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Updating 10-Q Risk Factor Statements

We are coming up on another round of 10-Q’s for SEC reporting companies. Given the emphasis on climate issues – including the impending climate disclosure – we may see more references to the topic in this coming quarter’s 10-Q. Over on, John Jenkins wrote about considerations in making these updates. Here, he points out comments from a  Goodwin memo on the topic:

If a company chooses to update its risk factor disclosure by restating the entire risk factor section from its Form 10-K report or a subsequent Form 10-Q report, we recommend that the company consider whether it would be better to highlight the changes in some manner that makes it more likely that the changes will come to the attention of readers. We believe that this is particularly relevant where the risk factor disclosure extends to several pages or more, which could have the unintended effect of making it difficult for readers to find and absorb the new disclosure about material changes.

Changes could be identified in various ways, such as in an introductory paragraph that refers readers to specific updated paragraphs, by use of footnotes, by use of bold text, or by use of symbols such as an asterisk at the beginning and end of each paragraph that contains changed or new text (which was the way the SEC’s EDGAR system marked changed text in the past).

Our view: Companies that have not previously considered adding climate matters to their 10-Q/10-K should be taking another look at that position right now. Investor and rating organization interest in the topic make a compelling argument that climate issues are material, including regulatory, transition and physical risks as laid out in the SEC’s climate disclosure proposal. Materiality determinations related to climate matters – such as whether Scope 3 emissions are material for purposes of inclusion in the climate disclosure (assuming that provision remains intact in the final release) – must be properly reflected across the entirety of SEC regulatory filings and updates. Even before the climate disclosure final release is issued, registrants making climate materiality decisions would do well to update their 10-Qs accordingly.

BlackRock Provides More Clarification on Transition Opportunities

Last week, BlackRock published its 2022 Midyear Outlook, which addressed key investment themes reflecting the current global political and economic situation. These viewpoints are valuable not only for investors and asset managers, but they provide perspectives on business opportunities for operating companies.

Investors can get exposure to the transition by investing not only in “already-green” companies but also in carbon-intensive companies with credible transition plans or that supply the materials, equipment and services needed for the transition. Commodities are a prime example: demand for some transition-critical minerals is expected to grow quickly. Investors may also wish to mitigate the portfolio impact of possible supply constraints: if high-carbon production falls faster than low-carbon is phased in, it could mean shortages and high prices for high- carbon outputs that economies can’t yet function without. So high carbon exposures can give exposure to the transition and help weather shocks.

Our view: Positioning for the transition economy is not simply a new entrant into Buzzword Bingo – it can offer meaningful mid- to long-term revenue opportunities for those companies taking climate risk management seriously and looking beyond the next quarter/fiscal year. Companies that struggle with integrating ESG into their business or culture should look at their company through the lens of transition opportunities. But these opportunities aren’t necessarily free – they can come with new or latent risks. Companies should thoroughly assess potential new business changes to take advantage of the transition economy.

Eccles Comments on the Future of EFRAG

Robert Eccles – a long-time giant in the ESG space – is a regular Forbes contributor on the topic. If you aren’t already following him, you should be. Among other things, he has a fun sense of humor as seen in this excerpt from an article just published on insights in the world of developing global ESG standards:

The International Sustainability Standards Board (ISSB) and EFRAG have both issued exposure drafts of standards for sustainability reporting. The ISSB’s standards are based on the concept of “single materiality,” those sustainability issues that matter to enterprise value creation. EFRAG’s standards emphasize “double materiality,” those sustainability issues that also affect society in general along environmental and social dimensions. The single vs. double materiality question is a hotly debated one. The Sustainability Taliban deride single materiality and want only double materiality or even more than that, so-called contextual materiality. The Sustainability Flat-Earthers scream that sustainability destroys shareholder value or is even an existential threat to the United States of America.

He goes on to point out his concern about potential credibility concerns with the work of the entities:

As these standard setting processes now become formalized, their own credibility depends, in turn, on the credibility of the Chair and members of their Boards. And it depends, perhaps most particularly, on the stewardship by the respective Board Chairs of “due process” that, on the one hand, respects the constitutionally-defined roles of the Board and the expert or advisory groups intended to contribute to the standard setting processes and, on the other hand, ensures transparency and meaningful consultation with external stakeholders…

Each organization has a different process for appointing the individuals who will head up the bodies charged with developing their sustainability reporting standards. The ISSB was established under the authority of the IFRS Foundation. An elite executive search firm, Egon Zehnder, was used to recruit for the roles of the ISSB, starting with its Chair, Emmanuel Faber, and its Vice-Chair, Sue Lloyd. Their credentials are impeccable.

EFRAG is in the process of selecting the Chair of the SRB, which requires that the European Commission nominate a candidate for appointment by the General Assembly of EFRAG. The nomination follows a Commission-led interview process with applicants, and advisory inputs from both the European Parliament and European Council… 

The EFRAG Sustainability Reporting Board Chair appointment is in many regards a political process. There’s obviously nothing wrong with this if it is done in a rigorous and transparent way that goes beyond the political connections of candidates to consider their credentials for the role. This decision will set the course for whether the EU’s standard-setting progress will have the necessary robustness and credibility at this most fragile and important moment in the European project of sustainability reporting.

Our view: Eccles is spot-on with his view on how vital credibility of organizational leadership is for both of these organizations. That impacts companies in obvious and less obvious ways. On the obvious side of things, if you are going to be tasked with developing programs and disclosures aligned with these standards, you certainly want to make sure the standards are valid, credible and (to the extent possible) meaningful. That won’t happen if the leadership of the organizations developing those standards is not widely viewed with respect. Second, Eccles’ comments apply equally to in-house ESG leadership as well. In our climate webcast last week, panelist Meredith Cross echoed this sentiment by saying that the credibility, interpersonal skills and even likability of a company’s in-house climate disclosure leadership is vital to success.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile