How the SEC’s Focus on Climate Change Might Affect Comment Letters

On Wednesday, Acting SEC Chair Allison Herren Lee directed the Division of Corporation Finance to begin focusing on climate-related disclosures. This is the first action the SEC has taken to address climate-related disclosure since the Commission’s 2010 Interpretive Guidance.

The action comes after the Commission issued final rules on the Modernization of Regulation S-K Items 101, 103, and 105, which many believe was a missed opportunity to update disclosure rules around climate-related issues. Acting Chair Lee and Commissioner Caroline Crenshaw have each made public statements (Lee) (Crenshaw) regarding their displeasure in the Commission’s decision to not include climate-related disclosure in the modernization rules.

The Commission’s 2010 Interpretive Guidance focused on climate-related disclosures in a company’s risk factors, business description, legal proceedings, and management discussion and analysis. It highlighted four areas of climate-related disclosure triggers, including:

  • Impact of Legislation and Regulation;
  • Impact of International Accords;
  • Indirect Consequences of Regulation or Business Trends; and
  • Physical Impacts of Climate Change.
Comment Letters Mentioning Climate Change

As is normally the case, the Commission’s Division of Corp Fin began to focus on climate change disclosures following the 2010 Interpretive Guidance; over 30 comment letters referenced climate change in 2010. However, comment letters quickly dropped off and we have not seen any comment letters referencing climate change since 2016. This does not mean that the SEC has completely abandoned climate-related disclosures, as this analysis was specific to the term “climate change.”

Most Common Topics Discussing Climate Change

The most common area of focus for climate change comment letters was the risk factors section. This was followed by the business overview section, reserves reporting, and the liquidity section of the MD&A. And top five concluded with the accounting for contingencies. This was to be expected as these were the areas focused on in the 2010 guidance.

Climate Change Comment Letters by Industry

The industries most likely to receive and issue comment letters containing references to climate change are those that many would expect. The Mining and Extraction sectors, including oil and gas companies, topped the list. They were followed by Power Generation and Manufacturers, respectively, with Insurance being the only other notable industry.

While we are likely to see many of the same industries bear the brunt of SEC comment letters due to Acting Chair Lee’s directive to focus on climate-related disclosures, the landscape has changed. Companies in industries that were largely overlooked during the 2010 guidance will see more scrutiny this time around.

For example, the convergence of high-profile tech companies moving to Texas and the Texas power crisis brought on by extreme weather in the state highlight the risks associated with deregulated power infrastructures. Will we see new risk factors related to operations and supply-chains from companies like Oracle and Tesla? Further, how will Corp Fin respond if these types of risks are overlooked?

And this is just one area of disclosure for one region of companies. Every company must reevaluate their climate-related disclosures and ensure they are identifying and disclosing appropriate risks, explain how the company is being affected by climate-related impacts (including any material regulatory, legal, or financial impacts), and explain how the company is addressing climate-related risks. Because many large companies have already issued their annual reports, look for these types of updates in Q1 reports, especially updated climate-related risk factors.

This analysis uses data from the Comment Letters database, powered by Audit Analytics.

For more information about Audit Analytics or this analysis, please contact us.

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