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SEC asks companies for rationales behind disclosures of climate risks

Many companies already share details on climate risks when disclosing information they deem material, but investors often find it hard to make comparisons (Photo: AFP)

The U.S. Securities and Exchange Commission is seeking more details from companies about their climate risks as it gears up to propose new disclosure requirements on the topic.

Many companies already share details on climate risks when disclosing information they deem material, but investors often find it hard to make comparisons.

The Biden administration and the SEC under Chairman Gary Gensler have made combating climate change and nudging investors to deploy more capital toward greener businesses a priority. The campaign includes an effort to mandate climate-related risk disclosures, with a proposal expected for this spring.

The SEC last year sent at least 43 letters to U.S. public companies on the matter, compared with none the previous four years, according to data through Thursday from research firm Audit Analytics. That was the most in a single year since at least 2008. The SEC’s corporate-finance division, which oversees company disclosure, often sends comment letters to public companies to ask about their disclosures or accounting practices in quarterly or annual filings with the regulator. The SEC didn’t respond to a request for comment.

Retail chain Target Corp. and Facebook parent Meta Platforms Inc. were among the companies the SEC sent such letters in exchanges the regulator made public this month.

The SEC requested information from the companies about significant risks related to climate change. The risks ranged from physical effects such as severe weather to litigation and regulatory compliance costs. The regulator often sent follow-up questions asking companies to explain the reasons behind what they shared with investors.

The inquiries come after the SEC in September published a list of requests its staff had sent to executives related to a 2010 guidance document on climate-change disclosures.

The SEC asked some companies in recent months to explain why they provide more information about climate change in corporate social-responsibility reports than in regulatory filings. Many large businesses voluntarily release annual CSR reports providing data on their renewable-energy use and carbon emissions.

Sportswear brand Under Armour Inc., for example, told the SEC its initiatives to reduce emissions summarized in its CSR report didn’t rise to the level of materiality under SEC rules.

Asked about its capital spending on climate-related projects, network-equipment company Cisco Systems Inc. said it implemented 443 energy efficiency projects between fiscal 2016 and 2020, such as improving airflow in laboratories and installing LED lighting in buildings. The projects totaled $55 million, compared with $4.6 billion in total capex spending over that period, Cisco said in a response to the SEC.

Cisco fully recouped the implementation costs of the projects, Chief Accounting Officer Prat Bhatt said in a letter made public Wednesday.

The SEC asked Target to show its purchases of carbon credits or offsets haven’t and aren’t expected to significantly affect its business. Target bought about $100,000 of carbon offsets to date, Chief Financial Officer Michael Fiddelke wrote in a Dec. 8 letter. The retailer in fiscal 2019 and 2020 bought offsets from the Arbor Day Foundation for tree protection and restoration programs in California, Peru and elsewhere.

In some cases, the SEC told companies their answers fell short. “Your response appears to be conclusory and does not adequately address the specific items from our prior comment," the SEC wrote to Charles Schwab Corp., referring to the financial-services company’s determination that indirect consequences of climate-related regulation on its business were immaterial.

Charles Schwab isn’t aware of any climate-related reputational harm from its operations, clients or financial products, CFO Peter Crawford wrote in a Nov. 15 letter in response. However, if environmental, social and governance products it offers investors were to be misrepresented by third-party advisers that manage them, the company could experience such harm, he wrote.

How companies handle these disclosures could help the SEC justify potential future rule making on climate-change reporting requirements, said Jay Knight, a partner at law firm Bass, Berry & Sims PLC and former special counsel for the SEC’s corporate-finance division. He noted that many of his corporate clients rely on other companies’ SEC exchanges to compile disclosures on various issues.

“Regulators are giving these disclosures a tougher look, which will likely result in additional comments going forward," Mr. Knight said.