SEC offers guidance on climate change disclosure shortcomings

The letter comments on the agency’s issues with a fictional business’s climate change disclosures. It precedes expected rulemaking from the SEC on the matter that could come as soon as October.

SEC climate change guidance from 2010 stated companies must disclose 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.”

Here are some of the ways the agency’s Division of Corporation Finance found during selective reviews of corporate filings that companies are running afoul of those requirements:

• By being more expansive in corporate social responsibility reports than in SEC filings. This is a case of disclosures made in one place to one group of investors not aligning with disclosures made elsewhere.
• By not fully disclosing material risks posed by climate change brought on by policy and regulatory changes, market trends, credit risks, technological changes, or litigation.
• By not identifying material past and/or future capital expenditures on climate change-related projects.
• By not disclosing material, indirect consequences of climate-related regulation or market trends that reduce demand for products that produce greenhouse gas emissions; increased demand for products that result in lower emissions than competing products; increased competition to develop products with lower emissions; increased demand for power generation from alternative energy sources; and reputational risks that may stem from operations or products that produce emissions.
• By not disclosing the physical effects of climate change—floods, hurricanes, sea level rise, extreme wildfires, and water shortages—on firm operations. These effects can harm property, customers, suppliers, and agricultural production while raising the cost of insurance and compliance.

“The sample comments do not constitute an exhaustive list of the issues that companies should consider,” the SEC said. “Any 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.”