Securities and Exchange Commission Publishes Climate Change Disclosure Guidance, Maintains Enhanced Focus on Climate Change Disclosure

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Introduction

On September 22, 2021, the U.S. Securities and Exchange Commission (the "Commission") published a Sample Letter to Companies Regarding Climate Change Disclosures (the "Sample Letter"). The Sample Letter is just the most recent example in a growing list of Commission statements and actions related to climate change-related disclosure, beginning with the Commission's 2010 Climate Change Guidance. Both the 2010 Climate Change Guidance and the Sample Letter ask issuers to assess climate change risks, impacts or litigation within the Commission's current principles- and materiality-based disclosure frameworks, and to disclose climate change-related information if they are material risks, material litigation or have had a material impact on the issuer's operations or financial results.

The Commission has made climate change disclosure an important piece of its regulatory agenda this year. On February 24, 2021, Commissioner Allison Herren Lee announced that the Commission's Division of Corporation Finance would "enhance its focus on climate-related disclosure in public company filings." Then, in March 2021, the Commission requested public comment on how the Commission might regulate climate change disclosure. According to Commission Chair Gary Gensler, "More than 550 unique comment letters were submitted [and] [t]hree out of every four of these responses support mandatory climate disclosure rules." Based on these comments, Commission staff is developing "a mandatory climate risk disclosure rule proposal for the Commission's consideration by the end of [2021]." As issuers continue to assess the risks and impacts of climate change on their business, they would be well-served to review their disclosures with the Commission's new Sample Letter in mind as a guidepost to provide enhanced climate change disclosure.

The Sample Letter comes after the Commission issued stand-alone comment letters addressing climate change-related disclosures in response to issuers' filings in fiscal year 2021. The Sample Letter provides sample comments in three disclosure buckets: General, Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").

Sample Letter

General

The Commission's sample "General" comment asks the issuer why that issuer disclosed more information in its corporate social responsibility report ("CSR Report") than in its disclosures filed with the Commission. There might be a good reason to put more or different information in a CSR Report than in a disclosure filed with the Commission. An issuer might buy carbon offsets to reach "net neutral" emission, which can certainly be touted in a CSR Report, but which might not be material to the financial condition or results of operations of the issuer. Still, issuers should review their CSR Reports to ensure alignment between CSR Reports and Commission-filed disclosures, and provide material climate change-related disclosures where the risks or impacts would figure into the investment decision of the average investor.

We note that you provided more expansive disclosure in your corporate social responsibility report (CSR report) than you provided in your SEC filings. Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report.

Risk Factors

The Commission's first sample "Risk Factor" comment asks issuers to disclose material effects of climate change transition risks that may affect the issuer's operations or financial results.

Issuers should review the risks that policy changes could materially impact their business. Policy and regulatory changes have already impacted and are likely to continue to impact a broad range of industries. U.S. federal subsidies for electric vehicles impacted and continue to impact the car market. The International Civil Aviation Organization's Carbon Offsetting and Reduction Scheme for International Aviation recently finalized its baseline emissions year. Governments around the world have explored and continue to propose variations of emissions-trading and carbon taxes, and will meet once again beginning October 31 at the 26th United Nations Climate Change Conference. What does the prospect of regulation look like for your business? Of note, and as mentioned, the Commission is considering new mandatory climate change-related disclosure rules. It is possible that the new rules might require certain issuers to expand their headcount and/or invest in new technology to monitor their emissions, develop emissions-reduction and adaptation plans, and feed that information into Commission, and other, disclosures.

Issuers should also assess realistic worst-case event and adaptation scenarios. How will the increased severity and frequency of drought, wildfires, hurricanes and floods impact business? What investments will it take to mitigate the impacts of those events? More broadly, what does a workplace and workforce with zero emissions look like? Does it mean that many people will continue to work remotely, from home, forever? How much would it cost with current technology for business to reach net zero Scope 3 emissions?

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

The Commission’s second sample “Risk Factor” comment asks issuers to disclose material litigation risks and explain the potential impact on the issuer. As demonstrated by the May 26, 2021, Dutch-court ruling requiring Royal Dutch Shell to reduce its emissions, the risk of climate change related litigation can be material to issuer; and such litigation is proliferating. According to the UN Environment Programme, in 2017 there were 884 climate change-related lawsuits brought in 24 countries. By July 1, 2020, there had been 1,550 climate change-related lawsuits brought in 38 countries in 2020, including about 1,200 filed in the United States.  In addition to litigation, issuers might also consider the risk from activists demanding strategic and operational changes, as demonstrated by Engine No. 1’s ability to secure 3 seats on ExxonMobil’s board of directors despite holding just 0.2% of ExxonMobil’s stock.

Disclose any material litigation risks related to climate change and explain the potential impact to the company.

MD&A

The Commission included 6 sample comments under MD&A. The first sample comment asks issuers to disclose material pending or existing climate change-related legislation or regulation from state to international governments. A few specific examples of government regulations are discussed above, under “Risk Factors”, and there are likely more climate change regulations on the way.

There have been significant developments in federal and state legislation and regulation and international accords regarding climate change that you have not discussed in your filing.  Please revise your disclosure to identify material pending or existing climate change-related legislation, regulations, and international accords and describe any material effect on your business, financial condition, and results of operations.

The second sample comment asks issuers to quantifiably disclose material past and/or future capital expenditures for climate-related projects. This might include the costs of designing and building zero-emissions data centers and offices, retrofitting to increase flood resilience, or sourcing and auditing equipment supply-chains.

Revise your disclosure to identify any material past and/or future capital expenditures for climate-related projects.  If material, please quantify these expenditures.

The third sample comment asks issuers to discuss the indirect consequences of climate-related regulation or business trends, such as reduced demand for high-emissions goods, increased demand for low-emissions goods, competition to develop innovative lower-emissions products, increased demand for generation and transmission of energy from alternative energy sources and reputational risks for emissions-producing issuers. As with everything else in the Commission’s sample letter, the touchstone for disclosures is materiality, which issuers should keep in mind as they assess these indirect consequences.

To the extent material, discuss the indirect consequences of climate-related regulation or business trends, such as the following:

• decreased demand for goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources;

• increased demand for goods that result in lower emissions than competing products;

• increased competition to develop innovative new products that result in lower emissions;

• increased demand for generation and transmission of energy from alternative energy sources; and

• any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions.

The fourth sample comment asks issuers to discuss the physical effects of climate change on their operations and results. Examples of these extreme events are listed above, under “Risk Factors”, and the Commission asks that issuers quantify the impact of material weather-related damages to property and operations, assess the potential impact of climate change-related events on suppliers and customers, and disclose any material weather-related impacts on the cost or availability of insurance.

If material, discuss the physical effects of climate change on your operations and results.  This disclosure may include the following:

• severity of weather, such as floods, hurricanes, sea levels, arability of farmland, extreme fires, and water availability and quality;

• quantification of material weather-related damages to your property or operations;

• potential for indirect weather-related impacts that have affected or may affect your major customers or suppliers;

• decreased agricultural production capacity in areas affected by drought or other weather-related changes; and

• any weather-related impacts on the cost or availability of insurance.

The fifth sample comment asks issuers to quantify any material increased compliance costs related to climate change.

Quantify any material increased compliance costs related to climate change.

The sixth sample comment asks issuers to disclose material purchases or sales of carbon credits or offsets and any material effects of such transactions on the business, financial condition, and results of operations of the issuer. Along with the quantification of offset or credit expenditures, issuers should consider the amount of detail to disclose about the carbon offsets or credits, such as where they are located or who they were purchased from, as well as any reputational risks that might arise from such purchases.

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

Looking Forward

Issuers should continue to assess their climate change-related disclosure as the Commission continues its enhanced focus on the topic. A good next step in this process is to review and evaluate existing disclosures with the Commission’s latest guidance in mind, and ensure that disclosure controls and procedures surface the appropriate material information so that decision-makers can mitigate risk, and provide disclosures that not only meet the Commission’s guidance but also improve the accuracy and reliability of issuer-specific and climate information in the market.