The SEC has been increasingly scrutinizing companies’ voluntary climate change disclosures as it moves closer to mandating reporting on greenhouse gas emissions (“GHGs”) and climate risks. Mandatory reporting of these risks is widely expected to be a component of the SEC’s anticipated Environmental, Social and Governance (“ESG”) disclosure rules, but the SEC has also taken the position that climate change risks already fall within the realm of a number of its disclosure rules.

In late 2021, the SEC published letters it sent to subsidiaries of Morgan Stanley, Verizon Communications, Ford Motor Co, and Toyota Motor Corp to report any risks they faced from climate change in 2021, or to better describe those risks. In September 2021, the SEC also notably published a sample letter that it may send to companies regarding climate change disclosures, which references to and expands upon the agency’s 2010 Climate Change Guidance.

Considerations for SEC registrants raised by the sample letter include:

  • CSR Report: Does the Company’s Corporate Social Responsibility (“CSR”) Report provide more expansive disclosure than its SEC filings?
  • Risk Factors: The Company should disclose the material effects of transition risks related to climate change that could affect the Company’s business, financial condition, or operations, such as policy/regulatory changes that could impose compliance burdens, market trends that could alter business opportunities, credit risks, or technological changes. Risk factors should include a discussion of any material litigation risks faced by the Company caused by climate change, and the potential impact of those litigation risks.
  • Management’s Discussion and Analysis of Financial Condition and Results of Operations: The disclosure should:
    • Identify any material pending or existing climate change-related legislation, regulations, and international accords and describe any material effects on the Company’s business, financial condition, and operations.
    • Include any material indirect consequences of climate-related regulation or business trends, such as decreased demand for goods/services that product significant GHG emissions, increased demand for goods that result in lower GHG emissions, increased competition to develop new products that result in lower GHG emissions, increased demand for generation/transmission of energy from alternative energy sources, and any anticipated reputational risks resulting from operations or products that produce material GHGs.
    • Note any material physical effects of climate change on operations and results, such as severe weather events, extreme weather-related property damage or impacts to operations (including agricultural production capacity, if relevant), the potential for indirect weather-related impacts that have affected or may affect major customers or suppliers, and weather-related impacts to costs or ability to obtain insurance.
    • Quantify any material increased compliance costs related to climate change.
    • Provide disclosures relating to any material purchases or sales of carbon credits or offsets, and any material effects on the Company’s business, financial condition, and results of operations.

On Monday, February 14, 2022, the SEC released the first of its climate-risk exchanges with operating companies. The SEC especially pressed Matson (an ocean shipping company) and Cintas (a uniform and cleaning supply manufacturer) about material past and/or future expenditures for climate-related projects, whether the companies expected less consumer demand for services that produce high amounts of GHGs, and how extreme weather events (caused by climate change) are affecting property and business operations. Although both companies initially responded they had fully disclosed these items in their respective 10-Ks, the SEC requested additional information to back up the companies’ claims, which the companies provided. In both instances, the SEC indicated that it was satisfied with the companies’ responses and concluded its review on January 14, 2022.

Although formal ESG and climate change disclosure requirements are still forthcoming, SEC registrants are advised to review their current climate-related disclosures for adequacy in light of the documentation released in late 2021 and early 2022 by the SEC.