On September 22, 2021, the Division of Corporation Finance of the U.S. Securities and Exchange Commission released a sample comment letter containing comments that Division Staff could issue regarding an issuer’s climate-related disclosures, or lack thereof. These illustrative comments serve as a preview of new rules regarding climate-related disclosures that are expected to be considered by the Commission late this year or early in 2022.
This publication of illustrative comments is part of the continuing coordinated focus by SEC leadership on climate-related disclosures, which began even before the new administration took over in March. Interim SEC Chair Lee directed the Division of Corporate Finance in February 2021 to enhance its focus on compliance with existing Commission guidance on climate-related disclosures. Then in March 2021, she invited public comment on climate change disclosures, which generated over 600 comment letters. The SEC has also formed a Climate and ESG Task Force to assess material gaps in climate risk disclosures under existing rules.
In addition to this focus on improving compliance with existing climate-related disclosure requirements, SEC Chairman Gensler has asked the Division Staff to develop new more comprehensive and standardized climate change disclosure rules for the Commission’s consideration. He very recently indicated that he expects these proposed rules to be ready for consideration by the Commission late this year or early next year. The sample comment letter publicized by the SEC provides an indication of the more standardized mandatory disclosures that are expected to be part of the new rules.
The sample comments are all materiality-based, and thus are consistent with the longstanding SEC guidance on climate-related disclosures from 2010. But while the 2010 guidance only minimally expands on the basic materiality standard, the new sample comments signal that new rules will likely contain a number of specific areas that an issuer will be required to address in its filings, if they are material, or be prepared to explain to the SEC why they are not material. By providing a preview of the upcoming rules, the release of the sample comment letter is intended to speed up the types of disclosures likely to be mandated in the upcoming rules.
In the sample comment letter, the Division Staff asks for discussion of the following climate-related matters to the extent material to the issuer, or for an explanation to the Staff as to why they are not material:
- Effects of transition risks related to climate change, changes or trends that could impose operational, technological or compliance burdens or changes
- Litigation risks
- Legislative, governmental and regulatory developments regarding climate change
- Capital expenditures, historical or anticipated, for climate-related projects
- Indirect consequences of climate-related regulations or business trends, such as increased or decreased demand for an issuer’s products/services, competition to develop new products, or reputational risk
- Physical effects of climate change, including extreme weather, drought or insurance cost/availability
- Compliance costs
Another comment in the sample comment letter asks the issuer to explain why it would elect to make climate-related disclosures in a document not filed with the SEC, such as a sustainability or corporate social responsibility report, as opposed to in public SEC filings. This comment signals the Commission’s belief that including these disclosures in SEC filings is a preferred means of disclosure because it causes their preparation to be subject to greater scrutiny and the end result to be of higher quality. It also signals that the Commission’s level of scrutiny of climate-related disclosures will extend beyond an issuer’s SEC filings to include its other publicly-available materials.
This coordinated focus by the SEC harkens back to a comparable coordinated attack on deficient disclosures in 2016, in that case related to non-GAAP financial measure disclosures. That effort began with the SEC attempting to educate issuers by identifying areas of deficient disclosures through new C&DIs and other guidance while simultaneously engaging in a publicity campaign to highlight the need for improvement. This educational phase was followed by much greater Staff focus on these disclosures in comment letters and then by heightened enforcement activity. One should expect that the release of the illustrative comment letter and accompanying SEC publicity campaign on climate-related disclosures will be closely followed by heightened Staff activity in issuing comment letters, as well as increased activity on the enforcement front. Indeed, comments on climate-related disclosures in recent Staff comment letters are reportedly already on the upswing.
The immediate takeaway for issuers is that more comprehensive and mandatory climate-related disclosure regulations are coming soon, and they will likely address the types of specific matters in the illustrative comment letter. There is great focus and enthusiasm within SEC leadership for climate-related disclosures, so issuers should redouble their efforts to determine which of these types of climate-related matters are material enough to be included in their SEC filings, or to be prepared to respond to Staff comment letters with their materiality analysis to explain their omission.
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