Materiality in Recent SEC Comments on Climate Disclosure

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum.

In September last year, Corp Fin posted a sample letter to companies containing illustrative comments regarding climate change disclosures, presumably designed to help companies think about and craft their climate-related disclosure. (See this PubCo post.) Corp Fin began by noting that, under its 2010 guidance (see this PubCo post), depending on the facts and circumstances, climate change disclosure could be elicited in a company’s SEC filings in connection with the description of business, legal proceedings, risk factors and MD&A. Still, right now, there is little in the way of prescriptive climate disclosure requirements, although a proposal for climate disclosure regulation is high on the SEC’s agenda. (See this PubCo post.) Instead, companies have instead looked largely to standards of materiality to determine whether climate disclosure is required in their SEC filings. However, many companies provide climate disclosure in corporate social responsibility reports that are not filed with the SEC, but instead typically posted on company websites. As reported in a recent analysis by Audit Analytics, in the SEC’s most recent round of comment letters about climate last month, the climate disclosure on which the SEC is commenting is primarily contained in these CSR reports. And the SEC wants companies to justify—in some detail—why that disclosure isn’t also in companies’ SEC filings.

According to the analysis from Audit Analytics, recent SEC climate-related comments were sent to nine large companies, with market caps between $3 billion and $240 billion and revenues between $3 billion and $50 billion. The recipients operated in a variety of industries.

In the first round of comments, there were 5.6 comments per letter, with a range of three to seven comments per letter. The analysis showed that two-thirds of the companies received a particular comment that was foreshadowed in the SEC’s sample comment letter: “We note that you provided more expansive disclosure in your CSR report than you provided in your SEC filings. Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report.”

And, no surprise, companies were also asked about climate-related risk factors. Four companies were asked about “any material litigation risks related to climate change and the potential impact to the company.” Some were also asked specifically about vulnerability to physical risk and transition risk. Physical risk refers to risks resulting from physical changes in climate, such as heat, fires, drought and flooding, while transition risk refers to risks (as described in sample comment letter) such as “the impact of pending or existing climate-change related legislation, regulations, and international accords; and the indirect consequences of regulation or business trends.”


In May 2021, the White House issued an Executive Order expressing its policy “to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk… including both physical and transition risks.” The EO states that the “intensifying impacts of climate change present physical risk to assets, publicly traded securities, private investments, and companies—such as increased extreme weather risk leading to supply chain disruptions. In addition, the global shift away from carbon-intensive energy sources and industrial processes presents transition risk to many companies, communities, and workers. At the same time, this global shift presents generational opportunities to enhance U.S. competitiveness and economic growth, while also creating well-paying job opportunities for workers.” (See this PubCo post.)

In that regard, Audit Analytics reports that companies received questions about “capital expenditures for climate-related projects, the indirect impact of regulations and market trends related to climate change, and costs associated with the physical effects of climate change,” with the latter largely tailored to individual companies. Some of the questions related to transition risks concerned “indirect consequences,” with questions comparable to the SEC’s sample comment: to discuss the “indirect consequences of climate-related regulation or business trends, such as decreased or increased demand for goods or services based on production or reduction of significant GHG emissions, increased competition to introduce lower-emission products, increased demand for alternative energy products, and reputational risks resulting from operations or products that produce material GHG emissions.”

Interestingly, Audit Analytics indicates that all of the companies received a second round of comments addressing company responses to the initial round. In the second round, there were 4.8 comments per letter, with a range of one to six comments. The leitmotif of comments in round two was “materiality”—both quantitative and qualitative. Often, in response to one or more comments, companies advised that they did not disclose certain matters because they were not viewed to be material. In many of those cases, the SEC indicated that they viewed the companies’ responses to be conclusory and pressed the companies to drill down and, as Audit Analytics phrased it, “show their work” in their responses by providing quantitative details or more detailed explanations to justify their conclusions.

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