SEC Climate Change Comment Letters Signal Early Action on Environmental, Social, and Governmental Disclosures

1. The comment letters evidence the SEC’s growing focus on environmental, social, and governmental (ESG) disclosures — particularly climate disclosures.

 In February, the SEC’s then Acting Chair directed the SEC’s Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings: “As part of its enhanced focus in this area, the staff will review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks.” This was followed by the creation of a Climate and ESG Task Force within the Division of Enforcement in March as well as comments in May by the Chief Accountant of the Division of Corporation Finance that SEC staff would be “scrutinizing how public companies account for climate-related risks and impacts to their business based on existing accounting rules.”

2. The SEC is using its existing tools to evaluate disclosures even as it looks to enhance its 2010 guidance.

 The SEC has made clear its intention to consider new rules governing climate-related disclosures. SEC Chairman Gary Gensler has indicated the commission may issue its proposal before the end of the year or early next year, which the Chairman reaffirmed in testimony before Congress on October 5. Once proposed, the rules will face a lengthy administrative process and anticipated legal challenges that would delay any final rule. However, currently under the Sarbanes-Oxley Act, the SEC is required to review public company filings at least once every three years and has discretion to selectively target companies in connection with disclosure concerns. The primary way in which the SEC communicates such concerns is through comment letters issued by the Division of Corporation Finance, and in releasing its Sample Letter, the SEC explained it “contains sample comments that the Division may issue to companies regarding their climate-related disclosure or the absence of such disclosure.” 

3. The SEC comment letters extend into a wide range of issues.

SEC staff will tailor comment letters to the specific company and industry, but consistent with the 2010 guidance, the Sample Letter includes an issues list that indicates the expansive way in which the SEC is probing into climate change disclosures. For example, the SEC is looking for

• considerations given to discrepancies between a corporate social responsibility report or other voluntary ESG report and SEC filings  
• information on a wide range of risks related to climate change that may materially affect a business and its financial condition and operations, such as policy and regulatory changes; market trends that may alter opportunities, credit risks, or technological changes; litigation; legislation; and international accords
• direct material expenditures for climate-related projects or increased compliance costs as well as material indirect consequences of climate-related regulation or business trends, such as a change in demand for goods or services or reputational risks
• material physical effects of climate change on the operations and results, such as severe weather that impacts a company directly — as well as its major customers or suppliers

4. Companies should track the changing legal landscape, as it can have implications for future reporting.

In recent years, there has not been much new federal law for companies to consider. However, filers should consider the uptick in climate-related activity with the Biden administration and Democratic-controlled Congress while also watching state activity. For example:

• The administration has announced dozens of regulatory actions. The most recent regulatory agenda from the Environmental Protection Agency (EPA) listed over 120 rules, which include rules directly related to climate or greenhouse gas emissions. For example, EPA is targeting new rules to govern the production and processing of natural gas and natural gas liquids, which could impose significant new costs on the sector and the economy writ large.
• Likewise, pending legislation includes a raft of climate-related provisions that would impact the cost of energy, such as a Clean Electricity Performance Program (CEPP). Designed to decarbonize the power sector, the CEPP could change the cost of electricity for filers depending on their particular electricity market.
• Congress is also considering a tax that would collect a $1,500 fee per ton of methane emitted above certain thresholds from the natural gas production, processing, and transmission segments. While the fee would directly affect those in the energy sector, public companies should consider assessing the extent to which a potential corresponding increase in the cost of energy and related goods may be material.

Companies will need to track these and other regulatory and legislative developments, even for those not directly subject to the regulation or law, and evaluate the potential implications for purposes of SEC disclosure.

5. Notwithstanding the breadth of the SEC letters, existing law and guidance still limit their reach into those matters that are material.

As is always the case with SEC staff comment letters, companies should respond as appropriate to their specific situation and disclosures. While the SEC expects companies to have robust climate disclosures in line with its 2010 guidance, the comment process is a dialogue with SEC staff where a company’s views on materiality continue to be relevant. Companies should carefully consider their voluntary climate disclosures in light of disclosures that are required under applicable federal securities laws. Companies should also keep in mind that their responses will eventually be made public, and there may be stakeholders who take an interest and expect statements from the company beyond the requirements of the federal securities laws.