Minding the Gaps: SEC’s Sample Letter Provides Valuable Guidance Into Relevant Climate Change Disclosures

Kelley Drye Client Advisory

On September 22, 2021, the Securities and Exchange Commission’s (the SEC’s” or the Commission’s”) Division of Corporation Finance issued new climate change guidance. The guidance consists of a sample letter outlining comments related to climate change disclosures, which the Division staff would likely issue to a public company after reviewing its SEC filings. See Sample Letter to Companies Regarding Climate Change Disclosures.

The comments in the sample letter provide public companies with valuable insight into the information that the SEC would consider relevant when evaluating climate-related disclosure in SEC filings, such as periodic reports under the Securities Exchange Act of 1934 and registration statements under the Securities Act of 1933.  Importantly, the sample letter gives companies a window into what the SEC sees as common gaps in disclosures and highlights topics that may warrant particular attention in SEC filings.

The SEC explained on its website that staff are sending letters to public companies seeking more information about how climate change might affect their financial earnings or business operations. These letters were sent to dozens of companies, including in the agriculture, oil and gas, banking, real estate, and transportation industries. See Paul Kiernan, SEC Asks Dozens of Companies for More Climate DisclosuresThe Wall Street Journal (Sept. 22, 2021).

In February 2021, the then-Acting SEC Chair Allison Herren Lee directed the SEC’s Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings” and stated that the SEC staff would begin reviewing existing disclosures as part of a process of updating the 2010 guidance. SEC Statement, Review of Climate-Related Disclosure (Feb. 24, 2021), available at https://​www​.sec​.gov/​n​e​w​s​/​p​u​b​l​i​c​-​s​t​a​t​e​m​e​n​t​/​l​e​e​-​s​t​a​t​e​m​e​n​t​-​r​e​v​i​e​w​-​c​l​i​m​a​t​e​-​r​e​l​a​t​e​d​-​d​i​s​c​l​osure. In early March, the SEC also announced the creation of a Climate and ESG Task Force in the SEC’s Division of Enforcement to initially focus on identifying any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.

Of note, the sample comment letter is consistent with the SEC’s 2010 Guidance Regarding Disclosure Related to Climate Change. It stated that information related to climate change-related risks and opportunities may be required in disclosures to a company’s description of business, legal proceedings, risk factors, and management’s discussion and analysis of financial condition and results of operations. 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”).

Companies should now consider the general disclosure, risk factors and MD&A comments highlighted in the SEC’s sample letter and the materiality of any such climate-related disclosures when preparing their periodic reports, even if they have not received a comment directly from the SEC.

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
  • 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.
  • 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
  • Identify material pending or existing climate change-related legislation, regulations and international accords, and describe any material effect on the business, financial condition and results of operations.
  • Identify any material past and/or future capital expenditures for climate-related projects.  If material, please quantify these expenditures.
  • 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.
  • 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.
  • Quantify any material increased compliance costs related to climate change.

    • 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.

With the publication of the sample disclosure comments, companies should now consider the SEC’s guidance when preparing public filings.

We believe that having a centralized list of these disclosure statements could make the process more manageable.  In addition, companies should keep in mind that the information and disclosures in a CRS report is typically designed for consumption by many different stakeholders. In particular, issuers could consider whether there are any significant discrepancies between voluntary CSR reports and information in a company’s SEC filings. Therefore, companies should review their existing SEC disclosures to identify any areas of potential reconsideration or revision.

As we have stated in our earlier client advisories, ESG and climate change matters are a very significant focus for the SEC and change is clearly coming to disclosures about these topics.  Companies should be prepared.