By Mike Gullette
As the Securities and Exchange Commission considers comments from its recent request for information on climate change disclosures, the Division of Corporation Finance has published a model comment letter consisting of comments that recently have been sent to various SEC registrants related to climate change. The big message here? Companies need to start discussing climate-related physical and transition risks, and they shouldn’t confine such discussions to the corporate sustainability reports they often include on their websites.
Technically, DCF isn’t breaking new ground, as such disclosures were already discussed in its Climate Change Guidance issued in 2010. This guidance has concentrated on disclosure for:
- The effects of pending or existing climate-change related legislation, regulations and international accords;
- The indirect consequences of regulation or business trends; and
- the physical impacts of climate change.
Part of the problem with this 2010 guidance, however, has been that most companies do not believe that such issues can be assessed and, if they can, are material to their financial results. By publishing this model comment letter, DCF seems to be sending the new message to registrants that there is a rebuttable assumption that climate change risks are, in fact, material. In other words, it’s up to the company to give a reason why such disclosures are not needed or included in the 10-Q/K management’s discussion and analysis of financial condition and results of operations.
It’s clear the Biden administration is looking to require some level of disclosure on the risks of climate change, and this will be clarified upon the issuance of a formal SEC proposal expected by the end of the year. ABA expects that the banking agencies will also be issuing climate risk management guidance to larger banks sometime in 2021. However, they may then take their cues from any final SEC guidance related to certain risk metrics. Of particular interest to banks will be whether disclosures of greenhouse gas emissions will be required. While various companies, including some large banks, have been including “Scope 1” and “Scope 2” emissions (those emitted directly or purchased by the company) within their CSRs over the past few years, “Scope 3” emissions (those emitted by their value chain partners and the consumers of their products) generally have been excluded. Such a complex and expensive process to estimate such emissions is compounded for banks, which may have to include the Scope 1, 2 and 3 emissions of their borrowers as a measure of “financed emissions.”
At this point, disclosures of Scope 3 financed emissions are being discussed worldwide and will be required in Europe. This, of course, introduces significant challenges to all banks, regardless of size. In its letter to the SEC on climate-related disclosures, ABA emphasized that valuable, decision-useful information could be derived not with detailed greenhouse gas estimates, but merely by providing industry-based disclosure of a bank’s loan and securities portfolios. Smaller banks would benefit the most from such streamlining.
To learn more about potential regulatory requirements related to climate risk or to join ABA’s Climate Task Force, contact Mike Gullette.
Mike Gullette is SVP for Tax and Accounting at ABA.
