Ed. note: Today’s post comes courtesy of guest contributors J.T. Ho and Ashley Walter from Orrick. This is an update to J.T.’s April post.
On September 22, 2021, the Division of Corporation Finance published a sample letter to companies regarding climate change disclosure. The letter contains sample comments that the Division may issue to companies regarding climate change disclosure. The Division noted that companies must disclose, in addition to the information expressly required by regulation, “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.”
The first sample comment, which was placed under the “General” heading, is the following:
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.
We advised in April that (i) companies should tread carefully in employing the concept of materiality in their ESG reports and (ii) companies that have been publishing reports for some time should reexamine their disclosures in light of recent developments, and the sample comment above underscores these points. To reiterate, if it is not possible to refrain from using the concept of materiality (for example, because the company conducted a “materiality assessment”), the term should be properly defined. In addition, when preparing an ESG report, a company should develop criteria for determining what content to include, and these criteria should be clearly described in the ESG report. The information in an ESG report is typically designed for consumption by many different stakeholders; therefore, articulating the process that the company engaged in to determine the set of relevant stakeholders and solicit feedback from those stakeholders is critical to establishing the scope of the report.
To highlight another point made in our April comments, in preparing an ESG report, a company must be focused on the actual ESG measures implemented and the process of preparing a carefully constructed and vetted report, as opposed to checking boxes and filling pages. The company’s disclosure controls process should include review of the framework used to develop the report, the content selected for inclusion, and how this approach compares to the company’s SEC filing preparation and review process. And companies should not neglect ESG information provided on a company’s website – the SEC’s sample comment could be made with respect to website material, as well.
Finally, at a high level, the SEC’s sample letter suggests that companies must adopt a unified approach to ESG disclosure – that ESG disclosure, whether living on the company’s website, in an ESG report, or within an SEC filing, cannot exist in silos must be prepared as part of a holistic strategy and review process. As noted above, this calls for a framework approach, where the underlying ESG measures pursued by the company are implemented as part of a coordinated plan and integrated into disclosure across various media as appropriate, with due regard for applicable legal standards, relevant stakeholders, and commercial requirements.