On September 22, 2021, in a step that emphasizes the SEC's increased focus on climate change disclosure, the SEC's Division of Corporation Finance ("Corp Fin") issued a sample letter for public companies containing comments illustrative of those that it may issue to companies "regarding their climate-related disclosure or the absence of such disclosure."1
This follows months of increased emphasis on climate change disclosures by the SEC, which is expected to release a proposed rule in the coming months mandating that public companies disclose climate change-related risks.2 A recent speech by Chair Gary Gensler, who has stated that he expects proposed rules on corporate climate risk disclosures in the second half of 2021, emphasized that such disclosures need to be "consistent and comparable" over time and noted that he has asked the SEC staff to include potential "recommendations about how companies might disclose their Scope 1 and Scope 2 emissions, along with whether to disclose Scope 3 emissions—and if so, how and under what circumstances."3 This followed a February 2021 directive by Acting SEC Chair Allison Herren Lee for Corp Fin to "enhance its focus on climate-related disclosure in public company filings."4
Basis for Comment Letter
A number of existing SEC disclosure rules may require disclosure related to climate change, including in disclosures related to a company's description of business, legal proceedings, risk factors, and management's discussion and analysis of financial condition and results of operations ("MD&A")5; companies also must disclose, "such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading."6
Sample Comments
While the majority of the sample comments focused on potential additional MD&A disclosure, perhaps most interesting was the first sample comment under the header "General", which pointed out the potential danger of discrepancies between the level of disclosure provided in corporate sustainability reports and in SEC filings. Specifically, the sample comment stated, "We note that you provided more expansive disclosure in your corporate social responsibility report (CSR report) than you provided in your SEC filings. Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report." This comment reflects the risk that accompanies providing disclosure in a sustainability report that is not included in the company's Form 10-K or 20-F ("Exchange Act Reports").
While there is a general trend of companies increasingly providing some ESG disclosure in their Exchange Act Reports, companies are still significantly more likely to make such disclosures in corporate sustainability reports or on company websites. Based on the sample comment letter, companies that provide more extensive climate-change related disclosure in their sustainability reports may have this disclosure scrutinized and be asked what consideration they gave to providing the same type of climate-related disclosure in their Exchange Act Reports. This goes one step further than the SEC's previous position that it may actively compare the information a company voluntarily provides in sustainability reports and elsewhere with any information disclosed in SEC filings for any inconsistencies.
The letter also posits sample risk factor comments, including to disclose the material effects of transition risks related to climate change, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks, or technological changes, as well as any material litigation risks related to climate change and their potential impact. A full list of the comments are provided below in Appendix A.
Beyond the letter, the SEC has already issued a number of comments on climate change disclosure that track the concerns raised in the SEC's 2010 Climate Change Guidance. Companies have received comments related to their discussion of the impact of climate change legislation and regulation, the impact of international climate change accords, the indirect consequences of climate change regulation or business trends and the physical impacts of climate change. A sample of such comments is included below in Appendix B.
Appendix A - Full List of Comments
General
1. We note that you provided more expansive disclosure in your corporate social responsibility report (CSR report) than you provided in your SEC filings. Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report.
Risk Factors
2. Disclose the material effects of transition risks related to climate change that may affect your business, financial condition, and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks, or technological changes.
3. Disclose any material litigation risks related to climate change and explain the potential impact to the company.
Management's Discussion and Analysis of Financial Condition and Results of Operations
4. There have been significant developments in federal and state legislation and regulation and international accords regarding climate change that you have not discussed in your filing. Please revise your disclosure to identify material pending or existing climate change-related legislation, regulations, and international accords and describe any material effect on your business, financial condition, and results of operations.
5. Revise your disclosure to identify any material past and/or future capital expenditures for climate-related projects. If material, please quantify these expenditures.
6. To the extent material, discuss the indirect consequences of climate-related regulation or business trends, such as the following:
- decreased demand for goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources;
- increased demand for goods that result in lower emissions than competing products;
- increased competition to develop innovative new products that result in lower emissions;
- increased demand for generation and transmission of energy from alternative energy sources; and
- any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions.
7. If material, discuss the physical effects of climate change on your operations and results. This disclosure may include the following:
- severity of weather, such as floods, hurricanes, sea levels, arability of farmland, extreme fires, and water availability and quality;
- quantification of material weather-related damages to your property or operations;
- potential for indirect weather-related impacts that have affected or may affect your major customers or suppliers;
- decreased agricultural production capacity in areas affected by drought or other weather-related changes; and
- any weather-related impacts on the cost or availability of insurance.
8. Quantify any material increased compliance costs related to climate change.
9. If material, provide disclosure about your purchase or sale of carbon credits or offsets and any material effects on your business, financial condition, and results of operations.
Appendix B – Sample Comments from SEC Staff Related to Climate Change Disclosures
Below is a selection of the type of comments that have been included in SEC Staff comment letters. Companies generally receive some, but not all, of these comments, many of which correlate to the topics addressed in the SEC's 2010 guidance on climate change disclosure.
- To the extent material, discuss the indirect consequences of climate-related regulation or business trends.
- Please revise your disclosure to identify any material past and/or future capital expenditures for climate-related projects.
- Quantify any material increased compliance costs related to climate change.
- Disclose any material litigation risks related to climate change and the potential impact to the company.
- If material, provide disclosure about your purchase or sale of carbon credits or offsets and any material effects on your business, financial condition, and results of operations.
- To the extent that you expect decreased demand for your goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources, please disclose any material expected effect on your business, financial condition, and results of operations.
- If material, discuss the significant physical effects of climate change on your operations and results.
- Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your sustainability report.
1 The sample letter is available here. Corp Fin notes that the sample comments "do not constitute an exhaustive list of the issues that companies should consider. Any comments issued would be appropriately tailored to the specific company and industry, and would take into consideration the disclosure that a company has provided in Commission filings."
2 See the SEC's Reg Flex Agenda here.
3 See "Prepared Remarks Before the Principles for Responsible Investment "Climate and Global Financial Markets" Webinar."
4 For more information on this and the SECs other climate-related initiatives, see our prior alert, "SEC Focuses on ESG and Climate Disclosure."
5 See Commission Guidance Regarding Disclosure Related to Climate Change, Release No. 33-9106 (Feb. 2, 2010) [75 FR 6290] (Feb. 8, 2010) ("2010 Climate Change Guidance").
6 See Rule 408 under the Securities Act of 1933 ("Securities Act") and Rule 12b-20 under the Securities Exchange Act of 1934 ("Exchange Act").
7 See our prior alert, "ESG Disclosure Trends in SEC Filings."
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