SEC's ESG Plans for Public Companies May Get Frosty Reception in Court

Gensler's answer suggests that he would not support requiring public companies to make disclosures beyond the material information that is already required to be disclosed. But, assuming his nomination is confirmed, the political pressure on Gensler to approve broader disclosures will be immense.

Courts Filter Out Insignificant Info, Protect First Amendment Rights

For decades, courts have recognized the benefit of using materiality as a guiding principle for disclosure (rather than imposing a laundry list of items that must be disclosed whether or not material).

For one thing, multiple judges have concluded the materiality principle weeds out insignificant information of "dubious significance" that could result in "an avalanche of trivial information."

Similarly, going back to at least the 1970s, the Commission recognized that requiring disclosure of all non-material information about "social matters in which investors may be interested … would in the aggregate make disclosure documents wholly unmanageable and would significantly increase the costs to all involved without, in our view, corresponding benefits to investors generally."

Despite the long history and current support behind requiring disclosure of information only if it is material to investment decisions, some advocates would require disclosure of ESG information regardless of whether it is material or not. We have been down this road before.

The Dodd-Frank Act, passed after the financial crisis of 2008-2009, required public companies to disclose whether their products contain "minerals that directly or indirectly finance or benefit armed groups in the Democratic Republic of Congo or an adjoining country" and describe its products as not "DRC conflict free."

Unlike most securities disclosure laws, Congress imposed the conflict mineral disclosure requirement for a humanitarian purpose: to reduce trade in minerals from the DRC.

In the absence of public companies deceptively using the "conflict free" label to sell securities, a federal appellate court concluded that compelling such disclosure — even for a laudable humanitarian purpose — violated the First Amendment's right to free speech.

Where Next for ESG?

Federal securities laws already require public companies to disclose material information, including ESG information, to ensure companies' disclosures are not misleading.

Beyond preventing deception in securities transactions, the federal securities laws make a poor tool to compel disclosure of information that is not material to investors — even if the disclosure achieves some other laudable social purpose.

But information that may be immaterial to shareholders at one point in time may become material at a later point in time. Many large institutional investors have been vocal about the importance to them of public company disclosure on ESG issues.

Ultimately, the changing views of investors on the importance of ESG disclosures may be more impactful than any new SEC regulation.