The SEC’s Open Comment Letter on Climate Change Disclosure: What Public Companies Should Be Doing Now

Back in February 2021, the then Acting Chair of the Securities and Exchange Commission (SEC) Allison Herren Lee announced that she had tasked the Division of Corporation Finance with reviewing the extent to which public companies were applying the SEC’s February 2010 guidance on climate change disclosure. The announcement also hinted that climate change rulemaking was on the horizon. Since that time, the SEC has solicited public comment on climate change disclosures and climate change disclosure rulemaking was added to the SEC’s rulemaking agenda for October 2021.

At that time, we predicted to Ballard Spahr clients that the staff of the Division of Corporation Finance would issue comments to public companies on their 2020 Annual Reports on Form 10-K or would issue a kind of “Dear CFO” letter to give blanket guidance on climate change disclosure. This prediction was not due to any special insight with the SEC’s activities. It was based on the text of the announcement and in part on the timing of Herren Lee’s direction, which was the last week of February, when most larger public companies would already be locked into 2020 Form 10-K disclosure and would not be able to preemptively address the 2010 guidance. This timing ensured that the staff of the SEC's Division of Corporation Finance would have rich fodder in the 2020 Annual Reports for comments on climate change.

On September 29, 2021, the SEC posted an open comment letter to issuers on climate change disclosure. This open comment letter is a follow-up to individual comment letters that the staff of the SEC's Division of Corporation Finance issued to selected issuers.

The open letter is styled as a comment letter on the latest Annual Report on Form 10-K of sample issuer “ABC Corporation.” Obviously the SEC’s intent is to spur disclosure among all issuers, even those that didn’t receive the individual comment letters. As companies are planning workflows for this year’s Annual Report on Form 10-K, additional time should be added to develop appropriately responsive disclosures to this open comment letter.  Issuers should also give consideration to developing and enhancing the processes to ensure the accuracy of this information, particularly the more technical information. For companies with September 30 or other fiscal year ends early in the fourth quarter, it will be especially important to get familiar with the open comment letter sooner rather than later.

Most of the comments are fairly consistent with the 2010 guidance, but the comment letter format will be helpful to many issuers as a starting template for a disclosure checklist. However, the first comment – flagging the differences in disclosure as between ABC Corporation’s SEC filings and its CSR report – has been piquing additional interest among public companies and lawyers:

We note that you provided more expansive disclosure in your corporate social responsibility report (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.

This first comment emphasizes to issuers that if information is material to investors, it should be reflected in a 1934 Act report, not solely in a CSR report. This comment has broader application than climate change disclosure and is expressive of the SEC’s position on ESG disclosure generally. It is also consistent with past comments issued by the staff of the SEC’s Division of Corporation Finance on differences between disclosure in 1934 Act reports and other investor-facing communications – i.e., earnings releases, conference presentations, management interviews and other public sources. As companies are increasing the volume and frequency of their ESG disclosure and as investors are increasingly vocal about the importance of ESG disclosure, public companies should take extra care to ensure that (1) investor-facing disclosure is aligned with their 1934 Act disclosure, and (2) investor-facing disclosure is subject to a process for ensuring accuracy and completeness in a manner comparable to 1934 Act disclosure. For technical environmental or other climate change-related disclosures, securities lawyers likely will need to collaborate with environmental and natural resources lawyers to ensure this information meets this standard. At Ballard Spahr, we recognize the multi-disciplinary nature of public company climate change disclosure. Our securities and environmental lawyers work together seamlessly to ensure disclosures meet SEC requirements and investor expectations.

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