Sample Letter to Companies Regarding Climate Change Disclosure

Managing Climate Risk in the U.S. Financial System by the CFTC

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Guidance Highlights:

In September 2020, the Commodity Futures Trading Commission (CFTC) published a report, Managing Climate Risk in the U.S. Financial System. According to this report, “existing legislation already provides US financial regulators with wide-ranging and flexible authorities that could be used to start addressing financial climate-related risk now.”

The report goes on to state that “[t]his is true across four areas—oversight of systemic financial risk, risk management of particular markets and financial institutions, disclosure and investor protection, and the safeguarding of financial sector utilities.”

Separately, the Securities and Exchange Commission’s (SEC) released a Sample Letter to Companies Regarding Climate Change Disclosure. This SEC action represents an extraordinary step towards integrating climate reporting into the U.S. financial system’s existing regulatory framework. Public companies will now need to invest significant resources to measure and report their effects on the environment, as well as how climate change is impacting their operations.

The SEC is among the first U.S. regulatory bodies that have taken this counsel to heart. As part of its mission to protect investors, the Commission issued the Sample Letter to Companies Regarding Climate Change Disclosure (Letter) on September 22, 2021. As foreshadowed in the CFTC’s report, the SEC invokes authority to dispense this Letter from a previous guidance on climate change supplied in 2010. This guidance details possible climate change-related disclosure requirements including:

  • “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.”

Moreover, the SEC cites Rule 408 under the Securities Act of 1933 and Rule 12b-20 under the Securities Exchange Act of 1934 to further elaborate that these disclosures cannot be misleading.

The Letter contains potential comments that the SEC’s Division of Corporation Finance may ask of public companies. The SEC notes that actual comments delivered will be customized to the specific company and industry, as well as its previously filed disclosure. The sample comments are broken down into three categories:

  • This comment is relevant to those organizations with publicly available “corporate social responsibility reports (CSRs)” that are more “expansive” than their SEC filings. The SEC asks these companies to elaborate why they did not include as detailed a climate-related disclosure in their filings as in their CSR.
  • Risk Factors. These comments require companies to disclose the material effects and transition risks to their organization related to climate change, such as shifting regulatory changes/priorities, market trends, credit risks, litigation risks, or technologies.
  • Management’s Discussion and Analysis. These comments express broad potential requirements, such as revising disclosures:
    • To contemplate the materiality of pending or existing climate change-related legislation, regulations, and international accords to the business.
    • To identify past or future capital expenditures for climate-related projects.
    • To discuss the indirect consequences of climate-related regulation or business trends, such as decreased demand for goods/services with high carbon footprints and reputational risks.
    • To discuss the physical effects of climate change on operations. For example, how weather-related events impact the availability or cost of insurance.
    • To quantify costs associated with compliance related to climate change.
    • To elaborate on the organization’s purchase or sale of carbon credits.

These sample comments are important for a variety of reasons. Beyond the SEC’s signal that it does not require additional rulemakings to expect comprehensive climate-related disclosures from public companies, the Letter indicates that the SEC will be utilizing other information besides formal filings, such as corporate social responsibility reports, for enforcement evidence.

Additionally, to address these comments, most companies will need to allocate significant time and resources. As we know, the quantification and reporting of climate change-related effects on operations and external entities is no small task.  But, the investment will be worth it – the SEC appears only to be the first of many regulatory bodies poised to implement climate change-related guidance and legislation.