political. So yeah. Let me pause here and I’ll hold for questions.


Jane Luxton:  Okay. I have a couple more questions, but I’m going to turn to the — we’re getting so many good ones from the Q&A and chat. Please, if you could put them in the Q&A box. It’ll make it easier for me to pick them up. We have two questions, and I was going to ask one also relating to the cost benefit of this rule. Here’s one from Charles Weller. “The SEC states, I believe, the cost of the rule will be 6.4 billion, 64 percent more than the 3.9-billion-dollar disclosure costs from the beginning of the SEC in 1934. Doesn’t that imply its real purpose is regulating climate change? And in any event, it must be — must it be dramatically cut back?” The other question was, “Does the SEC lay out a cost benefit analysis and how much — well, so that was waiting — so have they also calculated benefits?”


George Georgiev:  I can jump in. And obviously, cost-benefit analysis is definitely Paul’s domain — royal domain — and so I will just be very brief. I think the issue of cost benefit analysis is an important one. The SEC actually isn’t required to perform OIRA style cost benefit analysis. It does have its own guidelines on cost benefit analysis that it voluntarily adopted in response to some prodding from the D.C. circuit. Can we compare magnitudes? So I’m not familiar with the estimate that Charles Weller is citing. I would go back and take a look at it and thank you for the helpful citation to the federal register there. I think if this is a problem of the scale of the industrial revolution, it’s a major transition. 


So I think getting the information about what is happening — and companies are spending a lot of time and money dealing with the effects of climate change of their own volition — if that is happening then you would think that an information generating framework will also be costly. And I think we also have to keep in mind that companies are already spending a lot of that money. And actually, it is more efficient to have one framework versus a number of different frameworks — conflicting frameworks. And so I have heard CEOs and CFOs say that they have to respond to dozens of surveys from different rating agencies and climate information providers about what exactly they’re doing and just getting that information on the different standards out there is very time consuming and burdensome and potentially ends up distorting the playing field. So that’s my take on the cost-benefit analysis in general but obviously, we can talk more about it in specifics. 


Jane Luxton:  Okay. Paul, obviously, this is in your bailiwick, right? So what do you have to say about that?


Paul J. Ray:  That’s right. So the point from Mr. Weller is correct that the costs of the rule would exceed the costs from, I believe — at least from the top 10 most costly disclosure rules in the commission’s history. I haven’t checked on all of them but certainly from the top 10 current disclosure requirements. But it’s really important to note that that should not be taken as the cost of the rule. The rule will be vastly more costly than that. And the reason is the estimate that Mr. Weller gives us from the rule has to do only with the paperwork costs, with the costs of filling out the paperwork, of coming to understand the rule in the first place, and then gathering the information as needed and making the disclosures. But of course, it’s contemplated that the disclosures would be acted upon. They’re meant to prompt action. And the effects of the action are not part of the cost estimates. So it seems likely to me that the actual economic disruption of the rule will be quite considerably in excess of the several billion-dollar figure that the rule itself gives. 


The agency ought to have made some estimate — it would have been very difficult to do. I’ll grant the point. But the agency ought to have made some attempt at understanding what that additional and larger impact would be, and it didn’t do that. That is one feature of the cost benefit analysis that is troubling to me. Another feature that troubles me is the agency didn’t actually find that the benefits of the rule justify its costs. And presumably it thinks they do because it’s proceeding with the rule, but it didn’t explain why it thought that. It did assess the benefits of the rule, but it wasn’t able to quantify the benefits, certainly not with the same degree of rigor that if offered with respect to the paperwork costs. But even with respect to the paperwork costs, it didn’t find that the benefits justify the costs and that’s quite troubling. Under Michigan v. EPA, agencies need to assess both costs and benefits and then the ultimate step is to determine that the benefits are worth it, and the agency didn’t do that here. So that’s my other principal concern with the cost-benefit analysis.


Jane Luxton:  Well, and it’s already been said, and it will be said every time this rule comes up for sure, it will be challenged in court and chances are that’s going to be one of the major issues.

George Georgiev:  Can I just add one thing?


Jane Luxton:  Sure.


George Georgiev:  Yeah. So I think cost benefit analysis of financial regulation is very, very challenging, and I don’t think the SEC is required under its own guidelines and certainly not by any federal law to state that the benefits exceed the costs. I think if it had tried to estimate those second order costs that Paul, you’re referring to which I guess would have been helpful, but it could have been said that they’re very speculative as well. So I think there is some really excellent academic literature on this by John Coates and others on the difficulty — really the very significant difficulties in conducting cost benefit analysis on financial regulation. 


And on the specific rule, I would point you to a comment letter that a professor of finance at Columbia business school, Shivaram Rajgopal, filed where he estimated in a fairly rigorous way, as far as I can tell, that the reduction in market volatility that would result from the improvement in the accuracy of market prices, meaning reducing the noise in terms of fluctuation, would be, given trading volumes and given average daily fluctuations, would actually far — the benefit of that would far outweigh the cost of the rule. So I think there are benefits that the SEC did not even try to capture because they are very difficult to capture. So I would just say, cost benefit analysis — very, very difficult and I think in financial regulation, can we even do it?


Jane Luxton:  Okay. We’re at 12:55. I would love to ask you some of these questions that are here in the Q&A, and I’ll just touch on them because I’m going to give you a minute or two at most to do closing remarks. But one is talking about the imprecision of the information that is required under all three scopes of the rule and how will it benefit the public because of the vagueness of some of these topics and the inability to make them precise, and then a question from Jeff Clark for you George. He suggested, if this proposed rule is within the SEC’s powers, what are two examples of rules that fall outside those powers? Or is it that as long as the SEC requires that information be disclosed, it’s fine? So we won’t have a chance to answer those questions. Maybe those questioners will follow up with you afterwards, but very intriguing discussion. So let’s now — we have four minutes left. If you can each take a minute or two with any closing comments you’d like to add to this debate, that would be great. Paul, you ready to start off or do you want to go last?


Paul J. Ray:  No, I’m happy to go first. 


Jane Luxton:  Okay.


Paul J. Ray:  So yeah. Well, first of all, I just wanted to reiterate, Jane and George, thanks again for a great discussion. I have really enjoyed this. So we seem to be coming back again and again to this question of whether this is regular order rulemaking or something exceptional. And I think that there’s more to be said on that topic. We’re not going to say it here because it’s 12:57, but I think to resolve that question, we need to ask some of the following questions. We need to come to ground on what are other contexts in which the SEC has dispensed with a kind of requirement to disclose only information that the disclosing company determines is material. To George’s point, that obviously, the commission has in the past determined that certain kinds of information must always be disclosed even if they aren’t material and even if a particular piece of data is not material for a particular registrant. But I think we need to really wrap our heads around all the times the commission has done that in the past and think about whether there is a limiting principle that’s inherent in that past practice or that can ostensibly be lost from it and whether that limiting principle is consistent with what the commission has done here. 


To Jeff’s point, it’s not clear what the limiting principle would be here. If this qualifies as regular order disclosure regulation, I’m not sure what would not or at least what would not qualify as such if there was a sufficient popular demand for it. So those are a couple of questions that — and you can tell the way I would answer those questions probably from the position I’ve taken earlier in my opening remarks. But that’s a gesture of the way the conversation could develop. And with that, George, over to you.


George Georgiev:  All right. Well, thank you for that. Indeed, we can talk for another hour and still have more left over to — thank you again, Jane and Paul, for this terrific debate. I learned a lot and I really enjoyed it. So I think we do agree on a lot in terms of the major questions doctrine. I think we definitely need some constraints on — we don’t want an unfettered administrative state. I think we don’t want agencies to pour over old regulations in finding something that they’ve never noticed before, but when they have promoted disclosure regulation in the interest of investor protection for nine decades, I don’t think that’s what is happening here. So major questions doctrine, I think, very worthwhile. I would submit to you that based on the historical record and agency rulemaking practice — and we didn’t even get into the D.C. circuit and D.C. district court opinions that have looked at this which also support the SEC’s rulemaking authority the SEC as well on firm ground here. 


And I would go back to market efficiency and competitive markets and ensuring that investors are protected in terms of buying and selling securities and making investment decisions which by their nature aren’t comparative decisions on the basis of adequate information and I think that’s what the SEC has tried to do. Could it have done it better? Well, of course. That’s why we have notice and comment rulemaking. And that’s why the SEC — in every single SEC rule they take the feedback — and that’s why I’ve urged more substantive feedback on the specific features of the rule versus whether or not the SEC has rulemaking authority because there are things that the SEC could improve, and they are actively working to improve it based on those press clippings that we’re getting. So let’s see what the final rule looks like, but hopefully, it will be — we can agree that it doesn’t implicate the major questions doctrine, that there’ll be other things that will be more helpful in the development of that doctrine.


Jane Luxton:  Okay. We’ll have to leave it at that. Thank you both. I know Colton is ready to wrap this up. So I also want to thank you for laying the groundwork for our next panel on some of these questions. So thanks.


George Georgiev:  Thank you.


Colton Graub:  George, Paul, and Jane, we are very grateful to you for your time today and for the insightful discussion on this important issue. As you all indicated, we could’ve probably gone much longer given all of our audience’s great questions but alas, we’re limited to just an hour. For those in the audience who joined the conversation mid-way through, you can watch the recording via YouTube or listen to it via our podcast feed which is available everywhere you listen to podcasts. We welcome listener feedback by email at [email protected]. Thank you all for joining us. This concludes today’s discussion.




Conclusion:  On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcasts, Google Play, and Spreaker. For the latest from RTP, please visit our website at




This has been a FedSoc audio production.

George Georgiev

Associate Professor of Law

Emory University School of Law

Hon. Paul Ray

Director, Thomas A. Roe Institute for Economic Policy Studies

The Heritage Foundation

Jane Luxton

Managing Partner - Washington, D.C.

Lewis Brisbois Bisgaard & Smith LLP

Energy & Environment
Regulatory Process

The Federalist Society and Regulatory Transparency Project take no position on particular legal or public policy matters. All expressions of opinion are those of the speaker(s). To join the debate, please email us at [email protected].

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