Public companies better step up in providing useful disclosures related to climate change.
This is because the SEC’s Division of Corporation of Finance (CorpFin) is upping its scrutiny of disclosures related to climate change when reviewing public company filings under the direction of Acting Chair Allison Herren Lee. The staff will also start working on an update of a commission climate change disclosure guidance issued almost a decade ago.
Lee’s instruction to staff comes as President Joseph Biden has put climate change policy as a priority for the administration. Biden named Lee acting chair in January and will serve in the capacity until his pick to lead the SEC, Gary Gensler, is confirmed by the Senate.
CorpFin staff regularly reviews company filings to make sure they are appropriate and sufficient. When the staff has questions or believes the filings are inadequate, a comment letter is sent to the company to address the disclosure issues.
To better help companies determine what to disclose, the market regulator in 2010 published Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change, asking companies to disclose material information related to climate change, including lawsuits, business problems, regulatory supervisions, or international treaties. But in the past several years, many investor groups have complained that the information provided has been of little use. Moreover, the existential threat of climate change has become much clearer over the years.
“As part of its enhanced focus in this area, the staff will review the extent to which public companies address the topics identified in the 2010 guidance, 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,” Lee said in a statement on February 24, 2021. “The staff will use insights from this work to begin updating the 2010 guidance to take into account developments in the last decade.”
Lee said that investors are more than ever taking into account climate-related issues when making voting and investment decisions, and the SEC has a responsibility to make sure that they have the necessary information.
“Ensuring compliance with the rules on the books and updating existing guidance are immediate steps the agency can take on the path to developing a more comprehensive framework that produces consistent, comparable, and reliable climate-related disclosures,” Lee said.
Those who follow the SEC’s regulatory activities closely said that Lee’s statement is not surprising.
“She has been an advocate of increased climate-related disclosures in the past and, with the change in administration, this seems like an opportune time to pull what levers she can,” said Will Dorton, Of Counsel with Dickinson Wright PLLC. “The 2010 guidance is really her only means to push public registrants to improve climate-related disclosure in the short-term. Anything else would take a formal rulemaking or other commission action.”
Dave Brown, a partner with Alston & Bird LLP, agreed.
“It is now even more clear that the SEC is not waiting for Gensler to be confirmed to move forward on its climate change focus,” he said. “This will likely give public companies a head start with complying with the additional climate change related disclosure requirements that will no doubt come from the SEC within the year.”
Dorton, a former SEC CorpFin staff member, said the increased focus by the division “is fully in line with pressures coming from many large institutional investors and proxy advisory services, who have been pushing for more detailed climate-related and other ESG disclosures for several years now.”
Lynn Turner, former SEC chief accountant who has been one of the most vocal investor protection advocates, praised Lee’s direction.
“This statement gives companies a welcomed heads up and a chance to review their disclosure one more time before filing them with the SEC and their shareholders,” he said.
In the meantime, Davis Polk & Wardwell LLP advised their clients to do the following:
- carefully review any climate change disclosure in upcoming SEC filings, including soon-to-be filed Form 10-Ks, against the 2010 guidance;
- consider climate disclosures in any website or other unofficial disclosures and whether any of those disclosures should be modified or included in SEC filings because of their materiality to shareholders;
- expect increased Staff comments on their climate change disclosures; and
- be on the lookout for new SEC guidance and rulemaking.
This article originally appeared in the February 26, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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