A Warning From the SEC on Climate Change Disclosure: How Should Public Companies RespondOctober 13, 2021

As companies continue to evolve their communications, we continue to counsel our clients to stay ahead of consistently growing expectations of all stakeholders (regulators, investors, consumers etc.) In a recent open comment letter published by the U.S. Securities and Exchange Commission (the “SEC”), we see another example - regulators pushing expectations - and we expect that the bar will continue to be raised. Prudent companies will continually test and push themselves to ensure they are aligned with stakeholders, which is why we feel it is important to understand what the latest communications from the SEC mean for our clients.

Over the last ten months, SEC has taken actions that clearly indicate an intent to expand its 2010 Guidance for public issuers regarding climate change disclosure requirements. These actions include new staffing appointments at senior levels, the creation of a Climate and ESG Task Force in the Division of Enforcement, and a regulatory agenda that includes proposed rule amendments “to enhance registrant disclosures regarding issuers’ climate-related risks and opportunities.” SEC Chair, Gary Gensler, has also declared an expectation for the Commission to consider a mandatory climate risk disclosure rule proposal by 2021 year-end, though he suggested it may be early 2022 before the rule is released to the public.

In the latest action by the regulator towards the creation of an internal infrastructure that will ultimately result in ESG disclosure regulation, the SEC posted an open comment letter on September 9, 2021, to provide guidance to public issuers on disclosures related to climate change. The Comment Letter’s intent is to spur disclosure among all issuers, as well as to provide a framework for developing the 2021 Annual Report on Form 10K. With this in mind, we thought it worthwhile to review some of the Comment Letter’s major takeaways and how public companies should approach these suggested actions by the SEC.

Situations where a company has provided less detail in their 10-K than in the company’s corporate voluntary ESG disclosure.

This first comment in the SEC’s Letter raises the importance of ensuring that your ESG story is consistent with your other disclosures and corporate behaviors – specifically addressing the difference in disclosure between a company’s SEC filing and its CSR report. The Comment Letter’s language emphasizes to issuers that if information is material to investors, then it should be reflected in their filings and not just in a CSR report. Additionally, the comment suggests that the SEC may be considering requiring companies to incorporate climate information into their annual filings or, at the very least, explain why they have chosen not to do so.

Inadequate climate risk disclosures that are essentially boiler plate statements.

The Comment Letter also addresses the degree to which companies are addressing climate risk or adequately disclosing climate change-related risks – both from a transitional (regulation, litigation, etc.) and physical (extreme weather, natural resource availability, etc.) perspective. A suggestion is made for issuers to consider the indirect consequences of climate-related trends, including how their supply chain might be impacted by climate change.

Identify material climate-related capital expenditures.

Issuers are typically forced to incur significant financial costs when making a commitment to address climate change risks and opportunities. The Comment Letter suggests that issuers should use the Management Discussion and Analysis (“MD&A”) section of their financial filings to disclose information on any material carbon offset transactions. In the event that capital expenditures and offsets are a significant part of a company’s climate strategy, or that the company is subject to “cap and trade” laws, then those costs and affiliated expectations should be discussed at length in the filing. The implicit directive is to be transparent about any risks and uncertainties related to the costs incurred.

SUMMARY:

The Comment Letter provides insight on areas the SEC is focused on covering with respect to potential climate change disclosures. It’s highly likely that some companies will begin to receive comment letters from the regulator tailored to their own disclosures in addition to questions from investors. We believe companies should begin to prepare to spend more time discussing climate in their filings, which will require collecting additional data, synthesizing those inputs, and then articulating the findings in a clear and sophisticated manner. There will also be a need to identify any climate-related statements that could raise questions on inclusion in SEC filings, as well as review risks and opportunities using the TCFD framework as a guidepost. It’s likely that the SEC will use TCFD as a template, given the framework’s high adoption rate.

BCW will continue to closely monitor SEC activity on climate change disclosures, along with any additional proposed rules or significant developments. In the interim, please feel free to contact us with any questions as you review the situation and prepare to file your 2021 Annual Report.

CONTACT

Gus Okwu, Executive Vice President | [email protected] | +1 (212) 601-3491

Madeline Patterson, Senior Vice President | [email protected] | +1 (901) 299-4764

Monica Palid, Account Director | [email protected] | +1 (858) 663-6446