Jina Choi and David M. Lynn are partners at Morrison & Foerster LLP. This post is based on their Morrison & Foerster memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).
The Division of Corporation Finance of the U.S. Securities and Exchange Commission recently published a sample letter to companies providing illustrative comments that the Division of Corporation Finance may issue to companies regarding their climate-related disclosure, or the absence of climate-related disclosure [1] (the “Sample Letter”).
This action is the latest in a series of developments demonstrating the SEC’s focus on climate disclosure by public companies.
- The SEC continues to focus on and spotlight climate change and ESG-related disclosure obligations under the federal securities laws.
- The SEC may be working to update its 2010 guidance on climate change disclosure and the staff of the Division of Corporation Finance has sent out letters to public companies providing comments on climate-related disclosure or the lack of such disclosure in SEC reports.
- The SEC set forth a Sample Letter with illustrative comments regarding Risk Factor and MD&A disclosures.
- Companies should also consider recent guidance on how climate-related risks may need to be addressed in financial statements.
- The SEC’s Enforcement Division has set up an ESG Task Force which is focusing on any material gaps or misstatements in companies’ disclosure of climate risks under existing rules.
Comment on Climate Change Disclosures
More from: Clara Kang, Jessica Ground, Capital Group
Jessica Ground is Global Head of ESG, and Clara Kang is Counsel at Capital Group. This post is based on their comment letter to the U.S. Securities and Exchange Commission regarding its proposed framework for climate change-related disclosures by public companies. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).
We share the view that has been articulated by various policymakers, academics and other market participants that climate change poses a systemic risk to our financial markets and the broader economy. The potential impacts of climate change on financial markets are broad and far-reaching, including disruptions not only in asset valuations but more generally in the proper functioning of the markets as market participants seek to mitigate physical and transition risks stemming from climate change. As a result, investors increasingly view material climate (and other ESG)-related risks and opportunities as critical drivers of a company’s ability to generate value over the long-term. To that end, there is a strong need for climate-related issuer disclosure that is consistent, comparable and rooted in materiality.
Today, the asset management industry faces a significant data challenge with respect to climate or ESG-related information. As the Investor-as-Owner Subcommittee of the Commission’s Investor Advisory Committee noted in its May 2020 report, issuers take a range of different approaches (or none at all) in providing ESG-related disclosure: of those that do provide disclosure, some publish stand-alone reports while others incorporate disclosure in existing regulatory filings; some disclose information against third-party standards such as those issued by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD) while others do not; and still others do not report directly but provide information to third-party data providers. [1] Such data providers employ vastly different methodologies for ESG scoring systems that often result in an issuer being rated favorably for its ESG practices by one data provider but unfavorably by another. In short, while there is a plethora of ESG-related information in the marketplace, the information tends to be subjective, spotty and unreliable, limiting investors’ ability to effectively and efficiently consider material climate or other ESG risks in allocating capital.
READ MORE »