SEC issues sample comment letter as it steps up review of climate disclosures | White & Case LLP

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On September 22, 2021, in a step that emphasizes the SEC’s increased focus on climate change disclosure, the SEC’s Division of Corporation Finance (“Corp Fin”) released a sample letter for public companies containing comments illustrating those it can make to companies. “regarding their climate-related disclosure or lack of such disclosure.”1

This follows months of increased focus on climate change disclosures by the SEC, which is expected to issue a proposed rule in the coming months requiring public companies to disclose climate change risks.2 A recent speech by President Gary Gensler, who said he expects proposed rules on business climate risk disclosures in the second half of 2021, stressed that such disclosures must be “consistent and comparable” in the time and noted that he asked the SEC staff to include “potential recommendations on how companies might disclose their Scope 1 and Scope 2 shows, as well as whether to disclose Scope’s shows. 3 – and if so, how and under what circumstances ”.3 This followed a February 2021 directive from Acting SEC Chairman Allison Herren Lee for Corp Fin to “strengthen its focus on climate-related disclosure in public company records.”4

Basis of comment letter

A number of existing SEC disclosure rules may require disclosure related to climate change, including in disclosures related to a company’s description of operations, legal proceedings, risk factors, and corporate discussions and analyzes. management on the financial condition and results of operations (“MD&A”).5; companies must also disclose “other material information, if any, which may be necessary to make the required statements, in light of the circumstances in which they are made, and not misleading”.6

Examples of comments

While the majority of sample comments focused on possible additional information in the MD&A, the first example comment under the “General” heading was perhaps the most interesting, which underscored the danger. potential for discrepancies between the level of information provided in corporate sustainability reports and that of the SEC. deposits. Specifically, the sample comment read, “We note that you provided more detailed information in your Corporate Social Responsibility Report (CSR Report) than in your documents filed with the SEC. Please let us know your interest in providing the same type of disclosure in your documents to the SEC, as you indicated in your CSR report. This comment reflects the risk that accompanies disclosure in a sustainability report that is not included in the company’s Form 10-K or 20-F (“Exchange Act Reports”).

While there is a general trend that companies increasingly provide ESG information in their Exchange Act reports, companies are still much more likely to ensure that information is provided in sustainability reports or on business websites. Based on the sample comment letter, companies that provide more detailed information on climate change in their sustainability reports may have this disclosure reviewed and asked what consideration they have given to providing the same type. of climate-related disclosure in their reports on the Exchange Act. This goes a step further than the SEC’s previous position that it can actively compare information that a company voluntarily provides in sustainability reports and elsewhere with any information disclosed in SEC records for any inconsistencies.

The letter also offers sample risk factor comments, including disclosing the material effects of climate change transition risks, such as policy and regulatory changes that could impose operational and compliance burdens, trends that may alter business opportunities, credit risks or changes, as well as significant climate change litigation risks and their potential impact. A full list of comments is provided below in Annex A.

Beyond the letter, the SEC has already issued a number of climate change disclosure comments that follow concerns raised in the SEC’s 2010 Climate Change Guidance. The companies received comments related to their discussion on the impact of climate change legislation and regulations, the impact of international agreements on climate change, the indirect consequences of climate change regulations or trends. trade and the physical impacts of climate change. A sample of these comments is included below in Appendix B.

Appendix A – Complete List of Comments

General

1. We note that you provided more detailed information in your Corporate Social Responsibility Report (CSR Report) than in your documents filed with the SEC. Please let us know your interest in providing the same type of climate-related disclosure in your SEC documents that you provided in your CSR report.

Risk factors

2. Disclose the material effects of climate change transition risks that may affect your business, financial condition and results of operations, such as policy and regulatory changes that could impose operational and compliance costs, market trends that may alter business opportunities, credit risks or technological changes.

3. Disclose any material risk of climate change litigation and explain the potential impact to the business.

Management report and analysis of the financial position and operating results

4. There have been significant developments in federal and state legislation and regulations and international agreements regarding climate change that you did not discuss in your case. Please review your disclosure to identify pending or existing laws, regulations and international agreements related to climate change and describe any material effects on your business, financial condition and results of operations.

5. Review your disclosure to identify any past and / or future significant capital expenditures for climate-related projects. If they are significant, please quantify these expenses.

6. Where possible, discuss the indirect consequences of climate-related regulations or business trends, such as the following:

  • decreased demand for goods or services that produce significant greenhouse gas emissions or are linked to carbon-based energy sources;
  • increased demand for goods resulting in lower emissions than competing products;
  • increased competition to develop new innovative products that result in lower emissions;
  • increased demand for the production and transmission of energy from alternative energy sources; and
  • any anticipated reputational risk resulting from operations or products that produce significant greenhouse gas emissions.

7. If important, discuss the physical effects of climate change on your operations and bottom line. This disclosure may include the following:

  • severity of weather conditions, such as floods, hurricanes, sea level, the arability of agricultural land, extreme fires, and water availability and quality;
  • quantification of material damage caused by weather conditions to your property or operations;
  • the potential for indirect impacts related to weather conditions that have affected or could affect your main customers or suppliers;
  • decreased agricultural production capacity in areas affected by drought or other weather-related changes; and
  • any weather-related impact on the cost or availability of insurance.

8. Quantify any significant increases in compliance costs related to climate change.

9. If material, provide information about your purchase or sale of carbon credits or offsets and any material effects on your business, financial condition and results of operations.

Appendix B – Examples of SEC Staff Comments Regarding Climate Change Disclosures

Below is a selection of the type of comments that were included in the SEC staff comment letters. Businesses typically receive some, but not all, of these comments, many of which correlate with the topics covered in the SEC’s 2010 Climate Change Disclosure Guidelines.

  • Where possible, discuss the indirect consequences of climate-related regulations or business trends.
  • Please review your disclosure to identify any significant past and / or future capital expenditures for climate-related projects.
  • Quantify any significant increase in compliance costs related to climate change.
  • Disclose any material risk of litigation related to climate change and the potential impact on the business.
  • If it is important, provide information about your purchase or sale of carbon credits or offsets and any material effects on your business, financial condition and results of operations.
  • To the extent that you anticipate declining demand for your goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources, please disclose any expected significant effects on your business. business, your financial situation and your results of operations.
  • If important, discuss the significant physical effects of climate change on your operations and bottom line.
  • Please let us know your interest in providing the same type of climate-related disclosure in your SEC documents that you provided in your sustainability report.

1 The letter template is available here. Corp Fin notes that the sample comments “are not an exhaustive list of issues that companies should consider. Any comments made would be tailored appropriately to the specific company and industry, and would take into consideration the disclosure that they are making. a company provided in the Commission deposits. “
2 See the SEC’s Reg Flex program here.
3 See “Notes Prepared Prior to the Principles for Responsible Investment Webinar“ Global Climate and Financial Markets ”.
4 For more on this and other SEC climate-related initiatives, see our previous alert, “SEC Focuses on ESG and Climate Disclosure”.
5 See Commission Guidelines on Climate Change Disclosure, Publication No. 33-9106 (February 2, 2010) [75 FR 6290] (February 8, 2010) (“Guide to Climate Change 2010”).
6 See Rule 408 of the Securities Act of 1933 (“Securities Act”) and Rule 12b-20 of the Securities Exchange Act of 1934 (“Exchange Act”).
7 See our previous alert, “ESG Disclosure Trends in SEC Filings. “

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