SEC Issues Warning Letters on Climate Disclosures

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October 4, 2021

Letters identify specific areas of interest to the Securities & Exchange Commission

The Securities and Exchange Commission (SEC) recently released an example letter to hypothetical company ABC showing how they will be reviewing companies' climate change disclosures. A number of these warning letters have already been issued to a variety of companies. These letters come ahead of the expected release of the SEC's new guidance on climate-related disclosures, anticipated before the close of 2021. A few takeaways from these letters are:

The SEC is taking notice of differences between SEC filings & CSR reports

The example letter specifically inquires why more detail is provided in the company's voluntary corporate sustainability and responsibility (CSR) report than in SEC filings. This suggests that the SEC may want to hold companies to account for the claims and stated goals in their voluntary reports, which may put companies who disclose ambitious goals in CSR reports in a difficult position if those goals were not founded on a plan with a scientifically defensible basis and data supporting progress.

The SEC is looking for litigation & reputational risks

The example letter specifically references "reputational" and "litigation" risks. This is notable because the increased pressure from the SEC comes at the same time as companies face increased pressure from "greenwashing" suits, in which citizen groups challenge the veracity of businesses' sustainability claims. Companies who market their products, services, or net-impacts as climate friendly may be at the greatest risk for these suits if their claims are not accurately stated based on the assumptions and limitations in the underlying scientific assessments.

The SEC is looking at offsets

The example letter specifically references disclosing information on the purchase and sale of carbon offsets. While offsets can be an important tool for a company to reach net-zero emissions, over-reliance on offsets, purchases of unverified offsets, or improper claims based on those offsets could create risk. Companies who purchase offsets should understand the basis of the offsets they purchase (avoided, reduced, or sequestered emissions) and the limitations of claims that can be made based on those offsets.

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