The Link Between Judge Ketanji Brown Jackson and the SEC's ESG Rules
Two seemingly disparate but potentially related events are transpiring this week in Washington. Over the last three days, the U.S. Senate Judiciary Committee has heard testimony from Judge Ketanji Brown Jackson, President Joe Biden’s first Supreme Court nominee. At the U.S. Securities and Exchange Commission (SEC), meanwhile, Chair Gary Gensler on Monday released a draft rule that would require public companies to make climate-related disclosures to the commission – a significant proposal that could signal financial regulators’ growing interest in the climate impact that regulated entities have, and how a changing climate could impact those regulated entities.
On the surface, these two events don’t have much in common. But in truth, not only are both providing an opportunity for political posturing, but, if confirmed, Justice Brown Jackson could be one of the nine people who ultimately decide the fate of the SEC rule.
What Would the SEC’s Climate Disclosure Rule Require?
Taken together, the SEC’s rules to “enhance and standardize climate-related disclosures for investors” arguably are some of the most sweeping regulations ever proposed by the agency. They would require all publicly traded companies to disclose:
How the company’s board and management will identify and oversee their organization’s climate-related risks—risks that include everything from the costs of using fewer fossil fuels to cost related to the physical impact of storms, drought, and higher temperatures;
How these risks have or will impact a company’s strategy and outlook, including the likely material impact climate risks will have on the business and its finances;
The company’s processes for identifying, assessing, and managing climate risk; and
How they set their price on carbon.
Additionally, companies that have publicly stated that they will eliminate greenhouse gases (GHGs) or reduce their impact with a net-zero plan would have to report annually on their progress. Those reports would have to detail the company’s use of offsets, including planting trees, capturing carbon, or generating renewable energy.
Publicly traded companies also would have to account for their own GHG emissions from purchased electricity and other forms of energy and the GHG emissions that result from all the businesses along that company’s supply chain. Companies are required to get help from independent third parties (accounting and engineering firms) to ensure these emissions disclosures are accurate.
Former Congressional Budget Office Director Douglas Holtz-Eakin said that the practical implication of the SEC’s proposal “would require that even private companies—those outside of the jurisdiction of the SEC—would probably have to become willing partners of the public companies to satisfy this requirement.”
Other analysts agreed. “Taken together, the SEC’s proposals suggest that the regulator is seeking fundamental changes in the manner it regulates the private funds industry, or, as SEC Commissioner Hester M. Peirce characterized it in her announcement, a ‘sea change’ in that regulation,” wrote legal expert David Blass at Bloomberg Government. Pierce, the sole Republican currently sitting on the SEC, was the lone vote against the proposal.
The breadth of the rule—not to mention its subject matter (climate change)—mean this issue is ripe for political fodder.
Politics and the SEC’s Climate Disclosure Rule
The reaction on Capitol Hill to the SEC rules was swift and made it clear that this issue is divisive. It even could split the Democratic party in two … or three.
First, there was the Republican response. Senate Banking Committee Ranking Member Pat Toomey (R-Pa.) argued, “Forcing publicly-traded companies to gather and report global warming data—almost none of which is material to the business’s finances—extends far beyond the SEC’s mission and expertise.” Sen. Toomey also said the SEC’s action “hijacks the democratic process and disrespects the limited scope of authority that Congress gave to the SEC.” He concluded, the rule “is a thinly-veiled effort to have unelected financial regulators set climate and energy policy for America.”
The GOP could do a lot to derail the SEC’s efforts.
There currently is one vacancy on the SEC—and it must be filled by a Republican commissioner. GOP leaders will oppose President Biden’s yet-to-be-named nominee if they are unwilling to toe the party line of this matter. Commissioner Allison Lee, a Democrat, plans to leave the SEC in June. Republicans almost certainly will oppose, and could even try to stall, the nomination process for her successor. (The question is: will any Democratic senators from, say, coal-producing states, for example join them in that effort?)
But there is more: if Republicans take over Congress in 2023, they likely will write a Congressional Review Act (CRA) resolution that, if passed by both houses of Congress and signed by the president, would nullify the regulation. Obviously, President Biden would never sign such a resolution, but if the regulatory process lags and it takes Chair Gensler and his team until mid-to-late 2024 to finalize a rule, this issue would be one a new Republican president would tackle almost immediately, presuming a Republican wins the 2024 presidential election.
Even if the SEC moves faster and a CRA challenge is not possible (generally, Congress has 60 congressional business days to review rules after they have been finalized), a new Republican administration simply could issue its own disclosure regulation or stop enforcing the old one. That’s the same political back and forth we saw during the Obama-Trump administration dance on the U.S. Department of Labor’s fiduciary rule, until it was ultimately struck down by the courts.
While Republicans are united, Democrats are not.
Many Democrats, of course, are largely satisfied with the SEC’s outline. House Financial Services Chair Rep. Maxine Waters (D-Calif.), along with Reps. Sean Casten (D-Ill.) and Juan Vargas (D-Calif.), issued a statement applauding the SEC’s rule. They argued the regulation, if implemented, would “help our nation’s savers and investors to keep more of their hard-earned funds.” Rep. Casten said the rule is in line with legislation that he has written and proposed with Sen. Elizabeth Warren (D-Mass.).
But then there are the Democrats who think Chair Gensler and the other two commissioners who voted for the rule did not go far enough. Sen. Sheldon Whitehouse (D-R.I.) said the “proposal completely omits climate-related corporate political influence activities.” He argued, “Investors deserve disclosure of climate-related lobbying activity or support for outside groups that engage in climate-related influence activities.”
Finally, there is Sen. Joe Manchin (D-W.Va.), whose mining and energy constituents could be hard hit by the rule. Sen. Manchin has been relatively quiet about the SEC proposal this week, but don’t think for a second that silence implies approval. He’ll be under intense pressure from people back home to join GOP opposition to the rule.
The Courts and the SEC Climate Rule
As Bloomberg Law reported this week, Republican attorneys general—led by West Virginia Attorney General Patrick Morrissey—have been organizing for months to oppose the SEC rule, whenever it was released. In fact, this group sent a letter to the commission last June arguing that mandated disclosures on climate risk are unnecessary since companies already voluntarily provide environmental information.
At the time, Morrissey said, “Rest assured, West Virginia and other states will … go to court to defend against any regulatory overreach by the SEC in the name of climate disclosures.” The U.S. Chamber of Commerce and the American Petroleum Institute also have argued the SEC went beyond the authority given to Congress.
It’s not overreach that could sink the rule, however. According to Bloomberg Law, opponents also are likely to argue the SEC’s proposal violates the First Amendment since it would force companies to make “subjective” statements about their operations. “[T]here’s a First Amendment and compelled speech issue here,” Emory University Professor of Business Law George Georgiev explained to the news outlet. “There’s emerging jurisprudence from the D.C. Circuit and the Supreme Court that applies very high standards to what the government can require companies to disclose.”
Oddly, this isn’t the first time an SEC rule could be done in by First Amendment issues. In fact, it’s not even the first time in the last decade. Nearly eight years ago, it was First Amendment concerns that ultimately undid a sweeping conflict minerals rule required by the Dodd-Frank Wall Street Reform and Consumer Protection Act and implemented by the SEC. That rule required companies to examine their supply chain and to disclose if their products contained “conflict minerals” from a war-torn part of Africa. While costly and difficult, arguably that rule probably was not as complex as the SEC’s climate disclosure proposal.
That case never even reached the Supreme Court. The SEC ultimately lost before a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit—the court Ketanji Brown Jackson was confirmed to in 2021. Could the SEC’s current gambit go further up the judicial chain?
Most certainly, and, barring any unforeseen developments in the next few days, it is likely that Ketanji Brown Jackson will be there as a Supreme Court Justice when it does.