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Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International

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Winter 2023




Stanford Law School




Designing a regulatory response to climate change is one of the defining challenges of our era. In an attempt to address it, the Securities and Exchange Commission (SEC) has recently proposed a historic rule requiring climate-related disclosure by companies, resting squarely on the rationale of "investor demand." The proposed climate disclosure rule has met with an unprecedented response, some of it reflective of investor demand, but also including a broad array of opponents critical of the rule, who cast doubt on the rule's validity. A judicial challenge is all but inevitable.

This Article explains that the best way for the SEC to save climate disclosure and to protect investors is to let them decide. That is, the SEC should let companies opt out of all or part of their climate disclosure obligations if sufficient investors have voted to allow it to do so. This "investor-optional" approach would result in three important improvements necessary to save climate disclosure and best protect investors. First, it would make the design of the SEC's rule consistent with the SEC's core claim that there is investor demand for climate disclosure; if this is indeed the case, a mandatory rule is not necessary, creating a logical inconsistency that threatens the validity of a mandatory rule. Second, making climate disclosure investor-optional would circumvent claims that the rule is invalid, which-to the extent they apply at all-apply only to a mandatory disclosure rule. Third, an investor-optional rule would better protect investors than a mandatory rule, reducing their net costs, while preserving their benefits. As a result, the SEC is required to consider an investor-optional rule, and having done so, it will be difficult for the SEC to justify adopting a mandatory rule instead. As well as explaining why the SEC should let investors decide about climate disclosure, the Article explains how the SEC should design the rule to ensure that it best protects investors. Letting investors decide would have benefits beyond climate, not only for other "ESG" disclosure rules, but for the SEC's regulatory program more generally, and thus also for investors.

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