Defining Issues | February 2024

Insight

Continued climate disclosure focus by SEC staff

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. Over two years later, the staff continues to probe disclosures. The staff frequently pushes issuers to provide a quantitative analysis supporting claims that a disclosure is not material. We recommend that companies use the example comment letter to assess the quality of their Form 10-K disclosures.

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.
  • The SEC staff issued its example comment letter with nine key questions in September 2021.

Over two years later, we are seeing more focus by staff

  • As of January 2024, the staff has sent letters to more than 80 issuers since the example comment letter was issued. Staff has made over 500 comments and the follow-up rate on issuer responses has exceeded 50%.
  • Recent letters have focused on the quality of climate disclosures related to regulatory and physical risks, as well as differences between a company’s sustainability report and its Form 10-K, and the use of carbon credits.
  • When an issuer indicates to the SEC staff that disclosures are not material, it is not uncommon for the staff to request a quantitative materiality analysis. In addition, the staff has continued to probe explanations that it feels are not sufficiently precise about how an issuer considered the need for disclosure in its Form 10-K or its choice of words when disclosure was included. In some cases, issuers are agreeing to update risk language after back-and-forth with the staff.  
  • We recommend using the example letter to assess planned disclosures. This assessment helps to highlight areas in which disclosures could be strengthened to meet staff expectations under the 2010 climate disclosure guidance.

“Climate reporting is at the forefront of all sustainability reporting, whether voluntary or mandatory; with metrics and disclosures that provide greater visibility into a company’s actions, plans and prospects. The picture those disclosures paint – and how it connects to a company’s financial position and performance – is coming under increasing scrutiny.”

— 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 and final rule

  • 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.
  • The SEC’s fall regulatory agenda shows the final climate rule being planned for release around the April 2024 timeframe, or what we interpret as the first half of 2024.

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