In advance of the SEC issuing proposed rules supplementing disclosure of climate change-related matters, the Commission remains busy exploring additional, alternative means for requiring public companies to disclose climate risks and greenhouse gas emissions.
To that end, on September 22, 2021, the Division of Corporation Finance published an “illustrative” Sample Letter containing questions for companies to consider regarding the SEC’s 2010 Guidance Regarding Disclosure Related to Climate Change (the “2010 Guidance”). The Sample Letter follows a February 24, 2021 request by then Acting Chair Allison Herron Lee that the Division of Corporation Finance scrutinize disclosures for adherence to the 2010 Guidance. In releasing the Sample Letter, the SEC reminded companies that the 2010 Guidance may require disclosure related to climate change and stated it might send the Sample Letter to companies regarding their climate-related disclosure or the absence of such disclosure.
In light of the foregoing, it is important for companies to take another look at the 2010 Guidance and be prepared to address the issues raised in the Sample Letter.
The 2010 Guidance
The 2010 Guidance emphasized that certain climate change-related risks and opportunities might require disclosure due to their potential material impact on operations or financial conditions, including:
- The impacts of domestic legislation and regulation;
- The impacts of international accords;
- The indirect consequences of regulation on business trends; and
- The physical impacts of climate change on weather severity, sea levels, and water availability.
The Sample Letter invokes the 2010 Guidance
The Sample Letter is broken down into three topical sections with respect to climate-related matters:
The SEC asks for explanations as to why expansive disclosures in the company’s corporate social responsibility report are not included in the company’s SEC filings.
The SEC first asks the company to “[d]isclose the material effects of transition risks related to climate change that may affect [its] business, financial condition, and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks, or technological changes.” The SEC then requests the company to “[d]isclose any material litigation risks related to climate change and explain the potential impact to the company.”
Management’s discussion and analysis of financial condition and results of operations
The SEC outlines several topic areas that may require further disclosure, including:
- “[M]aterial pending or existing climate change-related legislation, regulations, and international accords” and “describ[ing] any material effect on [the company’s] business, financial condition, and results of operations”;
- “[M]aterial past and/or future capital expenditures for climate-related projects” and “[i]f material, . . . quantify[ing] these expenditures”;
- “To the extent material, discuss[ing] the indirect consequences of climate-related regulation or business trends,” for which the SEC provides the following examples:
- decreased demand for goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources;
- increased demand for goods that result in lower emissions than competing products;
- increased competition to develop innovative new products that result in lower emissions;
- increased demand for generation and transmission of energy from alternative energy sources; and
- any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions.
- If material, the physical effects of climate change on operations and results, which may include the severity of weather, quantification of weather-related damages, the impacts on major customers or suppliers, decreased agricultural production capacity due to drought or other weather-related changes, and weather-related impacts on the cost or availability of insurance;
- Quantification of any material increased compliance costs related to climate change; and
- If material, the purchase or sale of carbon credits or offsets and material effects therefrom.
Climate change disclosure remains a priority
The SEC’s Sample Letter serves as yet another reminder that climate change is a priority for the Commission. Companies should expect continued scrutiny and questions from the SEC concerning such matters while we await the Commission’s forthcoming proposed and final climate change disclosure rules.