Its proposed climate-change-disclosures rule will likely be vacated by the courts. The Securities and Exchange Commission (SEC) was established by an act of Congress in 1934. You'd think that a regulatory agency would take care to remain within the parameters set by the legislative act that established it, and the constitutional limitations that circumscribe all federal agencies. Unfortunately, the SEC has gone well beyond them in its recently proposed rule on climate-change disclosures. The question that needs to be answered is, Why?

In the comment letter that James Copland (of the Manhattan Institute) and I wrote to the SEC, we found numerous potential violations of the constraints that limit the SEC's authority to compel such disclosures. These included:

• the materiality standard that has been a hallmark of the SEC's disclosure regime since the Supreme Court's 1976 decision in TSC v. Northway;
• the statutory requirement that mandates disclosures be for the protection of investors (in the context of an investor's financial return);
• the need for a thorough cost-and-benefit analysis that finds that the proposed climate-change disclosures promote efficiency, competition, and capital formation as required in SEC v. Business Roundtable, accounts for the economic harm the proposed disclosures may do to the governance of public companies, and clarifies whether there really is investor demand for these disclosures;
• Supreme Court decisions establishing that the SEC cannot interfere with state laws that govern the internal affairs of the corporation and the established state policies of corporate regulation unless it is explicitly authorized to do so by Congress;
• First Amendment protections against compelled speech;
• the major questions doctrine that was just applied by the Supreme Court in West Virginia v. EPA, which limits an agency's power to address issues of economic and political significance without a clear statement from Congress providing such authorization.

The SEC did not abide by any of these constraints in its proposed rule. (While West Virginia v. EPA had yet to be decided at the time of the proposed rule's publication, the SEC must have known of the potential impact of this high-profile case on its authority regarding climate-change disclosures.) This is mystifying because a reviewing court would only need to find one violation to vacate all or significant parts of the hundreds of pages that constitute the proposed rule. Moreover, as Copland and I noted in a recent Wall Street Journal opinion piece, given the legal-talent pool at the SEC, it is reasonable to assume that the commissioners were well aware of these constraints.

Why not come up with a much more modest proposal that does not risk being vacated by the courts?

One possible reason, besides serving the financial interests of prominent investment advisors to index funds (which we discuss in our comment letter), is that the majority of SEC commissioners truly believe that the climate-change disclosures found in the proposed rule will help mitigate climate change either by pressuring public companies to reduce their emissions or by facilitating the creation of ESG investment funds. The increased investment in ESG funds would presumably reduce the financing costs of low-carbon-emitting companies and increase those of high-emitting companies. The commissioners might believe that proposing anything less – such as merely updating the SEC's 2010 interpretative release on climate-change disclosures – would be too insignificant, thus deciding to swing for the fences and go for a home run.

Nevertheless, just because three SEC commissioners may believe that climate-change disclosures will lead to climate-change mitigation does not mean they can go ahead and exceed their regulatory authority. The odds that the proposed rule will be subject to legal challenge and then vacated by the courts is extremely high. Until the SEC demonstrates greater respect for the limits of its disclosure authority, the likely result of such efforts will be a large waste of time, money, and resources.

Bernard S. Sharfman is a senior corporate governance fellow at RealClearFoundation and a research fellow with the Law & Economics Center at George Mason University's Antonin Scalia Law School. The opinions expressed here are the author's alone and do not represent the official positions of the RealClearFoundation or the Law & Economics Center.