The Power of the SEC as a Mechanism for Advancing Corporate Environmental Responsibility

The Power of the SEC as a Mechanism for Advancing Corporate Environmental Responsibility

Sarah Lottman 

In today’s capitalistic-focused world, companies are becoming a more powerful force as consumer demand fuels our economy in all sectors of society.[1] Companies around the world now yield more power and influence than ever before.[2] With this power and influence, companies can be an effective tool in inciting change. The environmental factors that a company chooses to disclose can greatly encourage or discourage the discourse on climate change.[3] By holding companies accountable for their environmental and sustainable practices, a lot can be done to combat climate change.[4] The Securities and Exchange Commission (SEC) charged with regulating publicly traded companies dictates what companies need to disclose in yearly filings.[5] The SEC through the Securities Exchange Act (SEA) has the power to make companies disclose more of their environmental impact on the world, and in turn encourage more sustainable practices in companies.[6]

While the SEA requires disclosures for materiality, nowhere in the Act or legislative history is that authority to require disclosures limited to materiality.[7] This is very important because the SEA allows the SEC to require disclosures outside of materiality, it just has not done so before. Some opponents might argue that if the disclosure is not material, then there is no need to mandate it, and if climate disclosure is material than there is no need to mandate it because they are already required to disclose it.[8] Expanding the SEA would cover all instances and removes third party necessity to sue for failure to disclose.[9]

Without expressly mandating climate disclosures, there’s still too much room for companies to get out of having to disclose environmental related disclosures. A company could interpret climate change effects to their company as non-material and would not have to report them. This would be hard for companies directly related to products made through carbon energy sources or services emitting greenhouse gases. However, companies not directly affected by climate change related catastrophes could interpret these factors as not having a material effect on the company’s financial condition or operations. If companies do decide to disclose climate change related disclosures, it can still choose which disclosure to report and how detailed. The only rules holding companies accountable would be that it cannot lie in their disclosures but how much information they disclose and if any would be up to the companies still. 

Further, courts have reinforced that “a lawsuit is not actionable unless there is a duty to disclose” because they have found that a trivial omission or disclosure error cannot support a lawsuit for fraud.[10] Courts have found that this “duty can arise from either an explicit SEC disclosure requirement or if further disclosure is needed to make other statements of the company not misleading.”[11] The Supreme Court held in TSC Industries, Inc. v. Northway, Inc.,  that “the proper balance between the need to insure adequate disclosure and the need to avoid the adverse consequences of setting too low a threshold for civil liability.”[12] In its reasoning the Court interpreted the SEC’s definition of material to mean information that has “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available,” is material.[13] Because materiality is constantly evolving, the best way to ensure company’s report environmental disclosures would be to outright mandate it.

The SEC should propose a rule that requires companies to report their Scope 1 and 2 emissions as part of an ESG report. Part I reviews the current Environmental, Social, Governance (ESG) disclosures, reporting, and the intended goals of these requirements. Part II discusses the benefits of the Securities and Exchange Commission (SEC) promulgating a rule to further its intended mission. Adding specific metrics as well as specific environmental data points would enhance the value of a company’s environmental report. Part III discusses statutory and regulatory amendment options for requiring quantitative environmental metrics.

[1] Bruce R. Scott, The Political Economy of Capitalism (Harv. Bus. Sch., Working Paper, No. 07-037, 2006),

[2] Id.

[3] Peter Eavis and Clifford Krauss, What’s Really Behind Corporate Promises on Climate Change?, N.Y. Times (May 12, 2021)

[4] Id.

[5] Commodity and Securities Exchanges, 17 C.F.R. pt. 229, 210 (2020) (disclosing the requirements for publicly traded companies expressly required by the SEC).

[6] Id.

[7] Securities and Exchange Act of 1934 § 4, 15 U.S.C. § 78d; See also Alexandra Thornton & Tyler Gellasch, supra note 34.

[8] Id.

[9] Id.

[10] See Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011) (holding that §10(b) and Rule 10b-5(b) do not create a duty to disclose “any and all material information” for corporations); see also ZVI Trading Corp. Employees’ Money Purchase Pension Plan & Tr. v. Ross, 9 F.3d 259, 267 (2d Cir. 1993) (holding that corporations do not have to disclose information just “because a reasonable investor would very much like to know that fact”).

[11] Allison Herren Lee, Living in a Material World: Myths and Misconceptions about “Materiality,” SEC (May 24, 2021), (citing Basic v. Levinson, 485 U.S. 224 (1988) and TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1977).

[12] TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 n. 10 (1976).

[13] TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 n. 10 (1976).

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