That there are limits on the limits is also clear from prior decisions. The only limit on companies ability to speak about climate is a long-standing limitnot created by the proposed rulethat they not lie or deceptively omit material information in doing so. It also illustrates the pace of ESG developments. John Coates is a senior research fellow at the University of Cambridge. Nothing at stake in this proposed rule justifies such judicial lawmaking. The new law creates a process for immediate disclosure for death or serious bodily injury. But for investors in that company, they reasonably could be, because the transition risks (in the form of higher energy costs or potential need for capital expenditures to mitigate their impacts) could be large for that company, depending on its size, capital, liquidity and financial resources. There remains substantial debate over the precise contents and details of what ESG disclosures might or should encompass. When Congress passed the PSLRA, the path to becoming a public company was fairly simple and standardized. To do so would turn the doctrines purpose against itself, turn courts into unelected mini-legislatures, and subvert rather than reinforce the separation of powers. This post is based on his recent comment letter. It addresses global climate risks to public companies, and not all climate risks created by domestic activities of all companies, public and private. Currently, EPA does not purport to require disclosures about greenhouse gas emissions from facilities located outside the US, even if they are owned by US companies. Companies in the defense industry report in their Commission-required filings using technical, specialized industry jargon on government procurement, budgets, military strategy, products and market dynamics about which staff at the Department of Defense have far more detailed knowledge than the Commission. People often think of mandatory disclosure in a way that suggests that there is nothing more than an on/off switch between mandatory and voluntary disclosure. 5, 2021); Priya Cherian Huskins, Why More SPACs Could Lead to More Litigation (and How to Prepare), A.B.A. Financial risks importantly include physical risks, such as those arising from severe weather events, such as floods, hurricanes, and wildfires. Large asset managers are already having to comply with similar requirements in Europe (regardless of where their portfolio investments are located). But the Commissions authorities go further, precisely because Congress recognized that investors need information beyond the moment of initial offer and sale, which are addressed by the 1933 Act. Bloomberg reports that, according to Coates, the new disclosure requirements will focus on three topics: diversity, equity and inclusion; climate change; and human capital management. But to develop and apply a disclosure rule of the kind proposed here does not require the same level of climate expertise as held by EPA (or, for climate changes impact on weather, the National Oceanic and Atmospheric Administration), and those agencies lack the expertise in finance, accounting and investment that is also necessary for any investor-oriented disclosure rule that addresses climate-related financial risk. 6LinkedIn 8 Email Updates. Finally, critics sometimes argue that investors do not need protection of mandatory climate-related financial disclosures because companies are already voluntarily making such information available. John Coates failed to apologise for his comments towards Annastacia Palaszczuk. The Commission has authority over disclosure about all activities of a consolidated multinational if it is a US public company, including the 40+% or more of those activities that are located outside the US, as noted above. Our existing disclosure regime, however, is already more nuanced than that, and there is no reason an ESG disclosure system would need to be less nuanced. This statement does not alter or amend applicable law and has no legal force or effect. Liability risk is an important feature of the conventional IPO process. [13] See, e.g., In re Quality Systems, Inc. Securities Litigation, 865 F.3d 1130, 1142, (9th Cir. If you need immediate assistance, call 877-SSRNHelp (877 777 6435) in the United States, or +1 212 448 2500 outside of the United States, 8:30AM to 6:00PM U.S. Eastern, Monday - Friday. EPA, by contrast, focuses on conduct in the United States. Three of those exclusions are of note: those made in connection with an offering of securities by a blank check company, those made by a penny stock issuer, and those made in connection with an initial public offering. Such a conclusion should hold regardless of what structure or method it used to do so. Coates has served as the SECs Acting Director of the Division of Corporation Finance since February 2021. Because the items listed in the statutes themselves could not reasonably be understood to cover all pertinent facts, the final language in the statute also reflected an expectation that Commission regulations would be needed to augment the statute itself. Before joining the SEC, he served as the John F. Cogan Professor of Law and Economics at Harvard University, where he also was Vice Dean for Finance and Strategic Initiatives. As a result, the rule will minimize costs and maximize benefits of compliance. The D.C. Critics of Coates say he has too . Our Team Account subscription service is for legal teams of four or more attorneys. Thousands more have been filed since the release was proposed, including many from self-identified individual investors. Proposal on Climate-Related Disclosures Falls Within the SEC's Authority Posted by John C. Coates (Harvard Law School), on Wednesday, June 22, 2022 Comments Off Print E-Mail Tweet Climate change, ESG, Investor protection, Legal history, Materiality, SEC, SEC rulemaking, Securities regulation, Sustainability More from: John Coates Information should be cost-effective and reliable, and not materially misleading, in every securities transaction. Finally, even if the major questions doctrine were thought relevant here, the contents of the proposal areas discussed at length above and in Annex Adirectly in keeping with the way that the Commission has functioned since inception. For EPA, those emissions may not be a priority. The Commission cannot shirk its duty to protect investors even if that duty to an extent overlaps with EPAs duty to protect the environment. "He has spent the last three decades deeply engaged with our capital markets as a scholar, practitioner, and member of the SEC's Investor Advisory Committee. The brief historical review in Annexes A and B (and much more detail could be added) shows that nothing about the current proposed rules contents (discussed more below) should be legally surprising in any meaningful way, to Congress or to companies or their investors. Although some are reluctant to consider legislative history or expert contemporaneous commentary in interpreting statutes, it is useful to do so briefly here for a simple reason. In addition to being limited and calibrated to U.S. public companies, the rule does not require disclosure related to non-investor impacts. Yet the Commission nonetheless has long protected investors in bank holding companies by requiring detailed disclosure beyond the financial statement for such companies, as noted in Annex A. That climate risks overall have been overstated by climate activists. Based on a review of current sustainability reports that cover the same topics as would be required by the proposed rule, companies with material climate risks could create compliant disclosure that would take up a relatively small share of a typical annual report. 3d 1041, 1049-50 (N.D. Cal. That is, the rules perspective of that of investors and companiestheir strategies, risk management, governance and metricswithout regard to whether a given company independently creates a climate impact that is large or small for the overall environment, or whether it is more or less exposed than other companies to physical risks of climate change. Three points about this text are worth emphasizing. See also Rodriguez v. Gigamon Inc., 325 F. Supp. The secondemissions datais widely used as measures of transition risk, that is, the risk that energy costs and policy responses by other lawmaking bodies (not the Commission) (some of which are already reflected in treaty commitments or other enacted policies of the US and other countries in which US public companies do business) will force companies to expend money to reduce their emissions or mitigate their impacts. Implied repeals occur only when two statutes are in irreconcilable conflict or when a later act covers the whole subject of the earlier one and is clearly intended as a substitute. In either case, the intention of the legislature to repeal must be clear and manifest. Nothing about the Clean Air Act is in irreconcilable conflict with the securities laws, and as just discussed, the Clean Air Act and subsequent EPA rulemaking address and could address only a part of what the proposed rule would address, even focusing narrowly on greenhouse gas emissions disclosure alone. In contrast, proposals to give the Commission discretion to approve or disapprove of the soundness of stock offerings was rejected by Congressthe 1933 Act in the end embraced full and fair disclosure as the method to protect investors. A public company might have a large amount of transition risk due to many different emission sources, each of which is below EPA thresholds. Image: Getty. If a U.S. public company owns facilities outside the US, as many do, they would be required to provide investors with information about those facilities. John C. Coates is the John F. Cogan, Jr. If that risk drives choices about what information to present and how, it should not in my view be different in the de-SPAC process without clear and compelling reasons for and limits and conditions on any such difference. Those choices I do not here address. What disclosures do investors need to make informed investment and voting decisions? In this way, SPACs offer private companies an alternative pathway to go public and obtain a stock exchange listing, a broader shareholder base, status as a public company with Exchange Act registered securities, and a liquid market for its shares. The Securities and Exchange Commission today announced that Renee Jones has been appointed Director of the Division of Corporation Finance. Nonetheless, whatever one thinks about the incentives for companies to go public or private, that question only bears on the efficiency or capital-formation impacts of the proposed rule, and how they compare to its advancement of investor protection, not on its legality. The guidance on potential conflicts of interest in the context of the initial public offering of a SPAC is divided into five categories: (1) insiders' competing fiduciary or contractual obligations to other entities, (2) the specified timeframe to complete an initial business combination, (3) deferred underwriter compensation, (4) economic terms Although courts have increasingly applied the First Amendment to disclosure obligations over time, critics are able to cite no case law supporting the notion that simply because facts may inform or be relevant to a political debate, requirements calling for disclosure of those facts are subject to heightened scrutiny, much less violate the First Amendment. So, too, for mining companies, asset-backed issuers, and other sectors, as also detailed in Annex A. Although the rule is more limited than what an impact advocate would want, it is in one important way broader than anything EPA has adopted or is likely to have to power to implement: its geographic reach. Recognizing innovation in the legal technology sector for working on precedent-setting, game-changing projects and initiatives. In Delaware, as under SEC Rule 405, control can be found to exist raising the corporate law standard in state court review of conflict of interest transactions where a shareholder owns less than 50% of the stock, but exercises control over the business affairs of the corporation. Before joining the SEC, he served as the John F. Cogan Professor of Law and Economics at Harvard University, where he also was Vice Dean for Finance and Strategic Initiatives. The Commissions authority to consider environmental risks was reinforced and made even more clear by another statute, which critics do not seem to have even noted, much less considered, as detailed below. Where do we go from here? 6, 2021) (showing that there have been 26 total liquidations as of Apr. Letting companies determine for themselves what is material in a given context can be a reasonable way to implement Congresss choice of full and fair disclosure as a policysometimes, companies exercise such discretion well enough to generate enough information to protect investors; but particularly as applied to risks that are new, or which raise difficult management challenges, and where there are limited sources of external scrutiny relevant to the judgments, companies predictably fail to comply with their requirements. Dynamically explore and compare data on law firms, companies, individual lawyers, and industry trends. Don't miss the crucial news and insights you need to make informed legal decisions. In the National Environmental Policy Act (NEPA), Congress made environmental considerations part of the SECs substantive mission. That statutestill on the booksprovides (among other things): The Congress recognizes that each person should enjoy a healthful environment and that each person has a responsibility to contribute to the preservation and enhancement of the environment. 6LinkedIn 8 Email Updates, What a SPAC Believer Thinks of SPAC Mania. [14], But, lest the safe harbor swallow the entire securities disclosure regime, the PSLRA specifically excludes from the safe harbor statements made in connection with specified types of securities offerings. One study worth highlighting, now published in a leading finance journal, finds that climate disclosures are already actively if imperfectly priced in the capital markets, effects confirmed in other published articles. Throughout I describe rather than argue for what the law should be. Congress, having made a fundamental policy judgment to require full and fair disclosure to protect investors, directed the Commission to make ongoing subsidiary choices of precisely what details of disclosure to require and when, after engaging in fact-finding and analysis that Congress chose not to try to do itself. New investors buy these shares in the aftermarket or participate in a new offering by the combined entity. Consistent with the long tradition of disclosure requirements sketched above and in Annex A, the proposed rule specifies disclosure of climate-related financial risks to and opportunities for public companies. However, many legal questions have clear answers. It specifies disclosure of facts, in neutral language. It is the first time that public investors see the business and financial information about a company. . John Coates, acting director of the SEC's Division of Corporation Finance, similarly stated in a recent speech that the "SEC should help lead the creation of an effective ESG disclosure system so companies can provide investors with information they need in a cost effective manner," noting in particular the task of adapting existing rules and Shareholder Litig. The rule is limited to companies from which the Commission has traditionally required full disclosure. The purpose of the disclosure was also to protect markets and market pricing, and improve the resulting allocation of capital. Many contain materiality qualifiers, but many do not. One of the primary purposes of the 1934 Act was to augment the 1933 Act by giving the Commission authority to require ongoing reports by companies whose securities were traded on stock exchanges. (forthcoming 2021); Minmo Gahng, Jay R. Ritter and Donghang Zhang, SPACs, Working Paper (Mar. [3] E.g., Andrew Ross Sorkin et al., What a SPAC Believer Thinks of SPAC Mania, N.Y. Times (Mar. In fact, its basic disclosure authorities (in Section 7 of the 1933 Act and Sections 12 and 13 of the 1934 Act) are augmented by additional specific authority to to prescribe the form or forms in which required information shall be set forth. If the Commission after fact-finding reasonably believes more detail is needed to protect investors about a concededly authorized topic, it is legally authorized to require more detail, as it has done through both rules and disclosure review since 1933. Finally, it is beyond argument that the Clean Air Act nowhere mentions the Commission much less modifies its disclosure authority. The Commission does, but has no investor-protection authority over climate impacts more generally, such as those on communities or habitats, beyond impacts that are important to investors decision-making.

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