Environmental, social, and governance factors (“ESG”) have pushed to the forefront of the SEC’s attention in recent years. In September, building on prior guidance, the SEC’s Division of Corporate Finance released a sample comment letter that requests additional information from companies related to climate change. The letter does not create new substantive law, but it illustrates the SEC’s increased interest in ESG and climate-related disclosures under the Biden Administration.
On February 2, 2010, the SEC issued its Guidance Regarding Disclosure Related to Climate Change (Release No. 33-9106), an interpretive release guiding public companies on how to apply the SEC’s existing disclosure requirements to climate change and its impact on businesses. The 2010 Guidance addressed four topics of climate-related disclosures, including: 1) the impact of domestic legislation and regulation related to climate change, 2) the impact of international accords related to climate change, 3) the indirect consequences of regulations and business trends, and 4) the physical impacts of climate change. Sheppard Mullin’s review of this 2010 Guidance can be found here: SEC Interpretive Release On Climate Change Disclosure | Sheppard Mullin Richter & Hampton LLP – JDSupra.
Since the start of the Biden Administration, the SEC has focused on promoting ESG-related disclosures to provide investors with more information about how companies will both impact and be impacted by climate change. In February 2021, then Acting Chair of the SEC Allison Herren Lee directed the Division of Corporate Finance to enhance its attention on climate-related disclosures. In March 2021, the SEC also created a task force to address violations of its ESG disclosure requirements. In recent months, SEC Chair Gary Gensler has also indicated that the SEC would place additional focus on ESG-related disclosures, and has indicated that the SEC would propose a mandatory climate risk disclosure rule by the end of 2021.
The September 2021 sample letter states that it is meant to assist the SEC in better understanding corporate disclosures required under its 2010 Guidance. The letter can be found here: SEC.gov | Sample Letter to Companies Regarding Climate Change Disclosures. The SEC’s sample letter requests additional information relating to the following topics:
- Whether the company provided more expansive disclosures in its corporate social responsibility report (CSR report) than it did in SEC filings
- Material impacts of climate-related transition risks on the business, its financial condition, and results of operations, including policy and regulatory changes, market trends, credit risks, or technology changes
- Material litigation risks related to climate change
Management’s Discussion and Analysis of Financial Condition and Results of Operations
- Current or pending climate change-related legislation, regulations, and international accords that may have a material effect on the business, financial condition, and results of operations
- Material past and/or future capital expenditure for climate-related projections
- Indirect consequences of climate-related regulations and business trends, including:
- the effect on demand for goods and services that produce significant greenhouse gas emissions or are related to carbon-based energy resources
- increase in demand for goods that result in lower emissions than competing products
- increase in competition to develop innovative new products that result in lower emissions
- increase in demand for generation and transmission of energy from alternative energy sources, and
- anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions
- Material physical effects of climate change on operations and results, including:
- severity of weather
- quantification of weather-related damage to property or operations
- potential for indirect impacts of weather affecting major customers or suppliers
- decreased agricultural production capacity in areas affected by drought or other weather-related changes, and
- weather-related impacts on the cost or availability of insurance
- Quantifying any material increases in compliance costs related to climate change
- The company’s purchase or sale of carbon credits or offsets and its impact on the business, financial condition, and results of operations
Public companies should consider the SEC’s sample letter as additional insight into the agency’s priorities in regards to climate-related disclosures and ESG. The disclosures should include thorough information in line with the potential questions raised in the letter, both to provide additional information to investors and to avoid scrutiny from the SEC. The SEC’s effort to promote climate-related disclosures will increase corporate transparency into how different companies are contributing to and being affected by climate change, making environmental factors a greater consideration for corporate leadership and investors.