On September 22, 2021, the Division of Corporation Finance (Division) of the Securities and Exchange Commission (SEC) issued a sample comment letter to highlight its increased focus on climate change-related disclosures or the absence of such disclosures in issuer filings under the Securities Act and the Exchange Act. This sample comment letter follows a recent increase in climate-related comments the Division has issued during the disclosure review process, and many of the sample comments appear to be derived from actual comment letters issued in 2021. The sample is consistent with the SEC’s 2010 Guidance Regarding Disclosure Related to Climate Change, which does not mandate specific, line item climate change-related disclosures, but instead takes a principles-based approach.
Disclosure matters discussed in the 2010 Climate Change Guidance include the following:
- the impact of pending or existing climate-change related legislation, regulations, and international accords;
- the indirect consequences of regulation or business trends; and
- the physical impacts of climate change.
The sample comment letter focuses on three main areas: (i) general disclosure, (ii) risk factors and (iii) management’s discussion and analysis (MD&A) of financial condition and results of operations.
- General Disclosure: The sample comment letter notes that future comment letters may ask an issuer to address potential discrepancies between the breadth of disclosures provided in such issuer’s corporate social responsibility reports (CSR reports) versus the abbreviated or even total lack of such disclosures in its SEC filings.
- Risk Factors: The sample comment letter also notes that an issuer may be asked to describe additional climate change-related risk factors, including:
- Material impacts of transition risks related to climate change, such as policy and regulatory changes and market trends; and
- Material litigation risks related to climate change and their potential impacts to the issuer.
- MD&A: A significant portion of the sample comment letter is devoted to specifying additional disclosures, to the extent material, in areas such as:
- The effects of pending or existing climate change-related legislation, regulations, and international accords;
- Past and/or future capital expenditures for climate-related projects;
- The indirect consequences of climate-related regulation or business trends, such as shifts in demands for products and services that produce significant climate impacts, increases in competition to develop lower-emission products, increases in demands for alternative energy, and anticipated reputational risks associated with operations or products that produce material greenhouse gas emissions;
- The physical effects of climate change on the issuer’s operations and results, including the impact of severe weather, quantification of weather-related damages to the issuer’s property or operations, and weather-related impacts on the cost of insurance;
- The increase in compliance costs related to climate change; and
- The effects of the issuer’s purchase or sale of carbon credits or offsets.
As noted by the Division, disclosure of the matters addressed in the sample comment letter depends on the issuer’s “particular facts and circumstances.” The Division also observed that the sample comments do not constitute an exhaustive list the issuer should consider. Accordingly, each issuer will need to determine – based on its particular facts and circumstances involving climate-related matters – what information is material to it and therefore must be disclosed so that the required statements are not misleading.
Next Steps: The sample letter is the latest step in the SEC’s comprehensive review of disclosure rules, practice and enforcement on ESG-related topics, which we expect to continue over the next several years. Accordingly, we believe issuers should take the following steps – even before receiving a comment letter from the SEC:
- Catalogue Various Climate-Related Disclosures. Many issuers give climate change- and ESG-related information, including current metrics and future goals, across a number of different mediums (e.g., CSR reports, investor presentations, SEC filings, etc.). With the increased focus on climate matters, issuers should also consider the internal control and disclosure control environment around this information. Having a centralized list of such statements will make the disclosure controls and procedures process more manageable. Additionally, such a list can aid an issuer’s ongoing internal review process to ensure that climate-related goals, projections, and potential expenditures are properly accounted for in the financial statements (such as capital expenditures and impairments), when disclosed in SEC filings (including with respect to the MD&A), and when calculated to provide forward-looking guidance.
- Acknowledge Different Intended Audiences. An issuer’s CSR report and other related sustainability reports are often intended for a broader audience than just the “reasonable investor.” Instead, these types of reports and the associated climate-related information contained therein often address concerns or respond to inquiries of other stakeholders (e.g., advocacy groups, proxy advisors, customers, employees, governmental regulators, ESG investors, rating services, etc.). Accordingly, when applicable, issuers should consider whether to note in CSR reports that the inclusion of climate-related or other ESG information is not necessarily an indication of “materiality” under the federal securities laws.
- Review SEC Filings. With the Division laying out a clear roadmap of potential future comments, issuers should review their existing SEC disclosures to identify any areas of potential reconsideration or revision. In particular, issuers could consider whether there are any significant discrepancies between voluntary CSR reports and information furnished to the SEC. When the Division issues a guidance document like the sample letter, its ultimate aspiration is that issuers will voluntarily revise disclosure going forward without the need for a formal individualized comment letter. Again, each issuer must conduct this analysis on the basis of its own unique facts and circumstances, but clearly the Division sees room for improvement across all public companies.