SEC Publishes Sample Comments on Climate-Change Disclosures
Background
In February 2021, then SEC Acting Chair Allison Lee issued a statement directing the Commission’s Division of
Corporation Finance (DCF) to increase its focus on climate-related disclosures
when reviewing public company filings, including assessing the extent to which
public companies have provided information that is consistent with the SEC’s
2010
interpretive release
Commission Guidance Regarding Disclosure Related to Climate Change (the
“2010 interpretive release”). In a manner consistent with this directive, the
DCF has recently issued comments to several public companies in a variety of
industries.
On September 22, 2021, the DCF publicly released a sample letter that highlights the types of comments the DCF
may issue to public companies regarding climate-related disclosures, primarily
focusing on disclosures in the business, risk factors, and MD&A sections of
filings. The sample comments, which the SEC has published before publicly
releasing any of the recently issued company-specific comments, serve as an
early warning to registrants that have not received any company-specific
comments to date.
Sample comments in the letter are largely consistent with comments the SEC has
recently issued. They are also consistent with the guidance in the 2010
interpretive release, which identifies four topics related to climate change
that public companies should consider when assessing what information to include
in their filings under existing SEC disclosure requirements:
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The impact of legislation and regulations.
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International accords.
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Indirect consequences of regulation or business trends.
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Physical impacts of climate change.
The letter further establishes that the SEC may review
information disclosed outside of a public entity’s SEC filings, including in
separate sustainability reports, and ask public companies to consider whether
they should also disclose such information in their SEC filings.
For more information about recent SEC communications regarding climate-related
matters; the 2010 interpretive release; and other environmental, social, and
governance (ESG) disclosures, see Deloitte’s March 22, 2021, Heads Up.
Sample Comments
The DCF has issued the sample comments for illustrative purposes, and they are
not exhaustive. Further, actual comments that the DCF issues to a public company
will be specific to that entity, its current climate-related disclosures, and
its industry.
Sample comments from the letter are provided and discussed below.
General
We note that you provided more expansive disclosure in
your corporate social responsibility report (CSR report)
than you provided in your SEC filings. Please advise us
what consideration you gave to providing the same type
of climate-related disclosure in your SEC filings as you
provided in your CSR report.
Connecting the Dots
As discussed in Section I.B.3 of the 2010 interpretive release, some of
the information in sustainability reports “may be required to be
disclosed in filings made with the Commission.” A report by the Center for Audit Quality notes that
since 2010, there has been a significant increase in the number of
registrants that publicly disclose climate-related information, and 95
percent of the S&P 500 “had detailed ESG information publicly
available.” In evaluating whether to disclose such information in SEC
filings, registrants may consider whether it would be material to a
reasonable investor or would alter the total mix of available
information. Registrants may also consider Rule 408 of the Securities
Act of 1933 and Rule 12b-20 of the Securities Exchange Act of 1934,
which require disclosure of “further material information, if any, as
may be necessary to make the required statements . . . not misleading.”
Risk Factors
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Disclose the material effects of transition risks related to climate change that may affect your 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. [See Section IV.A of the 2010 interpretive release for more information.]
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Disclose any material litigation risks related to climate change and explain the potential impact to the company. [See Section III.B of the 2010 interpretive release for more information.]
MD&A and Results of Operations
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There have been significant developments in federal and state legislation and regulation and international accords regarding climate change that you have not discussed in your filing. Please revise your disclosure to identify material pending or existing climate change-related legislation, regulations, and international accords and describe any material effect on your business, financial condition, and results of operations. [See Sections IV.A and IV.B of the 2010 interpretive release for more information about regulation and legislation and about international accords, respectively.]
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Revise your disclosure to identify any material past and/or future capital expenditures for climate-related projects. If material, please quantify these expenditures. [See Sections I.B.2 and IV.A of the 2010 interpretive release for more information.]
Connecting the Dots
Many registrants have publicly disclosed their goals related to reducing
emissions or reliance on carbon-based energy by a specified date.
Achieving these objectives may involve significant expenditures or
increased operating costs. However, steps necessary to attain emissions
goals may be embedded within broader strategic spending (e.g., new
technology that improves business performance may also be more energy
efficient). Therefore, isolating the incremental capital expenditures or
operating costs associated with plans to achieve these goals may be
difficult. Nonetheless, registrants may consider whether such increased
capital expenditures or costs represent a known trend that should be
currently disclosed.
MD&A and Results of Operations (continued)
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To the extent material, discuss the indirect consequences of climate-related regulation or business trends, such as the following:
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decreased demand for goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources;
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increased demand for goods that result in lower emissions than competing products;
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increased competition to develop innovative new products that result in lower emissions;
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increased demand for generation and transmission of energy from alternative energy sources; and
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any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions.
[See Section IV.C of the 2010 interpretive release for more information.] -
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If material, discuss the physical effects of climate change on your operations and results. This disclosure may include the following:
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severity of weather, such as floods, hurricanes, sea levels, arability of farmland, extreme fires, and water availability and quality;
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quantification of material weather-related damages to your property or operations;
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potential for indirect weather-related impacts that have affected or may affect your major customers or suppliers;
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decreased agricultural production capacity in areas affected by drought or other weather-related changes; and
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any weather-related impacts on the cost or availability of insurance.
[See Section IV.D of the 2010 interpretive release for more information.] -
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Quantify any material increased compliance costs related to climate change. [See Section II of the 2010 interpretive release for more information.]
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If material, provide disclosure about your purchase or sale of carbon credits or offsets and any material effects on your business, financial condition, and results of operations.
Connecting the Dots
When considering the above sample comments on MD&A, registrants
should evaluate not only the current impact of climate-related matters
on operations and financial condition but also whether such impact
represents a material known trend or uncertainty that should be
disclosed. As amended in 2020, SEC Regulation S-K, Item 303(b)(2)(ii),
requires disclosure of “any known trends or uncertainties that have had
or that are reasonably likely to have” a material impact on revenues or
income. Under the “reasonably likely” requirement, a registrant should
disclose a known trend or uncertainty if it (1) is reasonably likely to
occur and (2) would be material to the registrant if it did occur.
Many registrants may take a fresh look at the climate-related disclosures in
their SEC filings as a result of the sample comments. As part of their
evaluation, they may wish to determine whether they have appropriate governance,
as well as disclosure controls and procedures, related to (1) identifying
climate-related risks, opportunities, and associated business impacts; (2)
assessing whether climate-related information is material for disclosure in SEC
filings; and (3) ensuring that the information is accurate and complete in SEC
filings. While registrants may separately publish sustainability reports, such
reports may not currently be subject to the same extent of disclosure controls
and procedures as SEC filings. The evaluation of climate-related disclosures and
associated controls and procedures should reflect appropriate governance and
oversight from management, including relevant functions such as finance, and the
board of directors.
Although the letter does not include sample comments related to how
climate-related matters may affect the financial statements, certain topics
mentioned in the comments, such as severe weather events or carbon credits, may
have financial statement implications. See Deloitte’s May 26, 2021, Heads Up for more information about
accounting considerations related to ESG matters.
Looking Ahead
The SEC is expected to issue a proposed rule that may require
registrants to provide specific climate-related disclosures. In March 2021, then
Acting Chair Lee issued a request for input on climate-change disclosures as a
prelude to rulemaking. SEC Chair Gary Gensler has similarly focused on climate
risks and included climate-related disclosures, among other topics, in the SEC’s
rulemaking agenda in June 2021. In a recent speech, he stated that the SEC has received over 550 unique
comment letters as a result of the request for input on climate-change
disclosures and 75 percent of those letters supported mandatory climate
disclosure rules. In testimony before the U.S. Senate Committee on Banking,
Housing, and Urban Affairs, Chair Gensler stressed that “companies and investors
alike would benefit from clear rules of the road” and stated he had directed the
SEC staff to consider economic analysis and public comment in developing
climate-related disclosure requirements. Stay tuned for further details on the
proposed rule.
Other ESG Resources
For more information, see the following Deloitte resources: