Joint Statement by Commissioners Lee and Crenshaw on Amendments to Regulation S-K

Allison Herren Lee and Caroline Crenshaw are Commissioners at the U.S. Securities and Exchange Commission. This post is based on their recent public statement. The views expressed in the post are those of Commissioner Lee and Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

We want to start by thanking the staff in the Division of Corporation Finance, Office of the General Counsel, Division of Economic and Risk Analysis, and Office of the Chief Accountant who have worked on this rule. It has gone from proposal to adoption in less than one year’s time, which is not an easy task, particularly during a global pandemic. Due to the staff’s expertise, hard-work, and thoughtfulness, many of the changes adopted today will be beneficial for investors. For example, certain of the changes to Item 303 of Regulation S-K should enhance the quality of MD&A disclosures. [1] Nevertheless, there are two significant aspects of the rule that we cannot support. Therefore, we must respectfully dissent. [2]

First, the final rule eliminates certain disclosures and the tabular presentation of contractual information that currently provides investors with critical insight into supply chain and risk management. [3] More than 15 years ago, in the wake of several massive accounting scandals and pursuant to Sarbanes Oxley, the SEC issued a rule that required companies to include a table summarizing contractual obligations in annual filings. [4] The proponents of today’s rule argue that much of the information we are removing, or modernizing, is simply to eliminate duplicative disclosure of information that is readily accessible in filings required by other SEC rules or by the U.S. Generally Accepted Accounting Principles (“GAAP”). Yet one of the key categories of obligations disclosed in the table—purchase obligations—is not always required by U.S. GAAP and does not consistently appear elsewhere in filings. [5] Purchase obligation disclosures provides information about the amount and timing of payments due in future periods, providing insight into corporate supply chain risk management, financial hedging, and anticipated increases in product demand. [6] And in analyzing the impact of the COVID-19 pandemic on the cruise industry, researchers were able to use the contractual obligations tables to compare exposures and potential revenue shortfalls against near-term obligations. [7] Despite the utility of this information and over the objections of commenters, including the SEC’s own Investor Advisory Committee, [8] the final rule eliminates the contractual obligations table. At best, this obscures information investors need, and, at worst, makes some information, such as purchase obligations, inaccessible. [9] Given the relevance of these items to assessments of market performance, we disagree with the policy choice to eliminate them.

Second, this rule fails completely to address climate risk, similar to other recent modernization rulemakings that have failed to deal adequately with this and other critical factors that impact an issuer’s long-term sustainability, such as human capital management. [10] The modernization rulemakings afforded the Commission the opportunity to issue standardized disclosure requirements that would facilitate efficient comparisons of how companies manage these risks and assets. The Commission, instead, chose to rely heavily on principles-based disclosure requirements. We, along with our fellow Commissioners, share a common goal of ensuring that market participants are given the information they need to evaluate and price public companies. But we seem to have fundamentally different viewpoints on how best to accomplish that task.

In 2016, the Commission published a concept release seeking input on how to improve the disclosure requirements of Regulation S-K. [11] In response, the Commission received thousands of comments letters. [12] A vast majority of the unique comment letters addressed sustainability disclosure, even though only a small number of questions in the release pointed to sustainability disclosure. [13] Notably, 80 percent of the letters we received addressing sustainability favored improved disclosure of sustainability-related information in Commission filings. [14] Investors in other contexts are echoing that call for improved climate disclosure, recognizing the systemic risks that climate change poses to global financial stability. [15]

It has been argued that specific disclosure requirements are not necessary because the current principles-based approach requires management to provide appropriate and timely disclosure of known trends and other information material to future performance and planning—including the impacts and management of climate risk. This approach, coupled with private ordering, has yielded some results, as many public companies currently make some climate risk and human capital management disclosures. [16] We certainly agree that how a company manages climate risk and human capital is material information subject to disclosure under a principles-based approach, and that the securities laws require companies to include that information, amongst other material information, in their discussions of MD&A, descriptions of business, legal proceedings, risk factor disclosures, and perhaps elsewhere too. [17] However, many companies simply do not make these disclosures, the majority of U.S. based large companies have failed to acknowledge the financial risks of climate change in their filings. [18] Moreover, research and analysis have shown that a principles-based approach, coupled with voluntary disclosure, results in non-standardized, inconsistent, and incomparable disclosures. [19] A major purpose of requiring companies to disclose specific information about climate risk and human capital management is to allow market participants to accurately price and compare the risks and opportunities associated with these risks. [20] But when disclosure metrics are not uniform and standardized the task of pricing and comparing these risks and opportunities is, at best, unduly burdensome. And without specific requirements, much of the information is simply not there to be worked into the analysis.

While we are disappointed that the modernization of Regulation S-K did not address these vital issues, there is a silver lining. We have an opportunity going forward to address climate, human capital, and other ESG risks, in a comprehensive fashion with new rulemaking specific to these topics. In addition, the Commission should have an internal task force and ESG Advisory Committee that is dedicated to building upon the recommendations of leading organizations, such as the Task Force on Climate-Related Financial Disclosures, and defining a clear plan to address sustainable investing. [21] There’s no time to waste in setting to ourselves to this task, and we look forward to rolling up our sleeves to establish requirements for standard, comparable, and reliable climate, human capital, and other ESG disclosures.


1See Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, Release No. [ ] (Nov. 19, 2020) at 29, 31-33 (adopting new Item 303(a) to succinctly state the objectives of Management’s Discussion & Analysis of Financial Condition and Results of Operations (“MD&A”), codifying guidance that states a registrant should provide a narrative explanation of its financial statements with the goal of facilitating thoughtful discussion and analysis from management) (“Adopting Release”); id. at 74 (adding a new requirement concerning critical accounting estimate disclosures).(go back)

2There are some other changes that give us concern. Including the elimination of the tabular presentation of five years selected financial data, the elimination of the requirement to disclose selected quarterly financial data, and the elimination of specific disclosures related to off-balance sheet arrangements. See Adopting Release at 13-15 (eliminating the requirement for registrants to furnish selected financial data in comparative tabular form for each of the registrant’s last five fiscal years); id. at 20 (amending Item 302(a) to require disclosure of fourth quarter data only when there are one or more material retrospective changes that pertain to the statements of comprehensive income within the two most recent fiscal years); id. at 57-60 (replacing specific disclosures related to off-balance sheet arrangements with a materiality-based instruction).(go back)

3See id. at 39.(go back)

4See Disclosure in Management’s Discussion and Analysis About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations, Release Nos. 33-8182; 34-47264 (adopted Apr. 7, 2003).(go back)

5Information relating to certain purchase obligations are not specifically called for under U.S. GAAP, and are therefore typically not disclosed in the financial statements. See Adopting Release at 66, n. 235; Kwang J. Lee, Purchase Obligations, Earnings Persistence and Stock Returns at 8-9 (KAIST Business School, Working Paper No. 17, 2018) (explaining that the definition of a purchase obligation for the purposes of Regulation S-K does not meet the definition of an asset or liability as defined by FASB Statement of Financial Accounting Concepts No. 6 (SFAC 6)).(go back)

6See Lee, supra note 5, at 14 (finding that firms tend to limit their purchase obligations to a one-year period beyond the current fiscal year and the short-term nature of purchase obligations enables firms to have the flexibility to adjust the amount of their purchase obligations each year in expectation of future demand); Heitor Almeida et al., Risk Management with Supply Contracts, 30 Rev. Fin. Stud. 4179, 4180-81 (2017) (concluding that traded derivatives are only a part of a firm’s risk management activity and that many firms use purchase obligations as a hedging and risk management tool).(go back)

7See SEC Investor Advisory Committee, Comment Letter on Proposed Rule on MD&A, Selected Financial Data, and Supplementary Financial Information at 3 (May 21, 2020) (citing CFRA Industry Report, Risks Ahoy! Key Metrics at Cruise Lines (Mar. 11, 2020)).(go back)

8See id. at 3 (recommending that the Commission “reconsider whether to permit omission of the tabular contractual obligations information in annual reports” and consider “whether to augment the table, rather than to delete it.”).(go back)

9See Adopting Release at 66 n. 235; Lee, supra note 5, at 8-9.(go back)

10This was the case in the “modernization” of Regulation S-K Items 101, 103, and 105 that was released earlier this year in August and, for largely the same reasons, we must respectfully dissent to the “modernization” of the MD&A section of Regulation S-K. In both of these modernization efforts, the Commission either did not address or failed to address adequately ESG disclosures, including those relating to climate risk or human capital. Even though there have been, and continue to be, clear and emphatic calls for the Commission to do so. See, e.g., BlackRock, A Fundamental Reshaping of Finance (Jan. 14, 2020) (noting that it is necessary achieve wide-spread and standardized adoption in sustainability disclosure to allow investors to ascertain whether companies are “properly managing and overseeing” ESG related risks within their business and planning for the future); Bank of America Merrill Lynch, ESG Part II: A Deeper Dive, Equity Strategy Focus Point (June 15, 2017) (“ESG appears to isolate non-fundamental attributes that have real earnings impact: these attributes have been a better signal of future earnings volatility than any other measure we have found.”); Emiran Ilhan et al., Climate Risk Disclosure and Institutional Investors at 3 (Eur. Corp. Governance Inst., Working Paper No. 661, 2020) (finding through survey of some of the world’s largest investors that 51% of survey respondents believe climate risk reporting to be as important as traditional financial reporting, almost 33% of respondents consider it to be more important, and only 22% of respondents regard climate change as less important as compared to financial reporting). Several commenters urged the Commission to contemplate climate risk or ESG disclosures in MD&A. See The Forum for Sustainable and Responsible Investment, Comment Letter on Proposed Rule on MD&A, Selected Financial Data, and Supplementary Financial Information (June 17, 2020); Principles for Responsible Investment, Comment Letter on Proposed Rule on MD&A, Selected Financial Data, and Supplementary Financial Information (Apr. 28, 2020); Institute for Policy Integrity at New York University Law School, Comment Letter on Proposed Rule on MD&A, Selected Financial Data, and Supplementary Financial Information (Apr. 28, 2020); Senator Elizabeth Warren, Comment Letter on Proposed Rule on MD&A, Selected Financial Data, and Supplementary Financial Information (Oct. 13, 2020). On the other hand, some commenters either voiced opposition to incorporating such disclosures into MD&A or supported only voluntary disclosure of climate risk or other ESG disclosures. See Center for Capital Markets Competitiveness, U.S. Chamber of Commerce, Comment Letter on Proposed Rule on MD&A, Selected Financial Data, and Supplementary Financial Information (May 4, 2020); Ernst & Young, Comment Letter on Proposed Rule on MD&A, Selected Financial Data, and Supplementary Financial Information (Apr. 28, 2020); RSM US LLP, Comment Letter on Proposed Rule on MD&A, Selected Financial Data, and Supplementary Financial Information (Apr. 20, 2020). There is not a meaningful discussion of the climate and ESG disclosure concerns raised by these comment letters in the final release.(go back)

11These disclosures had not been reviewed in over 35 years, and we agree that changes to these disclosures are long overdue. See Concept Release, Business and Financial Disclosure Required by Regulation S-K at 6 (released on Apr. 28, 2016).(go back)

12Of the thousands of letters received, hundreds were non-form individual letters. See Comment File for Concept Release, Business and Financial Disclosure Required by Regulation S-K, File No. S7-06-16 (released on Apr. 28, 2016).(go back)

13The SEC received over 275 non-form comment letters, and for many commenters sustainability was the only, concern. See Sustainability Accounting Standards Board, The State of Disclosure: An Analysis of the Effectiveness of Sustainability Disclosure in SEC Filings at 4 (2016) at 4 (“Despite the fact that sustainability disclosure was a relatively minor topic of discussion in the SEC release, covering about four of its 92 pages, two-thirds of the more than 276 non-form comment letters the Commission received in response addressed sustainability-related concerns. Eighty percent of sustainability-related letters called for improved disclosure of climate related information in SEC filings, with only 10 percent of letters opposing SEC action on the matter.”).(go back)

14Id. at 4.(go back)

15See, e.g., BlackRock, Getting Physical: Scenario Analysis for Assessing Climate-Related Risks (Apr. 2019) (discussing the risks of extreme weather events to the creditworthiness of state and local issuers in the municipal bond market, risks of hurricane and flooding to U.S. municipal bonds, commercial mortgage-backed securities, and electric utilities). Further, financial regulators have also acknowledged the systemic risks climate change poses. See Bd. of Governors of the Fed. Reserve Sys., Financial Stability Report at 58 (2020) (“Climate changes adds a layer of economic uncertainty and risk that we have only begun to incorporate into our analysis of financial stability. Different sectors of the economy and geographic regions face different risks that will diverge from historical patterns….[climate change] increases the likelihood of dislocations and disruptions in the economy, is likely to increase financial system vulnerabilities that could further amplify these shocks.”); U.S. Commodity Futures Trading Commission, Market Risk Advisory Committee, Managing Climate Risk in the U.S. Financial System: Report of the Climate-Related Market Risk Subcommittee at i (2020) (“Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.”).(go back)

16Cf.., Sara Bernow et al., McKinsey & Co., More Than Values: The Value-Based Sustainability Reporting That Investors Want, (Aug. 7, 2019) (“McKinsey, More Than Values”) (noting that there is a “trove of data” from 30-odd years’ worth of sustainability reporting through various voluntary reporting guidelines and frameworks such as the Global Reporting Initiative, Greenhouse Gas Protocol, the UN Global Compact, Carbon Disclosure Project (now CDP), International Integrated Reporting Council, and the Sustainability Accounting Standards Board but this has led to louder calls from asset managers and investors to provide sustainability disclosures that are material to financial performance and with greater consistency, reliability, and comparability).(go back)

17A 2010 Commission guidance describes the most pertinent non-financial statement disclosure rules that may require disclosure related to climate change as the following items from Regulation S-K: Item 101 (Description of Business, Item 103 (Legal Proceedings), Item 503(c) (Risk Factors), and Item 303 (Management’s Discussion and Analysis). See Commission Guidance Regarding Disclosure Related to Climate Change, 75 Fed. Reg. 6289, 6293-95 (Feb. 8, 2010).(go back)

18See Jose Luis Blasco & Adrian King, KPMG, The KPMG Survey of Corporate Responsibility Reporting at 34 (2017) (finding less than half of the world’s largest 250 companies acknowledge the financial risks of climate change in their reporting and “[j]ust under half the G250 companies based in the US and Japan do so.”).(go back)

19See, e.g., McKinsey, More Than Values (2019) (“In our survey and interviews, one priority for improving sustainability reporting stood out: ironing out the differences among reporting frameworks and standards.”); Sustainability Accounting Standards Board, The State of Disclosure Report 2017: An Analysis of the Effectiveness of Sustainability Disclosure in SEC Filings at 14 (“Despite this widespread recognition that a company’s management…of sustainability issues can have material impacts, the quality of corporate disclosures on such topics remains lacking in FY 2016. For example, less than a third (29.5 percent) of available disclosures contained performance metrics, while more than half (50.4 percent) used boilerplate language and an additional 20.1 percent included tailored narrative”).(go back)

20A major study found recently that many institutional investors rank “climate risk-disclosures” as being just as important as financial statements when predicting investment performance. See Ilhan et al., supra note 10, at 3 (finding through survey of some of the world’s largest investors that 51% of survey respondents believe climate risk reporting to be as important as traditional financial reporting, and almost 33% of respondents considers it to be more important). And we know from recent events that a company’s management of human capital is reasonably likely to materially impact the relationship between revenue and costs. For example, companies that were able to shift their workforce to a remote work environment during the early days of COVID-19 outperformed those that did or could not. See Dimitris Papanikolaou & Lawrence D.W. Schmidt, The Supply-Side Impact of COVID-19, VoxEU & CEPR (July 23, 2020) (finding that the economic effect of the initial shock of shutting down the economy varied significantly, but “[a]cross nearly all measures we looked at, firms in sectors in which most of the work could be done remotely fared much better than industries where employees needed to work on site”).(go back)

21“We can bring companies, investors and innovators to the table, and build on the work of organizations such as the Task Force on Climate-Related Financial Disclosures to identify which specific climate risks and metrics should be disclosed and how.” Commissioner Allison Herren Lee, Opinion, Big Business’s Undisclosed Climate Crisis Plans, N.Y. Times, Sept. 27, 2020 (the final report of the Task Force on Climate-Related Financial Disclosures was released in 2017 and can be found at Final Report: Recommendations of the Task Force). See also Commissioner Caroline A. Crenshaw, Statement on the “Modernization” of Regulation S-K Items 101, 103, and 105, (Aug. 26, 2020) (recommending that the Commission “form an internal task force to undertake an immediate study on how investors can and do use information about human capital management, climate change risk, and other Environmental, Social, and Governance (“ESG”) metrics to assess the long-term financial performance of a company” and form an “ESG Advisory Committee, comprised of investors, issuers, and subject matter experts, [that] can ensure that the Commission is aware of and responding to current ESG trends affecting all aspects of the market, and hold it accountable for taking action.”).(go back)

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