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SEC Issues Climate Reporting “Wake-Up Call” to US Firms

Division of Corporation Finance questions on materiality prove climate commitment of agency, says Jefferies.

New warning letters from the US Securities and Exchange Commission (SEC) show the agency is “making strides” to ensure publicly-listed companies are providing adequate climate-related disclosures, according to Aniket Shah, Global Head of Sustainability and ESG Research at investment bank Jefferies.

Last week, the SEC’s Division of Corporation Finance started to send letters to public companies that are failing to satisfactorily disclose in line with the 2010 Climate Change Guidance.

Ahead of its finalised proposal for a climate-related financial disclosure framework next month, the Commission reiterated that existing rules already require climate-related disclosures. Including the 2010 guidance.

The move should serve as a “wake-up call” for companies that have yet to take climate seriously, said Shah. “The SEC has realised that companies aren’t disclosing enough on climate or that they do disclose climate-related performance within sustainability reports but not within their official SEC filings.”

The questions within the warning letter are far-reaching, said Shah, covering important topics such as materiality, corporate strategy and alignment, and consideration of domestic and international climate regulations. They also align with reporting guidelines outlined by the Task Force on Climate-related Financial Disclosures (TCFD).

“Thanks to TCFD, agencies like the SEC now have specific categories outlining the kinds of questions investors and other stakeholders actually want the answers to,” he noted.

Ahead of COP26 in November, led by the Investor Agenda, 587 investors managing US$46 trillion in assets recently called on governments to rapidly implement five priority policy actions to help them effectively respond to the climate crisis. One of these policy actions asked governments to commit to implementing mandatory climate risk disclosure requirements aligned with TCFD recommendations.

SEC Chairman Gary Gensler published the SEC’s annual regulatory agenda on 11 June, committing the agency to an October deadline for finalising a new climate-related financial disclosure framework. Once published, it will be subject to another public consultation, meaning that it is unlikely the US will have the standardised framework in place until mid-2022.

Climate disclosures when ‘material’

The new Division of Corporation Finance letter only asks recipients for climate-related disclosures to feature information that is ‘material’ to the company in question.

“This means that the SEC isn’t approaching climate-related disclosures as a blunt instrument. But equally it does enforce the fact that, if climate change is material to a business, then the agency will expect these kinds of disclosure,” said Shah.

Although investors may still query companies on why they consider climate change is not yet a material factor, Shah said the SEC’s approach is realistic, accounting for the fact companies across sectors are all at different stages in their transition to low-carbon business models.

“The SEC is encouraging instead of demanding companies to consider the materiality of climate-related risks on their business operations and to disclose how this is the case and what they intend to do about it.”

It will be up to companies and investors to decide what is and isn’t material to companies, Shah noted.

Going forward, Shah added he would like to see further guidance from the SEC as to how the agency intends to enforce these reporting requirements.

“This notion that the US is way behind the rest of the world on accounting for climate-related risks isn’t true. It’s just that we’re approaching it from a different perspective,” he said.

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