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US SEC prods companies to comply with decade-old climate disclosure guidance

23 September 2021 Amena Saiyid

Publicly traded companies received a "clear and unambiguous warning" from the US Securities and Exchange Commission (SEC) to follow decade-old guidelines for voluntary disclosures of climate-related risks to income, strategy, and operations even as it crafts a new proposed rule to mandate such reporting.

The SEC Division of Corporate Finance (DCF) alerted companies 22 September to expect a sample letter "regarding their climate-related disclosure or the absence of such disclosure" if it is not in line with the 2010 Guidance Regarding Disclosure Related to Climate Change.

In that non-binding guidance, the agency deemed climate impacts to be a material risk, but has just started to scrutinize the reports, given the complaints it has received from investors over inconsistent disclosure.

The SEC agrees that investors need climate risk reports that are consistent, comparable, and reliable so they can use them to price risk and allocate capital, and cast a proxy vote.

Attorneys who had viewed the SEC alert told Net-Zero Business Daily that they see it as a warning to companies that might have become complacent about disclosure as they wait for the proposed rule, which is due out at the year's end. They say the SEC is warning companies about the quality of climate risk disclosures, which investors have long complained is inadequate and inconsistent.

"Clear and unambiguous warning"

"This is an indication of where the SEC is potentially headed," said Sarah Fortt, a corporate governance attorney and ESG professional with the Vinson & Elkins law firm.

Fortt said companies receiving this letter should reach out to their appropriate counsel and treat it and respond to it like any comment letter they would receive from the SEC.

Tyler Gellasch, a former senior SEC staff member who now serves as a fellow with the Duke Law Global Financial Markets Center, sees the alert as a "clear and unambiguous warning" for companies and executives.

"It's clear corporation finance staff believe there are a significant number of companies that appear not to be complying with their guidance," Gellasch said, adding, "It's a lot to easier to warn the masses than to try and bring a bunch of enforcement cases."

Alert a "gap filler"

Fortt said she sees the alert as "a gap filler between the 2010 guidance and where we can expect SEC to come out with its climate disclosure proposal."

The alert is asking for more than the 2010 guidance, she said, and expects the proposed disclosure rule will seek more information than the sample letter seems to indicate.

For instance, in the sample letter, the SEC asks whether a company provided "a more expansive disclosure" in its corporate social responsibility (CSR) report than in its SEC filings, and then asks for the consideration it gave in "providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report."

Elaborating further, Fortt said companies should assume that the SEC staff is reading not just their filings with the agency, but also is looking at their voluntary disclosures on their website, comparing what regulators and investors are being told about the company's operations.

According to Gellasch, the SEC is giving companies a "heads up" before they bring enforcement actions.

Beyond public comment request

From the sample letter it also appears to Fortt that the SEC is posing questions that it asked the public to answer in late March about improving the current process of reporting climate risks by public holding companies.

At that time, the SEC asked: "What quantified and measured information or metrics should be disclosed because it may be material to an investment or voting decision? Should disclosures be tiered or scaled based on the size and/or type of registrant? If so, how? Should disclosures be phased in over time? If so, how?"

In the sample letter, the SEC goes further and asks companies to disclose "the material effects of transition risks related to climate change that may affect your business, financial condition, and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks, or technological changes."

The SEC also warned companies it may ask them to "disclose any material litigation related to climate change and explain the potential impact to the company."

While the alert may not face challenges in court, Fortt said she expects the proposed rule will face litigation after it is finalized.

"What's interesting is that the SEC does not think it has to issue new rules to put this letter out there. I think that's controversial because it goes beyond the guidance," said Fortt. However, she said she would be surprised if a company receiving this letter challenges it in court.

Posted 23 September 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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