The SEC, Corporate Disclosure, and Social Change

We have talked at length about the Commission's role in using disclosure to affect the corporate governance process. It is a topic that I have explored more fully in the paper, Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure.  We have not discussed the broader question of the use of disclosure to influence social change. 

With that, we note that the Investor Network on Climate Risk (an organization consisting of assorted investors, including a number of state governments and public pension plans) has petitioned the Commission to improve disclosure concerning the risks posed by global warming and climate change.  The petition can be found here.  As the petition noted:

• "The fundamental principle underlying the Commission’s disclosure requirements is that a public corporation must fully and fairly disclose all facts about its performance and operations that would be material to a reasonable shareholder’s investment decision. Efficient markets depend on the availability of information on corporate strategy, performance, and policies to give investors the insights they need to make investment decisions. Recent scientific, legal, and regulatory developments make it unavoidably clear that the risks and opportunities many corporations face in connection with climate change fall squarely within the category of material information that is required to be analyzed and disclosed in many corporate filings. Yet corporate disclosures of the risks and opportunities created by climate change lag behind these developments, and investors are left with little or in some cases no useful information about corporate exposure to these risks. Investors are responding to this information gap with increasing demand for more and better disclosure on climate risk that will allow them to make informed investment decisions."

The petition more or less took the position that the disclosure was already required (in places like the description of the business or the MD&A) but that the disclosure was inadequate and inconsistent.  The petition, therefore, "respectfully requests that the Commission issue an interpretive release clarifying that material climate-related information must be included in corporate disclosures under existing law."

The petition has been supported by some environmental groups and there is no question that one of the goals is to combat climate change. In other words, while the petition speaks in terms of information necessary for shareholders and investors, the goal of at least some members of the drive is to affect social change. See Exchange Act Release No. 11733 (Oct. 14, 1975)(noting that Commission "is generally not authorized to consider the promotion of social goals unrelated to the objectives of the federal securities laws").  

Matters of social responsibility often overlap with traditional issues of corporate disclosure.  The Commission has had to use disclosure principals to address matters ranging from illegal campaign contributions to assorted environmental matters.  Moreover, some have, from time to time, called for increased disclosure on topics of social responsibility.  See Cynthia A. Williams, The Securities and Exchange Commission and Corporate Social Transparency, 112 Harv. L. Rev. 1197 (1999).  In addition, Rule 14a-8 injects the Commission into the middle of the public debate on assorted matters since shareholders often submit proposals that relate to the topics. 

This topic will arise with increasing frequency.  In an era when most hesitate to interfere with the markets through heavy handed regulation, agreement generally exists that investors should be equipped with the tools necessary to make their own decisions.  In general, this means disclosure.  It is highly likely that the Commission will find itself increasingly under pressure to require disclosure on matters of social responsibility.  The risk increases when the Commission itself voluntarily enters the fray by pointing out this type of information to investors.