Better information leads to better decisions—this is the idea behind a regulatory device known as “mandated disclosure”。要求披露所有你周围,从calorie counts on fast-food restaurant menus to conversations with doctors around informed consent.

But the biggest experiment yet in mandated disclosure may be an expected U.S. Securities and Exchange Commission proposal to extend these ideas to climate impacts facing U.S.-listed companies. Climate disclosure rules would require publicly traded companies to release information to investors about their emissions and how they are managing risks related to climate change and future climate regulations.

While it is easy to spot climate change-related risks facing companies likeExxonMobilthat produces and sells fossil fuels that contribute to global warming,hidden vulnerabilities existfor businesses across the U.S. economy.

Largely in response toinvestors clamoring for more informationabout climate risks,as well as pressurefromgreengroupsthat believe disclosure will drive climate-conscious investing,SEC Chair Gary Gensler announcedin 2021 that the commission would use its statutory authority torequire climate-related disclosures.

The SECplannedto consider proposals for climate-risk disclosure rulesat its March 21 meeting.

Today we announced that@SECGovwill meet publicly on March 21 to consider staff proposals to mandate climate-risk disclosures by public companies.

Companies and investors alike would benefit from clear rules of the road. Here’s why:pic.twitter.com/li5osqvJkG

— Gary Gensler (@GaryGensler)March 10, 2022

As law scholars, wework on legal issues involving businesses and regulation. Here’s what you need to know about climate disclosures and some of the challenges the SEC faces in adopting them.

What investors want to know

Investor pressure for better information about climate impacts comes from two directions.

First, some investors want to avoid companies that will be affected by climate change. The company’s products may beregulated in the future因为他们的妊娠和分娩综合管理t on the climate, or its supply chains may get more expensive over time. Investors want to know which businesses will be able to adapt and preserve profitability.

Second, many investors are interested in ESG investing, which involves assessing companies’ commitments to environmental, social, and governance factors. Today,ESG investingaccounts for$17.1 trillion—or 1 in 3 dollars—of the total U.S. assets under professional management. The challenge for the SEC is to ensure that claims being made about the sustainability of a company arebased on reality.

The trend toward ESG investment has led to an outpouring of voluntary disclosure:About 90% of companiesin theS&P 500publish voluntary reports disclosing statistics on things like carbon emissions and how much renewable energy they use.

Some large investors require disclosure. For example,BlackRock, a multinational asset manager with around $10 trillion under its control, requires companies it invests in to disclose certain climate information. TheUnited Kingdomplans to require climate disclosure starting in April 2022, and theEuropean Unionhas reporting rules in place.

But the U.S. has been slow to impose mandatory climate disclosure requirements. Public companies have only been subject to a more generallegal standardthat they not materially mislead investors. The SECreleased guidancein 2010 to encourage climate disclosures, butit was unenforcedand failed to prompt standardized disclosures.

Rule benders and the effectiveness of disclosure

Research on the broader use of mandated disclosure, such as forhome mortgage lendingandconsumer product labeling, shows that crafting effective disclosure regulations is difficult.

One reason is that the companies can easily evade disclosing useful information while still complying with the letter of the law. These “rule benders” can be very creative. Consider the restaurant in New York City that was subject to a health inspection grading regulation and managed todisguise其“B”评级displ只需添加“是”ay of its grade. Disclosure regulations can also fail when they don’t effectively communicate valuable information.

Astudy of one type of climate disclosure–emissions labels on consumer products–found mixed evidence as to whether consumers altered their behavior in response. Rule benders can exploithuman tendenciesto discount or filter out warnings by providing an avalanche of unnecessary information that confuses and overwhelms the intended recipient.

Expect court challenges

One challenge the SEC has grappled with is whether it has statutory authority to require companies to disclose their “Scope 3”emissions. These are emissions that a company doesn’t directly control, such as emissions from the use of its products or emissions in its supply chain.

A company like Amazon may have extensive upstream Scope 3 emissions in its suppliers’ transportation networks. General Motors would have extensive downstream emissions when people drive its gas-powered vehicles.

The SEC’s three Democratic commissioners, who make up a majority of the commission,have reportedly spliton whether certain Scope 3 emissions can be viewed as “material” to investors and therefore subject to disclosure.

“Material” is definedas information that a reasonable person would consider important in making an investment decision.

Some critics of climate disclosures, includingseveral Republican state attorneys general, suggest that the SEC has no authority to require disclosures that are not financially material. Missouri’s attorney general wrote that requiring climate reporting would impose “large costs and administrative burdens” on publicly traded companies. A group of senators suggested greenhouse gas-related assets wouldshift to private companies. West Virginia’s attorney generalthreatened to sue the SEC.

The costs of disclosure would vary. Some companies already intensely monitor emissions. Others would likely face high costs if Scope 3 emissions were included. An oil company, for example, might have tomeasure emissions from all the vehicles using its fuel.

The Administrative Procedure Act allows courts to vacate SEC rules that aredeemed arbitrary or capriciousbecause the agency failed to offer sufficient justification for choosing the proposal over alternatives. The SEC is acutely aware of this risk. A prior oil and gas extraction disclosure rulewas invalidatedby a court in 2013 as arbitrary and capricious.

Proceeding with caution

The SEC’s forthcoming climate risk disclosure rule will not be the final effort to use information to shape the private sector’s response to climate change.

What the SEC does now will affect those future moves. No wonder it is taking its time and proceeding cautiously.

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Daniel Walters is an assistant professor of law at Penn State University. William Manson is a law student at Penn State. This post was originally published atThe Conversation.