The SEC Focuses on Climate Change in Latest Round of Comment Letters

In the past couple of weeks, the SEC began releasing their first round of climate change-related comment letters to the public. These letters should be used as a template for reviewing current disclosures and assessing whether disclosures should be updated.

Who is receiving these comments?

Climate Change- Corporate Social Responsibility

A variety of companies across multiple industries have received climate change-related comment letters. Apparel company Under Armour [UA/UAA], payment processor Discover Financial Services [DFS], and deep-sea freight company Matson [MATX] show the diversity of companies receiving these letters.

These companies have also been large. Company market capitalizations have been between $3 billion and $240 billion. Additionally, revenues have been between $3 billion and $50 billion.

What is the SEC asking?

There were 5.6 comments per letter in the first round of comments. Companies received between 3 and 7 comments per letter.

The first thing to understand about SEC climate change comments is that the Staff is looking at Corporate Social Responsibility (CSR) reports and disclosures on company websites. The SEC examined seven different companies’ CSR reports and one company’s website as part of the review process. The comment letter to Snap-on [SNA] was the only one to exclude reference to a CSR report or the corporate website.

None of the companies included their CSR reports in any filing with the SEC. It’s important to know the SEC can and will look at information outside of SEC filings when reviewing disclosures. And the SEC is ensuring alignment between disclosures in CSR reports with SEC filings.

First round of comments

Six of the nine companies that received climate change-related comment letters were asked the same general question.

We note that you provided more expansive disclosure in your 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.

Other frequent questions were related to climate change risks and the impact of climate change on a company’s operations.

Four companies received the following climate change risk factor question.

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

Palo Alto [PANW] received two questions about climate change risk factors, including a request to “disclose the material effects of transition risks related to climate change.”

In general, questions related to a company’s operations were about capital expenditures for climate-related projects, the indirect impact of regulations and market trends related to climate change, and costs associated with the physical effects of climate change.

Most companies received a comment about the physical effects of climate change that was tailored to the individual company. The comment Cintas [CTAS] received was the most comprehensive.

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 or services that result in lower emissions than competing products;

– increased competition to develop innovative new services that result in lower emissions; and

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

Second round of comments

Every company received a second round of comments. There were 4.8 comments per letter in the second round of comments. Companies received between 1 and 6 comments per letter.

The second round of comments were tailored based on the responses to the first round of comments. However, themes still emerged in the second round of comments.

One common theme was an assessment of quantitative materiality. When companies claimed the financial costs of climate change were not material, the SEC often asked companies to show their work. For example, Monster Beverages [MNST] received a question related to their quantitative materiality assessment.

We note from your response to prior comment 2 that you have had no material capital expenditures for climate-related projects for the periods covered in the 2020 Form 10-K and that future capital expenditures for climate-related projects are not expected to be material. Please tell us about your capital expenditures for climate-related projects and provide us with additional detail supporting your statements regarding materiality, including quantitative information.

The same was true of qualitative materiality. The SEC requested that Snap-on [SNA] give more detail about the indirect consequences of climate-related regulations and business trends.

Your response to prior comment 3 appears to be conclusory in nature without providing sufficient detail regarding the indirect consequences of climate-related regulation or business trends, including the specific items noted in our comment. Please describe the indirect consequences of climate change you considered in your response and explain how you concluded they were not material.

How are companies responding?

The general response from companies was that climate related disclosures – whether quantitative or qualitative – were not material.

In response to a comment about the materiality of capital expenditure costs, Cisco Systems [CSCO] quantified and specified projects related to decarbonization.

As described in the Company’s 2020 CSR report, the Company implemented a variety of climate-related projects categorized in two main categories: energy efficiency projects and renewable energy procurement projects. Between fiscal year 2016 and fiscal year 2020, the Company implemented 443 energy efficiency projects with an aggregate implementation cost of approximately $55 million, which cost the Company does not believe was significant when comparing such costs to the aggregate capital expenditures of $4.6 billion between fiscal year 2016 and fiscal year 2020. Notably, the implementation costs of such projects were fully recouped by the Company, as the projects provided the Company a return on its investment as a result of the energy efficiencies created. Examples of the energy efficiency projects include improving airflow in the Company’s laboratories, installing LED lighting in the Company’s buildings, and optimizing the Company’s mechanical equipment. The Company’s renewable energy procurement projects are designed to reduce the Company’s reliance on energy grid power across its global operations. In fiscal year 2020, the Company invested an aggregate of approximately $8.7 million across 44 renewable energy procurement projects related to its global real estate portfolio, which cost the Company does not believe was significant, when comparing such costs to the Company’s total costs and expenses of $35.7 billion for fiscal year 2020 or otherwise when comparing such costs to the Company’s consolidated financial statements for the relevant period. Additionally, the Company notes that the renewable energy procurement projects have also provided the Company a return on its investment, and the Company expects to fully recoup its investment in such projects over the course of the next few years.

In response to a comment about the materiality of regulations and market trends, Charles Schwab [SCHW] explained that the company’s products and services do not produce significant emissions and addressed reputational harm risks the company could potentially face if its products were misrepresented.

The Company is not aware of suffering any climate-related reputational harm from its operations, its clients, or from the financial products and services that it provides. However, if the ESG Products that the Company offers were to be misrepresented, the Company could suffer reputational harm. The Company covers that potential risk in the risk factor on investment management operations on page 17 of the Company’s 2020 Form 10-K, where the Company states that “Failure to properly perform operational tasks, or the misrepresentation of our services and products could subject us to regulatory sanctions, penalties or litigation and result in reputational damage, liability to clients, and the termination of investment management or administration agreements and the withdrawal of assets under our management.”


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