Defining Issues | February 2022

 

Insight

SEC staff questions quality of climate disclosures

Staff continues to question issuers’ climate disclosures; comment letters and responses now becoming publicly available.

In September, an illustrative comment letter provided example questions that the SEC staff is posing to companies regarding climate-related disclosures. As the staff continues to probe disclosures and the first comment letters and responses become publicly available, we recommend using the example comment letter to help assess whether the appropriate disclosures are included in 2021 year-end filings.

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.

Relevance of the sample letter to 2021 year-end filings

  • The Division of Corporation Finance spoke about the sample letter at the 2021 AICPA and CIMA Conference on Current SEC and PCAOB Developments; read our SEC Issues & Trends for more information.
  • One speaker observed that when companies responded by saying climate issues are not currently disclosed in SEC filings because they are not material, the staff has followed up with further questions – including requests for quantitative data to better understand why they are not material. This trend has been observed in several recent comment letters that have been made public by the SEC, and has resulted in companies having to provide additional support to the SEC as part of their responses. 
  • As issuers prepare their 2021 year-end filings, we recommend using the questions in the sample letter to assess planned disclosures. This reconciliation will help to highlight areas in which disclosures could be strengthened to meet staff expectations under the 2010 climate disclosure guidance. Recent public comment letters to issuers have closely aligned with the sample letter questions provided by the SEC, including questions on companies’ sustainability reports versus Form 10-K disclosures, and capital expenditures related to climate-related projects.   

“Although the sample comment letter relates to climate disclosures, it’s a timely reminder that the SEC staff is focused on ESG more broadly.

I encourage all issuers to think about whether they are disclosing all material ESG-related information – for example, related to human capital and cybersecurity risk governance – that might be necessary to ensure their filings are not misleading.”

— Timothy Brown, Partner, SEC & Regulatory Reporting 


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 Form 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 in Q1 or Q2 2022.
  • 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. 
  • In recent public comments, Chair Gensler has reiterated thoughts previously expressed: his belief that disclosures should be consistent and comparable; that the SEC should consider whether the disclosures should be filed in the Form 10-K; and again noting that generic boilerplate text does not help investors.
  • Read more in our article, ESG reporting: What to expect in forthcoming proposals, in Q3 Quarterly Outlook.

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