& Securities

Since issuing disclosure guidance in 2010 (“Commission Guidance Regarding Disclosure Related to Climate Change,”) the SEC has been expecting public companies to address climate change in their SEC filings, but the resulting disclosures have been disappointing to certain constituencies, including institutional investors, certain members of Congress,1 and the Democratic appointees to the Commission. In an unsurprising move, Acting Chair Allison Lee2 announced Wednesday that she was directing the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings.3 As a result, public companies, at a minimum, should expect their climate change disclosures, or lack thereof, to be scrutinized in 2021 as part of this targeted review in the form of comment letters from the Division’s Staff. It remains to be seen whether the ultimate product of this review will extend beyond Acting Chair Lee’s directive that the staff use insights from its work “to begin updating the 2010 guidance to take into account developments in the last decade.”

In anticipation of the SEC Staff’s review, which will also encompass recently amended disclosure requirements on such topics covered by the 2010 guidance as risk factors, management of human capital resources, legal proceedings, and MD&A, discussed in more detail here, public companies should review the 2010 guidance and, at a minimum, carefully consider the four risk areas identified in such guidance:

• The actual or potential impact of either or both existing and pending legislation and regulation, at either or both the federal and state level;
• The actual or potential impact of treaties and international accords or in progress;
• Any indirect consequences of regulation or business trends, including the following list in the 2010 guidance:
  • decreased demand for goods that produce significant greenhouse gases;
  • increased demand for goods that produce lower emissions, and increased competition to develop such goods;
  • increased demand for generation and transmission of alternative forms of “clean” energy;
  • decreased demand for services that use carbon-based energy sources; and
  • reputational risk, based on negative public perception of publicly reported data on a company’s greenhouse gas emissions.
• The actual or potential impact of physical effects attributed by many to climate change, such as more severe weather (e.g., hurricanes, floods), rising sea levels, diminished farmland arability, and reduced water availability and quality, including:
  • increased insurance claims and liabilities for insurers and re-insurers;
  • increased insurance premiums, or even loss of coverage, for companies with plants or operations in areas subject to severe weather;
  • serious risks of property damage and disruptions in product manufacturing and distribution for companies with operations concentrated on or near coastlines, such as offshore oil drilling firms or shipping companies;
  • decreased agricultural production due to drought or other weather-related changes; and
  • adverse, indirect financial and operational effects flowing from weather-disrupted operations of major customers or suppliers.

We also anticipate that the SEC Staff will scrutinize proxy statement disclosures about board oversight of risk management for discussion of how, in particular, the board oversees the management of material risks posed by climate change.4

Once the review is complete, Acting Chair Lee has directed the SEC staff to “assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks.” It is too early to tell what disclosure requirements specifically will spring from this review, but in the meantime public companies would be well-served to review and, if appropriate, enhance their climate change disclosures in keeping with the 2010 guidance and recently effective amendments to applicable SEC disclosure requirements.