Defining Issues | September 2021

 

Insight

SEC staff questions quality of climate disclosures

Sample comment letter highlights staff’s extensive questioning of the quality of public companies’ climate disclosures.

An illustrative comment letter provides example questions that the SEC staff is posing to companies regarding climate-related disclosure.

Applicability

  • Public companies

Relevant dates

  • Effective immediately

Key impacts

Background

  • On February 24, 2021, then SEC Acting Chair, Allison Herren Lee, released a statement that she was directing the SEC’s Division of Corporation Finance to enhance its focus on climate-related disclosures in public company filings.
  • The statement indicated that efforts would be directed at evaluating current disclosure rules with an eye toward the disclosure guidance that was issued in 2010 and developing insights to help modernize that guidance. 
  • Lee’s statement was followed by inclusion of the topic in the SEC’s 2021 examination priorities, and the announcement of a new enforcement taskforce to focus on climate and ESG issues.
  • Read more about these developments and the 2010 disclosure guidance in KPMG Defining Issues, SEC on ESG: Focus on climate-related disclosures.
  • The SEC also issued an informal request for public input on climate change disclosures to help evaluate current rules. The comment period closed on June 13, 2021; read our comment letter.

The sample letter shows extensive inquiries

  • The first question, which is general, highlights that staff is interested in differences between companies’ ESG or sustainability reports and their filings. The question asks what consideration was given to providing the same type of climate-related disclosure in SEC filings as was provided in the ESG or sustainability report. 
  • This line of inquiry is consistent with the staff questioning why certain information discussed in earnings calls or on the company’s website, for example, was not considered material for disclosure in SEC filings.
  • The additional sample inquiries and instructions relate to specific disclosures in the risk factors and MD&A sections of a company’s 10-K.
  • Questions include requests for information about the material effects on the company of transitioning to a low-carbon economy (e.g. market trends, technological changes); the physical effects of climate change (e.g. floods, hurricanes); and the indirect consequences of climate-related regulation or business trends.
  • The letter asks for material increased compliance costs related to climate change to be quantified; and for disclosures about the purchase or sale of carbon credits or offsets.
  • Requests for revised disclosures relate to pending or existing climate-related legislation, regulations and international accords; and past and/or future capital expenditure for climate-related projects.
  • The letter is accompanied by a general reminder that companies need to 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.”

SEC climate-related disclosure proposals

  • This scrutiny of public company disclosures comes as the staff finalizes climate-related disclosure proposals that are expected to be published by the end of 2021.
  • SEC Chair Gary Gensler has spoken about the specific areas being considered – covering both qualitative and quantitative disclosures – as well as where those disclosures should be required.
  • Read more in our article, ESG reporting: What to expect in forthcoming proposals, in Q3 Quarterly Outlook.

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