SEC Climate Change Commentary Letter is a Warning | Vinson & Elkins LLP


1. The SEC audits your sustainability report.

The first element addressed in the comment letter concerns a situation where the company in question provided less detail in its 10-K than in the company’s voluntary ESG disclosure. While we have previously warned On the importance of making sure your ESG story is consistent with your other corporate information and behavior, the comment letter shows that the SEC is thinking exactly the same. Additionally, the wording of the comment letter suggests that the Commission might consider requiring companies to incorporate climate and perhaps sustainability information into their annual dossiers, or at least explain why they have. chose not to.

2. The SEC is so on standard disclosure of climate risks.

We have already discussed the importance of TCFD, primarily for its role in how businesses (and, in particular, financial institutions) conceptualize climate risk.2 The comment letter also focuses on the extent to which companies are simply treating climate risk in a generic and abstract sense or adequately considering and disclosing both transition (regulatory, litigation, credit, etc.) and physical ( extreme weather conditions, decreased production capacity associated with chronic physical trends, etc.) risks associated with climate change. And the comment letter peels further onion by noting the need to also consider the indirect consequences of climate-related trends, including how climate change may impact a company’s supply chain. .

3. The SEC keeps abreast of ESG news (and wants you to, too).

ESG is changing rapidly. The comment letter acknowledges that ESG litigation, laws and regulations (both in the United States and other jurisdictions) may have material impacts on the business, financial condition and results of operations of a business, and suggests that businesses should be more proactive and sophisticated in considering how these developments may affect them. When it comes to climate-related litigation, companies should not only consider the history of litigation alleging that a company’s operations have contributed to climate change resulting in property damage, but should also consider the range greater risk of litigation arising from ESG reports, including greenwashing. claims and other claims relating to a company’s operations, such as challenges to permits necessary for operation on the grounds that the project would unnecessarily increase greenhouse gas emissions. With respect to policies and regulations, businesses should assess state and federal developments that could impact their customers and suppliers in addition to their own business and operations. Overall, this means that companies will need more than ever to ensure they stay on top of ESG litigation trends as well as policy and regulatory changes.

4. The SEC wants to know what climate risks and strategies are costing you.

Addressing the risks and opportunities associated with climate change can be a costly endeavor. The comment letter specifically calls for disclosures to identify significant capital expenditures for climate-related projects, as well as any significant compliance costs related to climate change. For the Management Discussion and Analysis section of periodic corporate filings, the comment letter specifically addresses the need to disclose information about buying or selling carbon credits or offsets as they are material. This is of particular importance for companies that have announced emission reduction commitments, in particular net zero commitments. If offsets or other capital expenses are an important part of a company’s climate strategy, then the company should be prepared to discuss these expenses and associated expectations in more detail. Finally, we note that companies must be prepared to face the costs associated with managing physical and transition climate risks.

5. For the SEC, honesty is the only policy.

When it comes to corporate disclosure, honesty should be a given. However, even where disclosures are not intentionally misleading or inaccurate, there remains a risk of bias regarding potential demand and market outlook and how these biases may influence potential climate risk assessments and decision making.3 It’s easy to look at climate risks or your company’s position in global climate dynamics and think “yes, but we’re special”. This means that while the Board may live up to a company’s final conclusion that it is “special” notwithstanding regulatory and business trends, the rationale for such a conclusion is likely to be scrutinized. For example, if demand is expected to drop in a particular industry, but every company in that industry says “it won’t materially affect us,” those companies shouldn’t be surprised if the SEC comes in and asks to see their homework. So if you pretend to be special, be prepared to prove why in future annual filings. It also means that companies should avoid disclosing only the bright, positive version of their climate-related risks and strategies – it’s time to be honest about the downsides, risks, costs and uncertainties.

6. The SEC needs you to remember that physical climate risk is more than “more severe heat waves and storms”.

While the availability and quality of data are both ongoing concerns, the comment letter features many examples of the types of physical effects of climate change that can impact a company’s operations and performance. Beyond the standard consideration of acute and chronic physical climate risks at a business site, these include the availability of insurance and indirect impacts, such as impacts on major customers or suppliers. Although many physical climate projections lack the sophistication to predict sub-regional impacts, companies should still consider the full spectrum of potential climate risks and provide details where they are relevant and available. As with the entire field of climate disclosures, these expectations will evolve with data and modeling capacities.

So what comes next?

The comment letter undoubtedly broadens the Commission’s approach to climate change-related disclosures and also highlights what the SEC believes to be the current scope of its authority. While we await the development of the SEC’s proposed rules, the comment letter provides additional insight into the SEC’s position in its thinking about what climate change disclosures should likely cover. Perhaps of more immediate importance, it reiterates the SEC’s focus on climate change, and that focus is likely to result in changes in disclosure requirements and, even before that, practices. We expect many companies to begin receiving comment letters tailored to their own disclosures soon, and companies should also expect their investors to respond to each new floor set by the SEC. Companies should be prepared to spend more time discussing the climate in their SEC cases, and while that doesn’t necessarily mean longer disclosures, it undoubtedly means more robust and longer data collection efforts. time to articulate how the company sees climate change in a sophisticated and appropriate framework. manner.


2 For a discussion on the taxonomy of climate risks, see the 2017 report of the Task Force on Climate-related Financial Disclosures, available here.

3 See, for example, Toby Macdonald, How do we really make decisions, BBC News (February 24, 2014),

First publication in CorpGov

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