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.

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  1. The House Financial Services subcommittee (Investor Protection, Entrepreneurship and Capital Markets) held a hearing Wednesday, titled “Climate Change and Social Responsibility: Helping Corporate Boards and Investors Make Decisions for a Sustainable World.” See also Recommendation from the Investor-as-Owner Subcommittee of the SEC Investor Advisory Committee Relating to ESG Disclosure (As of May 14, 2020).
  2. Senate nomination/confirmation hearings next Tuesday, March 2, 2021, on President Biden’s nominee for SEC Chair, Gary Gensler, (available here) may shed more light in this topic and, ultimately, whether the agency intends to reverse the previous administration’s reliance on a principles-based disclosure regime.
  3. John Coates, Acting Director of the Division of Corporation Finance as of February 1, 2021, is well-versed in views on these matters as a result of his leadership on an SEC advisory panel on ESG matters. In remarks delivered during a webcast conference held by the Institute of International Finance on February 18, 2021, Acting Director Coates is quoted as saying “’Personally I’m going to do my part to help the SEC policy keep pace with developments that are affecting investors and public companies and capital markets… And in case anybody had any doubts [that] means respecting science and evidence and reality,’ he said.” Moral Money, Financial Times, Fri., Feb. 19, 2021.
  4. In many ways, the SEC’s enhanced focus mirrors recent private sector calls for more robust climate disclosure. For example, BlackRock has requested that all companies “to disclose a plan for how their business model will be compatible with a net-zero economy, which it defined as limiting global warming to no more than 2 degrees Celsius above preindustrial averages and eliminating net greenhouse gas emissions by 2050. Many other institutional investors, including Vanguard and State Street, have recently issued similar directives to public companies.