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SEC Issues Sample Climate Change Comment Letter

On September 22, 2021, the Division of Corporation Finance (Division) of the Securities and Exchange Commission (SEC) issued a sample comment letter to highlight its increased focus on climate change-related disclosures or the absence of such disclosures in issuer filings under the Securities Act and the Exchange Act. This sample comment letter follows a recent increase in climate-related comments the Division has issued during the disclosure review process, and many of the sample comments appear to be derived from actual comment letters issued in 2021. The sample is consistent with the SEC’s 2010 Guidance Regarding Disclosure Related to Climate Change, which does not mandate specific, line item climate change-related disclosures, but instead takes a principles-based approach.

Disclosure matters discussed in the 2010 Climate Change Guidance include the following:

  • the impact of pending or existing climate-change related legislation, regulations, and international accords;

  • the indirect consequences of regulation or business trends; and

  • the physical impacts of climate change.

The sample comment letter focuses on three main areas: (i) general disclosure, (ii) risk factors and (iii) management’s discussion and analysis (MD&A) of financial condition and results of operations.

  • General Disclosure: The sample comment letter notes that future comment letters may ask an issuer to address potential discrepancies between the breadth of disclosures provided in such issuer’s corporate social responsibility reports (CSR reports) versus the abbreviated or even total lack of such disclosures in its SEC filings.

  • Risk Factors: The sample comment letter also notes that an issuer may be asked to describe additional climate change-related risk factors, including:

    • Material impacts of transition risks related to climate change, such as policy and regulatory changes and market trends; and

    • Material litigation risks related to climate change and their potential impacts to the issuer.

  • MD&A: A significant portion of the sample comment letter is devoted to specifying additional disclosures, to the extent material, in areas such as:

    • The effects of pending or existing climate change-related legislation, regulations, and international accords;

    • Past and/or future capital expenditures for climate-related projects;

    • The indirect consequences of climate-related regulation or business trends, such as shifts in demands for products and services that produce significant climate impacts, increases in competition to develop lower-emission products, increases in demands for alternative energy, and anticipated reputational risks associated with operations or products that produce material greenhouse gas emissions;

    • The physical effects of climate change on the issuer’s operations and results, including the impact of severe weather, quantification of weather-related damages to the issuer’s property or operations, and weather-related impacts on the cost of insurance;

    • The increase in compliance costs related to climate change; and

    • The effects of the issuer’s purchase or sale of carbon credits or offsets.

As noted by the Division, disclosure of the matters addressed in the sample comment letter depends on the issuer’s “particular facts and circumstances.” The Division also observed that the sample comments do not constitute an exhaustive list the issuer should consider. Accordingly, each issuer will need to determine – based on its particular facts and circumstances involving climate-related matters – what information is material to it and therefore must be disclosed so that the required statements are not misleading.

Next Steps: The sample letter is the latest step in the SEC’s comprehensive review of disclosure rules, practice and enforcement on ESG-related topics, which we expect to continue over the next several years. Accordingly, we believe issuers should take the following steps – even before receiving a comment letter from the SEC:

  • Catalogue Various Climate-Related Disclosures. Many issuers give climate change- and ESG-related information, including current metrics and future goals, across a number of different mediums (e.g., CSR reports, investor presentations, SEC filings, etc.). With the increased focus on climate matters, issuers should also consider the internal control and disclosure control environment around this information. Having a centralized list of such statements will make the disclosure controls and procedures process more manageable. Additionally, such a list can aid an issuer’s ongoing internal review process to ensure that climate-related goals, projections, and potential expenditures are properly accounted for in the financial statements (such as capital expenditures and impairments), when disclosed in SEC filings (including with respect to the MD&A), and when calculated to provide forward-looking guidance.

  • Acknowledge Different Intended Audiences. An issuer’s CSR report and other related sustainability reports are often intended for a broader audience than just the “reasonable investor.” Instead, these types of reports and the associated climate-related information contained therein often address concerns or respond to inquiries of other stakeholders (e.g., advocacy groups, proxy advisors, customers, employees, governmental regulators, ESG investors, rating services, etc.). Accordingly, when applicable, issuers should consider whether to note in CSR reports that the inclusion of climate-related or other ESG information is not necessarily an indication of “materiality” under the federal securities laws.

  • Review SEC Filings. With the Division laying out a clear roadmap of potential future comments, issuers should review their existing SEC disclosures to identify any areas of potential reconsideration or revision. In particular, issuers could consider whether there are any significant discrepancies between voluntary CSR reports and information furnished to the SEC. When the Division issues a guidance document like the sample letter, its ultimate aspiration is that issuers will voluntarily revise disclosure going forward without the need for a formal individualized comment letter. Again, each issuer must conduct this analysis on the basis of its own unique facts and circumstances, but clearly the Division sees room for improvement across all public companies.

Copyright © 2021, Hunton Andrews Kurth LLP. All Rights Reserved.National Law Review, Volume XI, Number 273
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Susan Failla Capital Market Litigation Business Attorney New York Hunton Andrews Kurth Law Firm
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Susan is a seasoned problem-solver with over two decades of experience helping her clients achieve their business goals.

Susan is co-head of the firm’s Capital Markets practice. She has led capital markets transactions totaling over $150 billion for companies in the consumer products, energy, information services and financial services industries. Creating business-oriented solutions without compromising client service is the guiding principle of Susan’s approach to leading transactions.

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Scott H. Kimpel Capital Markets and Securities Practice Hunton Andrews Kurth Washington, DC
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Scott brings in-depth knowledge of SEC policies, procedures and enforcement philosophy to each representation.

Scott regularly advises clients across a broad sector of the economy facing sensitive reporting, compliance and enforcement matters before the Securities and Exchange Commission and other capital markets regulators. His practice encompasses a wide range of matters involving the securities laws, mergers and acquisitions, corporate governance, regulatory enforcement, administrative law and public policy. Scott also leads the firm’s working group on blockchain and distributed...

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W. Lake Taylor Jr. Richmond Virginia Securities Corporate Partner Hunton Andrews Kurth Law Firm
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Lake’s practice focuses on securities law, corporate finance, mergers and acquisitions, and general corporate law.

Lake has significant experience representing clients on securities law matters. He advises a wide variety of public company clients on ongoing reporting and disclosure requirements under the U.S. securities laws. In addition, he advises clients on public and private securities offerings of both equity and debt, tender offers and exchange offers. Lake’s practice also includes representing clients in connection with...

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Lawton B. Way Corporate Governance Practice Hunton Andrews Kurth Richmond, VA
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Lawton focuses his practice on securities law, corporate finance, corporate governance and general corporate law.

Lawton represents public and private clients on mergers and acquisitions and corporate governance matters – including shareholder activism, related party transactions and fiduciary duty matters. He has significant experience advising clients on ongoing reporting and disclosure requirements under US securities laws and Nasdaq and NYSE rules. Additionally, Lawton advises clients on public and private capital market transactions, including securities offerings and tender...

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