On September 22, 2021, the SEC released its Sample Letter to Companies Regarding Climate Change Disclosure (“Letter”). The Letter is not only important for what it will seek, but for what it portends. The Letter invokes the 2010 Climate Change Guidance
The Letter makes three main points. First, the SEC will closely review corporate sustainability/ESG reports (“Reports”) often found on corporate websites, regardless of whether linked or incorporated by reference into an SEC filing. Where a Report is more detailed than formal disclosures, the SEC may seek explanation as to the reasoning behind the differentiation. This could not only lead to heightened enforcement, but also compel additional disclosures to conform to the Report. In the alternative, issuers may seek to revise their Reports keeping in mind the same liability standards as an SEC filing would entail.
Second, regarding a company’s risk factors disclosure, the Letter makes clear companies should make a materiality determination regarding climate change risk. Upon a finding of materiality, disclosures should contemplate financial and operational impacts on business, as well as regulatory risks that could affect compliance, business operations, and credit risk, as well as litigation and transaction risks. In pointing to international accords, which presumably include the United Nations convention adopted in 2015 known as the “Paris Agreement,” the SEC staff expresses the view that international accords are to be considered in a materiality determination.
Third, the same general disclosure principles will apply to the Management’s Discussion and Analysis section. The Letter may require revisions to disclosures to identify and quantify material climate related capital projects, compliance costs, and carbon credits/offsets. The Letter also indicates an expectation, that where material, a discussion should include the effect of climate related legislation/regulation, including international accords, as well as indirect physical consequences. Importantly, the SEC seeks a quantification as well as an analysis of compliance costs and identification of past and/or future compliance costs.
The Letter is important for several reasons. First, the SEC appears to be signaling that neither separate legislation nor rulemaking is needed to require disclosures regarding climate change and potentially other ESG matters – so long as the traditional securities materiality standard is at issue.
Second, the SEC is looking beyond formal filings for evidence that could lead to enforcement. While the Letter speaks in terms of corporate social responsibility reports, it is reasonable to expect potential reviews of webpage materials and investor presentations.
Third, the Letter’s express statement seeking quantification of compliance costs relating to climate change may very well require more than a broad brush analysis. For example, for industries with significant methane emissions, an analysis of applicable air emissions regulatory frameworks will likely be necessary.
 Paris Agreement Further, On September 24, 2021 the International Organization for Standardization (ISO) issued the London Declaration to accelerate a successful achievement of the Paris Agreement.
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