Corporate Disclosure of Environmental Information: The SEC Announces a Public Proceeding

On February 11, 1975, the Securities and Exchange Commission (SEC) announced that it will conduct a public proceeding and hold public hearings on whether it should require corporations to discloseinformation about "socially significant matters," and, in particular, about the environmental effects of corporate activities and about corporate fair employment practices.¹ The SEC has never before scheduled a formal public hearing to consider disclosures related to the interests of "ethical investors."² Nor has the SEC ever announced publicly that it is considering disclosure rules which are not primarily focused on disclosure and financial and economic information.

The public proceeding is being held in response to Judge Charles Richey's decision in Natural Resources Defense Council v. Securities and Exchange Commission³ which directed the SEC to take rulemaking action within 120 days with respect to the environmental and civil rights issues raised by plaintiffs NRDC and the Project on Corporate Responsibility.

Judge Richey's December 1974 Order came after three and a half years of effort — by petition submitted to the SEC⁴ and by legal action — by NRDC and the Project to require the SEC to broaden its corporate disclosure rules in the environmental and civil rights areas. This Comment addresses only the environmental issues raised by the law suit, and will refer to NRDC and the Project (the Project is now defunct) as NRDC.

A basic purpose of the suit was to force the SEC to recognize that the National Environmental Policy Act mandates substantive changes in the SEC corporate disclosure regulations. In particular, NRDC sought the adoption of regulations which would require corporations to report to the Commission the actual environmental impacts caused by their corporate activities and what they are doing about these impacts. The SEC opposed NRDC's efforts on the ground that the proposed regulations concern matters that are primarily of social rather than financial concern and are therefore not "material" in a "traditional economic sense."

The SEC regulations challenged in the NRDC suit are contained in Securities Release 5386⁵ and require only that each registrant disclose any "material" effect on corporate financial condition of compliance with environmental laws and of any environmental litigation involving the corporation. In congressional testimony presented at the time these rules were proposed,⁶ and in papers filed in NRDC's suit, the SEC stated that it considered these limited environmental disclosures as adequate to satisfy its obligations under NEPA. NRDC disagreed and argued that NEPA requires disclosure of environmental impact information of scope and content similar to that which would be required by its proposed regulations. In concluding his opinion, Judge Richey noted that "[t]here appears to be merit in the Plaintiff's disclosure suggestions …"

The opinion, however, is directed to the SEC's failure to comply with the procedural requirements of the Administrative Procedure Act: both the SEC's notice of proposed rulemaking⁷ and the SEC's statement of basis and reasons for adopting the final rules were found deficient. Judge Richey stated that the notice "should have been calculated to elicit comment from legal scholars, public interest groups, foundations, colleges, universities, and other institutions and individuals" including those who are among the "ethical investors" in this country who want to invest their assets in firms "which are concerned about and acting on environmental problems of the nation." Accordingly, Judge Richey [5 ELR 10040] directed the agency to undertake within 120 days further rulemaking action in accordance with his opinion.⁸

It is significant, however, that the Commission has decided not to undertake actual rulemaking at this time. Instead the Commission is utilizing a "public proceeding" to determine "whether its present disclosure rules are adequate" under NEPA and, if not, whether further rulemaking action should be taken. The purpose of the current proceeding, in the SEC's words, is "to obtain the views of the public concerning whether, and to waht extent, information that does not necessarily have direct and immediate economic significance might nevertheless be the type of information that a reasonable investor would wish to have in making an investment decision or giving a proxy."⁹

The announcement requests comments from interested persons on NRDC's proposed amendments to the registration statement and report forms which the SEC requires of all corporate registrants. The amendments would require that corporations disclose with respect to each major activity or product:

(1) the nature and extent, quantified to the degree feasible, of the resulting environmental pollution or injury to natural resources;

(2) the feasibility of reducing such pollution or injury under existing technology, including a description of alternatives and their respective costs;

(3) the prospects for improving that technology;

(4) existing and projected expenditures for reducing such pollution or injury;

(5) legal requirements affecting the impact on the environment of the registrant's activities, including requirements for licenses, permits and outstanding court or administrative orders; and

(6) pending or threatened judicial or agency proceedings, whether initiated by private or governmental bodies, challenging the registrant's compliance with environmental protection standards.¹⁰

The NRDC suit and current SEC proceeding raise squarely the question of the extent to which NEPA in combination with the Securities Act of 1933 imposes upon the SEC a duty to expand its traditional focus on information directly related to the financial condition and prospects of reporting corporations. The 1933 Act specifies certain information that must be included in registration statements, and states further that the SEC may require inclusion of "such other information … as the Commission may be rules or regulations require as being necessary or appropriate in the public interest or for the protection of investors. "¹¹ Supreme Court opinions have interpreted this language broadly to include "information which a reasonable investor might have considered important in making an investment decision."¹² By this standard, the SEC's self-imposed limitation in its disclosure requirements to matters of "financial" or "economic" significance is unduly narrow. The agency's guiding criteria should focus not only on the nature of the information, but also on its usefulness or importance to investors.

Even assuming that SEC can limit its disclosure requirements to matters of financial or economic concern to investors, it should be clear that at least some types of environmental impact have a critical bearing on the financial outlook of a wide range of corporations. Obvious examples are a corporation engaged in mining or other extractive activity, one manufacturing goods from depletable resources, and a utility seeking to build additional power generating capacity in a region where pollution levels exceed federal standards. Thus, Judge Richey observed the risk that a corporation generating high levels of pollution which fail to meet federal standards may be subjected to severe monetary sanctions and that some investors may regard sensitivity to environmental problems as a mark of intelligent management.

NRDC bases its challenge not only on the public interest provisions of the Securities Act, but also on the mandatory provisions of NEPA. NRDC argues that such environmental disclosure is a matter of statutory duty, imposed on the SEC by NEPA, and constituting a new substantive requirement for the agency to apply to the securities laws which compel corporate disclosures "in the public interest," and therefore of matters not limited by tests of economic or financial significance. NRDC cites a law journal article written by two members of the SEC's Office of General Counsel to reinforce its point: "These 'affirmative environmental disclosure requirements' should, they state and plaintiffs agree, be imposed 'regardless of whether or not such disclosure is considered "material" in the "traditional sense of being of economic relevance to investors."'" While Judge Richey clearly subscribes to this view in his opinion, he was unwilling to impose such disclosure requirements on the SEC as a matter of law, preferring [5 ELR 10041] to require that the SEC undertake to reach its own conclusions through a rulemaking proceeding. The SEC has asserted that Securities Release 5386 is an adequate fulfillment of its NEPA obligations,¹³ and the current notice does not suggest any change in the agency's position.

Moreover, in the February 11 Notice the Commission suggests an additional objection to broadening its disclosure requirements: "… the Commission must take due care that its disclosure requirements elicit meaningful, effective disclosure without causing disclosure documents to be excessively technical or obscure …"¹⁴ (emphasis added) This objection is potentially troublesome to the NRDC challenge. NRDC is seeking disclosure of information on corporation activities and products which will enable investors to compare the environmental performance of different corporations. Insuring comparability is no easy matter, given variations in product, corporate structure and size of pollutants, and sensitivity of the environment to the reported pollutants. Moreover, if the seemingly simple task of providing meaningful comparative information on the performance of new automobiles as required by the National Highway Traffic Safety Administration is any indication, the reporting corporations can choose to make themselves masters of insuring non-comparability of information and otherwise subverting the usefulness of the information to investors and others. Thus NRDC may be forced by practical considerations to simplify and narrow the types of disclosure it seeks.

It would appear, however, that NRDC's interest in winning disclosure of information regarding pollution and pollution control extends well beyond establishing yardsticks for investors to use in comparing corporate performance. NRDC cites the famous Brandeis dictum on the SEC's disclosure regulation that "sunlight is said to be the best of disinfectants" to preface its argument that enforced disclosure of practices contrary to the public interest operates both as an effective deterrent and as an incentive for corporations to undertake all feasible corrective measures. An apparent further expectation of NRDC is that the required disclosures could lay the basis for private or governmental enforcement actions against polluters shown by the data disclosed to be in violation of state or federal standards. Fear of this eventuality is perhaps at the root of much of the opposition to the NRDC proposals.

The fundamental difference between the SEC's current rule and that proposed by NRDC is critical to corporations facing technical or economic problems in achieving compliance with anti-pollution standards. SEC Securities Release 5386, which requires corporate disclosure of the effect of environmental laws on corporate financial condition and of environmental litigation involving the corporation, could lead to the accumulation of data and information which readily lends itself to use by corporations building a case showing how burdensome environmental standards have been for them. The information required by Release 5386 could thus become a vehicle for opposing further environmental controls and regulations. On the other hand, the effect of the NRDC proposal would be just the opposite; it would generate data tending to support the imposition of more stringent environmental controls and enforcement. Seen in this perspective, the SEC argument that Securities Release 5386 meets its NEPA obligations looks almost preposterous. Far from advancing the goals of NEPA, Release 5386 could enable corporations to subvert them.

The Securities and Exchange Commission, which has recently taken some bold steps against corporations contributing illegally to political campaigns, has so far failed to exhibit the same commitment to the public interest in the area of its NEPA policies. The Commission is presently under court order to reformulate its NEPA compliance program, and might do well to reconsider its traditional view that the scope of its disclosure requirements should necessarily be limited to information of economic interest to investors.

NRDC's suit, even if one does not agree that all its recommendations are mandated by NEPA and the securities laws, has raised the important question of whether NEPA's requirement that all agencies of the government shall "interpret and administer" laws and regulations in such a way as to advance the statute's goals is purely rhetorical and hortatory or in fact means what it says. Environmentalists — and Judge Richey, who has retained jurisdiction over the case for the purpose — are awaiting with keen interest the SEC's final decision on its NEPA responsibilities.

1. 40 Fed. Reg. 7013 (Feb. 18, 1975).

2. The public hearings are scheduled to commence on April 14, 1975, at the SEC's offices in Washington, D.C. Written comments on the questions presented in the Notice are due by May 14, 1975. Comment letters should be submitted in duplicate, and addressed to George A. Fitzsimmons, Secretary, SEC, Washington, D.C. 20549.

3. Natural Resources Defense Council, Inc. v. Securities and Exchange Commission, No. 409-73 (D.D.C. Dec. 9, 1974), 5 ELR 20074.

4. Petition for Rulemaking Before the Securities and Exchange Commission: Petition of Project for Corporate Responsibility and Natural Resources Defense Council, (June 7, 1971), available, ELI Digest Facsimile Service, ELR Dig. [285] (Supp.).

5. April 20, 1973.

6. Testimony of then SEC chairman William Casey, February 16, 1972, before House Subcommittee on Fisheries and Wildlife Conservation and the Environment.

7. Securities Release 5235, February 16, 1972.

8. NRDC and the SEC have agreed to the following extension of time for such further rulemaking:

June 13, 1975, completion of SEC consideration of whether further rulemaking is necessary;

July 3, 1975, announcement of proposed rule, if necessary;

August 29, 1975, issuance of final rule if proposed.

9. 40 Fed. Reg. 7014 (Feb. 18, 1975).

10. Petition for Rulemaking, supra n. 4.

11. 15 U.S.C. § 77g.

12. Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-154 (1972); cf. Mills v. Electric Autolite Co., 396 U.S. 375, (1970). Cited in NRDC v. SEC., 5 ELR 20076.

13. The SEC explicitly solicits comments which will be positive and negative toward the NRDC proposal, including indications from corporations of the extent of success of shareholder initiatives on environmental issues. These initiatives have rarely won more than 5 percent of the support of shareholders, but the value of such data in measuring general shareholder interest in such issues is subject to question.

14. 40 Fed. Reg. 7014 (Feb. 18, 1975).