Defining Issues | January 2023

Insight

Climate disclosures in focus for 2022 year-ends

Pending a final climate rule, the SEC staff continues to question issuers’ climate disclosures under existing rules.

In September 2021, an illustrative comment letter provided example comments that the SEC staff is sending to companies regarding climate-related disclosures. More than a year later, the staff continues to probe disclosures. Staff frequently pushes issuers to provide a quantitative analysis supporting claims that the disclosure is immaterial. If you haven’t revisited your current disclosures using the example comment letter, we recommend doing it now.

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.
  • Since that time, the SEC has reinforced its commitment to this topic in speechmaking and statements. Specifically, during the comment letter panel at the 2022 AICPA & CIMA Conference, the staff stated that it will continue to focus on climate-related disclosures in public filings. See our coverage of the conference here.

More than a year in, we are seeing more focus by staff

  • As of early January 2023, the staff has sent approximately 70 letters to issuers since the example comment letter was issued.
  • When an issuer has indicated to the SEC staff that disclosures are not material, the staff has subsequently requested that a quantitative materiality analysis be provided. These analyses are submitted through comment letter responses. Disclosure topics where analyses have been requested include carbon credits, the effect of climate change on insurance premiums, and climate-related capital expenditures and compliance costs. In some cases, issuers are agreeing to update risk language after back-and-forth with the staff.
  • As issuers prepare their 2022 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.    

“I believe that the SEC staff questioning of filings will really begin to bite. Companies are getting closer to their commitment dates – an example might be, say, a 50% emissions reduction by 2030 – so that means the financial reporting considerations start to become material. My advice would be, do your homework now – don’t let yourself get caught off-guard.”

— Julie Santoro, Partner, Department of Professional Practice


A reminder of what’s in the sample letter

  • 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.”

The SEC’s climate proposal

  • The SEC issued The Enhancement and Standardization of Climate-Related Disclosures for Investors in March 2022. See our Top 10 Q&A on the proposal, and read our response here.
  • The SEC received over 4,000 unique responses to the proposal. Our analysis of responses revealed general support for standard-setting in this area, but concerns with the proposal as written.
  • After a technical glitch and reopened comment period, the SEC currently estimates release of a final climate rule in April 2023.

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