Recently, the SEC’s Division of Corporation Finance has issued a number of comment letters relating exclusively to climate-change disclosure issues. The letters we have seen to date comment on companies’ most recent Form 10-K filings, including those of calendar year companies who filed their Form 10-K more than 6 months ago, and have been issued by a variety of the Division’s industry review groups, including to companies that are not in particularly carbon-intensive industries. Many of the climate change comments appear to be drawn from the topics and considerations raised in the SEC’s 2010 guidance on climate change disclosure, as reflected in the sample comments that we have attached in the annex to this alert. We expect this is part of a larger Division initiative because the letters are similar (although not identical), contain relatively generic comments, and have been issued in close proximity to one another. Accordingly, it is reasonable to expect that additional comment letters will be issued in the coming weeks and months.
The issuance of these comments and their focus comes as no surprise given the SEC’s Chair and several commissioners have indicated that climate change disclosures are a priority. As detailed in Gibson Dunn’s client alert of June 21, 2021, the SEC also recently announced its anticipated rulemaking agenda, which includes a near-term focus on rules that would prescribe climate change disclosures.
Observations and Practical Considerations
Companies should not view this initiative, or even the receipt of such a comment letter, as a mandate to include wide-ranging climate-related data and disclosures in future Form 10-K filings. However, the comments serve as a useful reminder that, as part of a company’s disclosure controls and procedures, climate-related information should be carefully considered for possible inclusion in a company’s periodic reports.
Companies that receive climate-related comments should consider the following points when responding:
- Focus on applicable Form 10-K disclosure requirements. Companies should bear in mind the applicable disclosure requirements (for example, information material to an understanding of the general development of a company’s business, material factors making an investment risky, known trends and uncertainties reasonably likely to have a material effect on financial or operating results, and information necessary to make other disclosures not misleading) in the context of the company’s climate change initiatives as they stood at the time that the Form 10-K was prepared, and be prepared to defend their prior materiality determinations. We note that all of the comments requesting disclosure that we have reviewed to date include (appropriately) a materiality qualifier and are addressed to specific line item disclosure requirements. Thus, the fact that a company has disclosed climate-related information to investors through other Regulation FD-compliant means is not indicative of whether such information was required in a Form 10-K, or even that such information was material under federal securities law standards.
- Be consistent. It may require some time for companies to carefully diligence all of their climate disclosures in their sustainability report, press releases, and other disclosures in the public domain (e.g., blogs, social media communications, earnings calls, investor days, etc.). However, it will be necessary to review all of this information before addressing what should or should not rise to the level of required SEC disclosure, and to ensure consistency.
- Consider all stakeholders. Because comment letter responses will be made public, it is important to be sensitive to how information is characterized when drafting a comment letter response (as the SEC Staff is not the only interested party). In particular, there is no doubt that some investors are extremely interested in climate change-related disclosures and initiatives, whether in the context of board risk oversight or financial planning and sustainability, so companies will need to be sensitive to these and other stakeholder considerations.
In light of the SEC’s continuing focus on climate change related disclosures through the Staff review and comment process, public companies should consider the following suggestions.
- Don’t wait. We recommend that companies start taking inventory of their climate change disclosures now, regardless of whether or not they receive a comment letter focused on these issues, as many companies have announced new or more detailed and specific initiatives during the year, and such information is an important input to companies’ disclosure controls and procedures.
- Consider your sustainability report disclaimers. Companies should make sure their sustainability report (and any other climate and ESG information) clarifies that inclusion of such information in the report is not an indication that the contents are necessarily material to investors or required to be disclosed in SEC filings. In this regard, the standard of “materiality” for purposes of federal securities law disclosure requirements and SEC filings is not the standard that many companies apply when determining which issues to address and the level of detail to be included in their sustainability reports. For example, some sustainability reporting standards refer to “materiality” differently or encompass stakeholders’ interests other than shareholders in their standards. What may be “important” or “relevant” to stakeholders reviewing an ESG report may not equate to what is “material” for investors in the context of disclosures required in a Form 10-K.
- Update DCPs. Revisit company disclosure controls and procedures to ensure that they take into account ESG-related information. For example, commitments for capital expenditures on climate-change initiatives should be considered when drafting MD&A disclosure. Similarly, companies also should consider the potential impact of risks posed by climate change developments when drafting Risk Factors.
- Dust off the SEC’s 2010 guidance. Gibson Dunn’s client alerts entitled “Considerations for Climate Change Disclosures in SEC Reports” (March 1, 2021) and “SEC Issues Interpretive Guidance on Climate Change Disclosures” (Feb. 4, 2010) provide an overview of the SEC’s 2010 climate change guidance and offer helpful considerations for climate change disclosures in SEC reports. As noted above, many of the new climate change comments appear to mirror the topics and concerns raised in the SEC’s 2010 guidance.
- Consider potential accounting implications of climate-related/net-zero commitments. When making climate-related commitments (e.g., setting various greenhouse gas emission reduction targets or net-zero goals), companies should consider the impacts those commitments may have on their financial statement disclosures, such as capital expenditures, contingent losses, accruals, depreciation, impairment charges, and possible restructuring plans/costs, in addition to the impact to Risk Factors, MD&A, and other disclosure topics addressed above.
- One size does not fit all. Like most disclosure, any climate change disclosure should be tailored to a company’s particular facts and circumstances. Companies should of course provide disclosures required under existing regulations, but (particularly while awaiting new rules from the SEC) companies should carefully consider the pros and cons of voluntary additional disclosures and continue to be judicious in their determination of the best format for communicating with all of their stakeholders. Our Gibson Dunn lawyers can help companies determine how to navigate the many considerations that arise when making climate-change disclosures.
Sample Climate Change Comments
Below is a sampling of the type of comments we have seen in SEC Staff comment letters (with companies generally receiving only some but not all of these). As noted above, many of these climate change comments appear to mirror the topics and concerns raised in the SEC’s 2010 guidance on climate change disclosure.
- To the extent material, discuss the indirect consequences of climate-related regulation or business trends.
- Please revise your disclosure to identify any material past and/or future capital expenditures for climate-related projects.
- Quantify any material increased compliance costs related to climate change.
- Disclose any material litigation risks related to climate change and the potential impact to the company.
- 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.
- To the extent that you expect decreased demand for your goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources, please disclose any material expected effect on your business, financial condition, and results of operations.
- If material, discuss the significant physical effects of climate change on your operations and results.
- 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 sustainability report.