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Don’t wait until the SEC staff asks you about climate change
Publication date: 23 Sep 2021 (updated 24 Mar 2022)
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A PDF version of this publication is attached here: Don't wait until the SEC staff asks you about climate change (PDF 235kb)
This In the loop was updated on March 24, 2022 to include a summary of comment letters issued by the SEC’s Division of Corporation Finance regarding climate change disclosures and related responses from registrants.
John Coates, Acting Director, Division of Corporation Finance,
March 11, 2021
Voices from an increasing number of constituents extoll the merits of a new age of environmental consciousness. Vocal in the crowd, investors and other stakeholders across the business spectrum see environmental, social, and governance (ESG) disclosures as a window into a company’s future. Shareholder proposals related to environmental impact are on the rise in number and level of support. And if companies weren’t already acutely aware of the need to moderate their impact on the environment, many are voluntarily responding to stakeholder demand and increasingly making climate-related commitments—net zero, carbon neutral, carbon negative. Some of these commitments and other climate-related impacts are disclosed on websites or in speeches, sustainability reports, or survey responses, which may stand in stark contrast to what is (or isn’t) said in a company’s SEC filings.
The SEC is responding to the increased disparity between public statements and what’s included in regulatory filings with increased attention to the quality and adequacy of disclosure. Issuers of securities are required to make material disclosures to facilitate investors’ informed decision making. Of course, what constitutes a material disclosure that informs decision making is subject to significant management judgment. And while management is responsible for determining what is material and ultimately disclosed in its filings, the SEC staff is charged with assessing those disclosures for compliance with the federal securities laws.
On March 21, 2022, the SEC proposed new rules for climate-related metrics and other disclosures (see our In brief on the proposal). Companies should review the proposal and consider commenting before the May 20, 2022 deadline. However, in the meantime, it’s important for companies to continue to focus on compliance with the current requirements. This document highlights the requirements and provides insight into recent SEC comments on registrant disclosures.
 | An old story with a renewed focus and an eye toward change
In its 2010 interpretive release outlining how existing disclosure requirements apply to climate change matters, the SEC noted that “climate change has become a topic of intense public discussion in recent years,” which is a sentiment equally, if not more, appropriate today. But even the 2010 guidance was nothing new. Since the 1970s, the SEC has asked for climate-related disclosures. After 40 years of developments, the SEC provided a roadmap in 2010 that summarized how existing requirements apply to climate-related risk.
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Today’s focus
Climate change creates direct and indirect risks for companies in nearly all industries. Investors want to know about risk because it informs their decision making.
Commissioner Allison Herren Lee, Regulation S-K and ESG Disclosures: An Unsustainable Silence, August 26, 2020
 | The following table summarizes the Regulation S-K requirements highlighted by the SEC in 2010. Companies have a responsibility to assess whether a material exposure in the following areas merits disclosure, and audit committees should understand management’s assessment.
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Regulation S-K Item | Disclosures applicable to climate-related matters |
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Description of business
Item 101 requires a registrant to describe its business and that of its subsidiaries.
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Legal proceedings
Item 103 requires a registrant to briefly describe any material pending legal proceeding to which it or any of its subsidiaries is a party.
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MD&A
Item 303 requires disclosure known as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A.
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Risk factors
Item 105 requires a registrant to provide a discussion of the material factors that make an investment in the registrant or offering speculative or risky.
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Foreign private issuers (FPIs)
While FPIs are not subject to Regulation S-K, Form 20-F includes similar provisions that may require disclosures related to climate change:
- Item 3.D requires the disclosure of material risks.
- Item 4.B.8 requires a description of the material effects of government regulation on the business.
- Item 4.D requires a description of environmental issues that may impact how a company uses its assets.
- Item 5.D requires disclosure of any known trends, uncertainties, demands, commitments, or events reasonably likely to have a material effect on the company’s financial condition and results of operations.
- Item 8.A.7 requires information on any legal or arbitration proceedings that may have or have had significant effects on the company’s financial position or profitability.
Commissioner Elad Roisman, Keynote Speech at the Society for Corporate Governance National Conference, July 7, 2020
In its 2010 guidance, the SEC included the following examples of the types of events that may require disclosure under one or more of the Regulation S-K rules. These are only examples and registrants should consider their own circumstances, and consider discussion with SEC counsel, within the context of the SEC’s rules and requirements.
 | Impact of legislation and regulation
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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
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 | In addition, the SEC issued guidance that became effective in February 2020 related to the use of key performance indicators and metrics in MD&A. In that release, the SEC noted that some companies voluntarily disclose environmental metrics. The main intent of the release was to remind companies that when disclosing metrics, further information may be necessary under existing MD&A requirements to make the presentation of the metric not misleading. According to the SEC, adequate context for an investor to understand the disclosed metric would generally be expected to include:
Disclosure of the estimates or assumptions underlying the metric or its calculation may also be necessary context for the metric.
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In September 2021, the SEC’s Division of Corporation Finance reiterated the importance of the 2010 interpretive guidance and published some examples of staff comments the Division may issue to companies regarding climate-related disclosures. Since that time, the Division has issued comment letters to both domestic and foreign SEC registrants across a wide range of industries specifically focused on climate-related disclosures. As of March 22, 2022, the comment letters for 28 registrants have been made public. Based on our review, each registrant received an average of six initial questions, each of which mirrored the examples published in September 2021. Broadly, the letters asked about topics such as (1) inconsistencies between a registrant’s corporate social responsibility report and its SEC filings and (2) the lack of disclosure in a registrant’s SEC filing of the risks, trends, and impact of climate change for the registrant and its business.
In general, registrants responded to the initial questions by indicating that the matters were quantitatively and qualitatively immaterial such that further disclosure was not warranted. Follow up comment letters were issued to all 28 registrants; these letters most commonly requested that the registrant support its assessment of materiality, referring in several instances to initial responses as “conclusory,” indicating that the registrant did not “adequately address the specific items” from the prior comment.
Letters exchanged with 2 of the 28 registrants required 3 rounds of responses, while the letters for the remaining registrants were resolved after the second round. Of the approximately 160 comments issued, only a few ultimately required the registrant to expand its disclosures.
Examples of common staff comments and follow up comments in the letters made public to date follow.
Final thoughts
When the SEC’s guidance was issued in 2010, the stated purpose was to “remind companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with [the SEC] and provided to investors.” In our current culture of enhanced environmental focus and demands from both regulators and legislators for increased transparency, and in the face of the recent comment letters, companies would be well served to evaluate their impact on the climate and the climate’s impact on them, and to make transparent disclosures now based on that evaluation. And it shouldn’t be just about risk; if climate change, or the reaction to climate change results in business opportunities, those should be disclosed, too.
The SEC’s proposed disclosures call for a phased transition beginning with fiscal year 2023 (filings in 2024) with some registrants not required to apply the new disclosures until 2026 filings. Until then, we continue to believe that in light of a heightened focus from a variety of stakeholders, what a company does not say can be as influential as what it does say. There is much that investors and other stakeholders want to know, and much that current SEC rules already require.
To have a deeper discussion, contact:
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