Securities and Exchange Commission (the “Commission”) Chair Gary Gensler has repeatedly signaled his intention to begin requiring public filers to disclose climate change-related risks in quarterly and annual filings, citing increasing investor demand for this information. But even before the Commission has considered changes to Regulation S-K or other disclosure frameworks, the Division of Corporation Finance (the “Division”) is already reminding filers of the Commission’s 2010 Guidance Regarding Disclosure Related to Climate Change (the “2010 Guidance”).
On Sept. 22, the Division staff published a sample letter that has reportedly been sent to filers in a variety of industries asking for more company-specific information that would help the staff “better understand [the company’s] disclosure.” The letter contains nine questions related to the disclosure of risk factors and the MD&A sections of the applicable filing. In addition, the letter asks companies to explain the difference in quality or quantity of climate-related information in corporate social responsibility reports published by the company and the information contained in the disclosures filed with the Commission.
All companies that file disclosures with the Commission, whether in receipt of this letter or not, are well-advised to consider the Division staff’s goals and expectations with respect to the 2010 Guidance and the disclosure framework in general. The Commission has a statutory mandate to ensure that disclosures completely and accurately contain information that is “material” to the investing community. Rule 405 defines this term:
- The term material, when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered.
Investor demand for information, changes in consumer attitudes toward a company’s social responsibility profile, and the increasing severity and frequency of storms, wildfires, floods, and other natural disasters raise interesting and important questions about the applicability of the materiality threshold in the context of quarterly and annual disclosures. While many companies may seek to work with the Division staff to update their disclosures to include more information, it is possible that the letters the Division staff has sent will prompt one or more enforcement actions against recalcitrant filers unwilling or unable to make such disclosures—likely setting up the opportunity for the federal judiciary to revisit what “materiality” means in the context of modern American capital markets.
In addition, issuers should expect the SEC to release a proposal in the coming weeks requiring disclosure of climate-related risks. Such disclosures will likely be modeled off of the current disclosures recommended by the Financial Stability Board’s Taskforce on Climate-related Disclosures (TCFD) and as contemplated by Congress in the Climate Risk Disclosure Act of 2021, a bill that passed the House of Representatives in June. Upon release of the proposal, interested stakeholders will have the opportunity to submit comments to the SEC to address concerns ranging from liability protections to scope of disclosure.