The SEC’s division of corporation finance last month published a sample letter outlining comments the division may make to companies regarding their climate-related disclosures, or the absence of such disclosures.
A brief statement preceding this sample comment letter reiterates the view expressed in the agency’s 2010 interpretive guidance that a variety of existing SEC disclosure rules may require companies to disclose the current and potential future material impacts of climate change on the company’s business and financial condition and performance.
The SEC staff has been conducting an extensive review of climate change disclosure and compliance in Form 10K reports. When the staff has questions about a company’s climate change disclosures, it has sent a comment letter to the company, and the sample comments reflect the staff’s experience during this continuing review.
The sample comment letter highlights the importance of a thorough review of company disclosures about climate change and related issues, both in SEC filings and in materials such as CSR reports that companies post to their websites.
WHAT COMPANIES SHOULD DO NOW
The sample comment letter highlights three areas of a company’s climate change disclosures that it should focus on: disclosures in SEC filings, disclosures in CSR reports and other non-filed materials, and how a company’s disclosure controls and procedures apply to climate change disclosures. We suggest that companies review the sample comments and consider the following points.
Disclosure compliance in SEC filings
How does the disclosure about climate change impact the company’s compliance in SEC filings with existing disclosure rules, particularly if considered in light of the specific interpretations provided by the SEC in the 2010 interpretive guidance? As the 2010 guidance discussed in detail, many existing SEC disclosure rules may require disclosure about the impacts of climate change on the company, if material. These include the following parts of a Form 10 K report:
- Item 1, Business: The material impacts of climate change, which could include (for example) impacts on the company’s products or services, its geographical markets, competitive conditions in the company’s industry and the material impact of governmental regulation on the company
- Item 1A, Risk factors: The material risks the company faces from climate change impacts
- Item 3, Legal proceedings: The impact of material pending legal proceedings
- Item 7, Management’s discussion and analysis: The material impacts of climate change on the company’s financial condition and performance, as well as disclosure of potentially material impacts of known trends, events and uncertainties related to climate change.
We recommend that companies evaluate existing climate change impacts, including known trends and uncertainties, and review their recent disclosures in light of current SEC rules and the 2010 interpretive guidance. Companies with September 30 and December 31 fiscal year-ends should begin this process as soon as possible, so that the upcoming Form 10 K report can reflect the results of the company’s review.
Disclosures in other company materials
It is becoming increasingly common for companies to make statements about their efforts and plans to deal with climate change, as well as other ESG matters, in various publications and other public materials. In many cases, these materials are the responsibility of investor relations or marketing groups – rather than the finance, accounting and legal groups that prepare and review SEC filings – and may not be subject to the company’s disclosure controls and procedures.
Questions companies should consider include:
- Are the statements about climate change in other company materials accurate?
- What internal procedures apply to preparation and review of these materials?
- Do these materials get legal and/or financial review, when appropriate?
- Are the statements about climate change in these materials consistent with the statements in the company’s SEC filings?
- What disclaimers and/or cautionary statements are appropriate for materials that are not filed with the SEC?
- Has the company reviewed the statements in its CSR report and other website materials with an understanding that the anti-fraud provisions in Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 apply to such statements?
Third-party service providers
Does the company have procedures that govern who will provide information on climate change and other CSR matters to third parties? In addition to an increasing volume of materials prepared by companies for various uses other than SEC filings, companies are becoming involved with an increasing number of third-party service providers that prepare reports on the company’s ESG/CSR status and achievements.
For example, many companies have issued ‘green bonds’, which are debt securities issued by the company with an undertaking to use the proceeds of the offering to fund projects that meet specific standards, some of which are directly related to climate change. These offerings typically include an affirmation by the company that it will engage a third party (often the company’s independent auditor) to attest that the company used the proceeds in the manner described in the offering documents.
Another example is reports prepared by third parties that provide ESG scores or ratings used by institutional investors. These present risks that are similar to the risks involved in the release of non-regulatory materials.
ON THE HORIZON
It is very likely the SEC will propose new, specific disclosure requirements related to climate change matters before the end of 2021 or in early 2022. ESG disclosures – and particularly climate change, human capital and diversity disclosure – are among the most prominent and most sensitive disclosures companies make today.
In many cases, the broad range of company groups that are involved in various types of ESG and climate change disclosure present a greater challenge than many other types of company disclosure for content generators. At the same time, the number of content consumers, and the importance of ESG and climate change disclosure to these content consumers, requires companies to manage these disclosures well.
In late July 2021, SEC chair Gary Gensler outlined some rule-making considerations in a public statement. These included requirements related to the location of the new climate change disclosure, new qualitative disclosure requirements, new quantitative disclosure requirements – particularly in light of the desire that company disclosures should be comparable among different companies – industry-specific disclosure requirements and scenario analysis that could show how companies might respond to a range of potential changes, including risks related to climate change.
In March 2021, the SEC announced the formation of an enforcement task force focused on climate change and other ESG issues. Although to date the SEC has not announced an enforcement action initiated by the task force, the 22-member task force will likely initiate an enforcement action in the near term.
The current review of climate change disclosure across a broad spectrum of public companies is one result of the SEC’s focus on climate change issues and disclosures. The proposed disclosure rules that are anticipated before the end of this year are another result. ESG issues, particularly climate change, are a very significant focus for many investors, consumers, suppliers and regulators in the US and the rest of the world. Change is clearly coming to disclosures about these topics, and companies should be prepared.
Folake Ayoola and John Newell are counsels in Goodwin’s public company advisory practice and Sean Donahue is chair of the firm's public company advisory practice
