The Division of Corporation Finance of the U.S. Securities and Exchange Commission recently published a sample letter to companies providing illustrative comments that the Division of Corporation Finance may issue to companies regarding their climate-related disclosure, or the absence of climate-related disclosure (the “Sample Letter”).
This action is the latest in a series of developments demonstrating the SEC’s focus on climate disclosure by public companies.
In February 2021, the SEC’s then-Acting Chair Allison Herren Lee directed the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. As part of its enhanced focus in this area, the staff of the Division of Corporation Finance (the “Staff”) has been reviewing the extent to which public companies address the topics identified in the SEC’s 2010 guidance on climate change disclosure (the “2010 Guidance”), assessing compliance with disclosure obligations under the federal securities laws, engaging with public companies on these issues, and learning how the market is currently managing climate-related risks. The February 2021 announcement by the then-Acting Chair noted that the Staff will use insights from this work to update the 2010 Guidance.
In the 2010 Guidance, the SEC identified Regulation S-K Item 101 (Description of Business), Item 103 (Legal Proceedings), Item 105 (Risk Factors), and Item 303 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) as items that may potentially require climate change disclosures. The SEC also noted in the guidance that, in addition to the various Regulation S-K line-item requirements, companies “must also consider any financial statement implications of climate change issues in accordance with applicable accounting standards,” including ASC 450 under U.S. GAAP. Disclosure matters discussed in the 2010 Guidance include:
In the Sample Letter, the Staff notes that companies also must disclose, in addition to the information expressly required by Commission regulation, “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.”
The illustrative comments that are included in the Sample Letter are consistent with comments that public companies have been receiving in recent weeks from the Division of Corporation Finance on disclosure in their most recently filed Annual Reports on Form 10-K. The Sample Letter indicates that the sample comments do not constitute an exhaustive list of the issues that companies should consider, and “[a]ny comments issued would be appropriately tailored to the specific company and industry, and would take into consideration the disclosure that a company has provided in Commission filings.”
The comments included in the Sample Letter are as follows:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Sample Letter does not include illustrative comments on disclosure included in financial statements or financial accounting matters, but companies should consider recent guidance on how climate-related risks may need to be addressed in financial statements.
In May 2021, Lindsay McCord, the Chief Accountant of the Division of Corporation Finance, warned at the Baruch College spring financial reporting conference that the Staff is scrutinizing how companies account for climate-related risks and impacts based on current accounting standards, such as standards for asset retirement, environmental obligations, and loss contingencies. It should be noted that earlier this year, the Financial Accounting Standards Board (“FASB”) published a staff educational paper regarding the intersection of environmental, social, and governance (“ESG”) matters and financial accounting standards, addressing both accounting issues and management disclosures. The educational paper provides examples of how an entity may consider the direct or indirect effects of material environmental matters when applying current U.S. GAAP, including:
In March 2021, the SEC announced the creation of a Climate and ESG Task Force (the “Task Force”) in the Division of Enforcement. The SEC indicated that the Task Force is developing initiatives to proactively identify ESG-related misconduct. The Task Force’s initial focus is to identify any material gaps or misstatements in companies’ disclosure of climate risks under existing rules. The Task Force works closely with other SEC divisions and offices, including the Division of Corporation Finance. Companies that receive comment letters regarding climate change disclosure from the Division of Corporation Finance should recognize that their responses may be shared with the Task Force.
While it may take time for investigations generated by the Task Force to come to a conclusion, senior leadership in the Enforcement Division has pointed to the September 2020 action against Fiat Chrysler Automobiles (“FCA”) as the type of case the public may expect from the Task Force. In that case, the SEC charged the London-based public company which sold cars through its Michigan-based subsidiary with misleading disclosures about an internal audit of its emissions controls systems.
In the wake of the VW “Dieselgate” scandal in which VW installed a “defeat device” on diesel vehicles in order to pass U.S. emissions tests, FCA and other car manufacturers began receiving inquiries about their “EcoDiesel” engines and the Environmental Protection Agency (the “EPA”) and the California Air Resource Board (CARB) announced that they would be testing diesel vehicles for “the purposes of investigating a potential defeat device.” FCA launched its own internal audit to determine whether any of its vehicles contained VW-like defeat devices. According to the SEC’s Order, the audit was focused on whether any of the software in the engines contained code or was calibrated to detect if the vehicles were undergoing emissions testing like the defeat devices at VW. Also, the SEC’s Order alleged the internal audit was not a comprehensive review to check for defeat devices generally or to ensure compliance with U.S. emissions regulations.
The SEC found certain statements made by FCA in early 2016, including one that claimed that the “audit revealed that all current production vehicle calibrations are compliant with applicable regulations” to be misleading, because FCA did not sufficiently disclose that the internal audit had a limited scope and did not cover or address some of the issues the EPA had been raising with FCA. In fact, in 2017, the EPA issued a notice of violation to FCA and the Department of Justice filed a complaint against FCA and certain of its subsidiaries for violations of the Clean Air Act. To settle the SEC’s enforcement action, FCA paid a $9.5 million penalty for filing misleading statements or reports.
In March 2021, then-Acting SEC Chair Lee asked the Staff to evaluate the SEC’s disclosure rules “with an eye toward facilitating the disclosure of consistent, comparable, and reliable information on climate change.” To facilitate the Staff’s assessment, Lee requested public comment on questions that would be useful to consider as part of the evaluation. Lee also solicited comments generally as to how the SEC can best regulate climate change disclosures. The SEC has received over 400 comment letters in response to this request.
Also in March 2021, John Coates, the then-Acting Director of the Division of Corporation Finance and now the SEC’s General Counsel, stated his view that the SEC “should help lead the creation of an effective ESG disclosure system so companies can provide investors with information they need in a cost-effective manner.” Coates also advocated for a single global ESG disclosure framework.
In June 2021, SEC Chair Gary Gensler indicated that he has asked the Staff to put together recommendations for mandatory company disclosures on climate risk. He has specifically asked the Staff for recommendations for considerations around governance, strategy, and risk management related to climate risk. In addition, Gensler noted that the Staff is looking into a range of specific metrics, such as greenhouse gas emissions, to determine which are most relevant to investors. Gensler also asked the Staff to consider potential requirements for companies that have made forward-looking climate commitments, or that have significant operations in jurisdictions with national requirements to achieve specific, climate-related targets.
We expect that the SEC will propose rules addressing climate change disclosure in the near term. The Enforcement Division’s Task Force will continue to develop initiatives and investigations related to climate and ESG-related disclosure. Companies are now in the process of responding to comments that they have received from the Division of Corporation Finance on their climate-related disclosure, or the absence of such disclosure, and we expect that process to continue to play out through the Fall of 2021. In the meantime, public companies should continue to focus on the information that they include in their SEC filings and in other communications regarding climate change risks and carefully consider the applicability of existing SEC and Staff guidance to their disclosures.
 Sample Letter to Companies Regarding Climate Change Disclosures, available at https://www.sec.gov/corpfin/sample-letter-climate-change-disclosures.
 Statement on the Review of Climate-Related Disclosure (Feb. 24, 2021), available at https://www.sec.gov/news/public-statement/lee-statement-review-climate-related-disclosure.
 Rule 408 under the Securities Act of 1933 and Rule 12b-20 under the Securities Exchange Act of 1934.
 FASB Staff Educational Paper, Intersection of Environmental, Social, and Governance Matters with Financial Accounting Standards (Mar. 19, 2021), available at https://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176176379917.
 https://www.law360.com/articles/1402762/top-sec-official-suggests-more-esg-enforcement-is-coming; https://www.law360.com/articles/1373422/sec-s-esg-unit-chief-says-existing-regs-key-to-enforcement.
 Public Input Welcomed on Climate Change Disclosures (Mar. 15, 2021), available at https://www.sec.gov/news/public-statement/lee-climate-change-disclosures.
 ESG Disclosure – Keeping Pace with Developments Affecting Investors, Public Companies and the Capital Markets (Mar. 11, 2021), available at https://www.sec.gov/news/public-statement/coates-esg-disclosure-keeping-pace-031121.
 Chair Gary Gensler, Prepared remarks at London City Week (June 24, 2021), available at https://www.sec.gov/news/speech/gensler-speech-london-city-week-062321.