The SEC is prodding more companies—including snowmobile maker Polaris Inc. and ceramics manufacturer
At least six companies received questions about ESG reporting that was included in company sustainability reports but left out of 10-K statements, according to a Bloomberg Law review of agency letters. All of companies defended their ESG disclosures, though they agreed to consider changes for future filings with the Securities and Exchange Commission.
The queries don’t mean the SEC is investigating the companies for wrongdoing, but show it’s trying to improve the financial reporting process. The agency is putting the finishing touches on rules that would make companies put greenhouse gas emissions details and other climate information in their annual 10-K reports. Climate information is currently included in 10-Ks on a voluntary basis, if the company deems it material to investors.
The SEC is trying to better understand the line between voluntary and mandatory ESG disclosures, said Jill Fisch, a University of Pennsylvania Carey Law School professor, who studies corporate governance. A lengthy online sustainability report coupled with more limited 10-K climate disclosure raises questions about how a company decides what’s important to investors, she said.
“Why are you sending out all of this information if it’s not material?” Fisch said.
The letters are the latest batch of correspondence since the SEC warned companies in a notice last year that it was looking for discrepancies between their online corporate sustainability reports and SEC filings.
This time, in addition to Corning and Polaris, the agency contacted car parts maker
The agency’s Division of Corporation Finance told each of the companies that they provided “more expansive disclosure” in their sustainability or corporate responsibility reports than in their 10-Ks. The SEC asked the companies how much consideration they gave to “providing the same type of climate-related disclosure” in both types of reports, according to the letters.
The SEC pressed companies to update their 10-Ks with more ESG disclosures, if they determined they were material after further review. But the agency also listened to corporate responses.
“Right now, Corp Fin’s been very reasonable when you respond and you tell them, “Hey, here’s why we didn’t include it. We don’t think it’s material. Here’s the reasons,’” said Sarah Morgan, a Vinson & Elkins LLP partner, who advises companies on sustainability reports and other climate disclosures.
An SEC spokeswoman declined to comment. Representatives of companies that received SEC queries declined to comment or didn’t respond to requests for comment.
Companies are required to put information that’s useful to reasonable investors in their 10-Ks, under the materiality standard used by the SEC. The 10-K filings carry a greater legal burden to be accurate than sustainability reports, but the online sustainability publications still can’t mislead investors under the agency’s anti-fraud rules.
The companies determined that many details in sustainability reports are unnecessary for a reasonable investor reading a 10-K, though some people interested in their businesses may seek out the information.
Big companies have sophisticated processes to identify material issues, said Sonia Barros, a Sidley Austin LLP partner, who advises companies on disclosures. They often have disclosure and ESG teams that work together, she said.
“They do spend a lot of time thinking about this carefully,” Barros said.
Polaris, for example, uses its corporate responsibility report and other online materials to respond to “evolving stakeholder expectations” about ESG initiatives, Polaris CFO Robert Mack said in a June 2 letter to the agency. The company has worked on its materiality assessments with Business for Social Responsibility, a nonprofit organization that advises companies on ESG strategies, according to the Polaris corporate responsibility report.
“We expect to continue providing information about climate change and other ESG topics, which do not rise to the level of materiality required for SEC reporting, through various public disclosures, including our website and” corporate responsibility report, Mack said in his letter.
Companies have wide discretion in making materiality decisions about ESG issues in the absence of SEC rules targeting the space. One of the few tools the agency has is 2010 guidance that reminds companies to make disclosures about climate change if material to their businesses.
The SEC now is looking to require 10-K disclosures on a variety of climate matters, including Scope 1 and 2 emissions from companies’ direct operations and power usage, under a proposal it released in March.
None of the companies that recently received letters from the SEC used their 10-Ks to report their Scope 1 and 2 emissions. Some included emissions reduction goals in their 10-Ks, but the most detailed information on the companies’ carbon footprints appeared in their sustainability reports.
The SEC didn’t specifically use its recent letters to companies to encourage greenhouse gas emissions disclosures in 10-Ks. But the agency told the companies they’re “responsible for the accuracy and adequacy of their disclosures.”
Corning discussed a goal to reduce Scope 1 and 2 emissions by 30% by 2028 in a June 24 letter to the SEC responding to the agency’s questions about the company’s ESG disclosures. It didn’t update its 10-K with the information, however.
“The Company has not seen material effects on, or material trends affecting, its operations or financial results that are attributable to reputational concerns over the extent to which its operations or products contribute to climate change,” Corning CFO Edward Schlesinger said in the letter to the SEC.
Companies ultimately can put different details about their carbon footprint in their sustainability reports than in their 10-ks without breaking securities laws—if the information doesn’t conflict, Fisch said. But that flexibility may be unwise for the SEC to permit, she said.
Greenhouse gas emissions data are increasingly used to help assess the potential financial effects of climate change on companies, Chair Gary Gensler said when the agency issued its March proposal.
“If it’s necessary or it’s useful for a company to provide all of these disclosures that are not in the 10-K maybe what that means is the existing 10-K requirements aren’t meeting the needs of the market,” Fisch said.