SEC Presses Companies on Climate Risk With New Rules on Horizon

Wall Street’s top regulator is pushing companies to reveal in their financial statements more details about the impact of climate change as the agency eyes finalizing its much-watched climate disclosure rules.

Securities and Exchange Commission staff who regularly review corporate filings have sent climate-related queries to more than a dozen large companies over the past three months, according to a Bloomberg Tax review of securities filings.

The regulator has pressed businesses such as Estée Lauder Companies Inc., Oracle Corp., Eli Lilly & Co., and others to divulge why their annual financial reports contain less information about climate risk than their separate sustainability reports. Commission staff are also asking companies for details about the impact of severe weather and the how climate risks affect customer demand for their goods and services as well as competition from other businesses.

Companies and their attorneys are bracing for more questions.

“The SEC is not going away on the issue, even if the rule continues to get delayed,” said Megan Gates, partner at Covington & Burling LLP. “Companies will expect this to be a focus.”

The SEC in March 2022 issued a proposal that would require companies to reveal detailed information about their greenhouse gas emissions and the risks a changing environment poses to their operations. The new rules were expected to be finalized by the end of 2023, but the timeline has since slid to 2024.

Sustainability Reports Differ

No specific US securities law or accounting rule currently mandates climate change disclosure, but companies are required to disclose risks that are material, or significant, to their business. SEC commissioners in 2010 released interpretive guidance on how existing securities rules apply to what information companies should reveal about business or legal developments related to climate change.

Inconsistencies abound. Some companies produce glossy sustainability reports, outlining their commitment to going green and saying they’re concerned about access to clean water or rising sea levels affecting their bottom lines. But companies often fail to mention much about these risks in the financial statements they file with regulators.

Most of the companies recently queried by the SEC told the agency that the reason they include more information in their corporate sustainability reports compared to their securities filings is that each report caters to different audiences. Regulators and investors are the main audience for financial filings. Others like customers, employees, and non-governmental organizations could read sustainability reports, many businesses told the SEC.

The SEC in 2021 announced it would double down on reporting gaps, unveiling a list of climate-related sample questions the SEC planned to ask companies during its regular reviews of corporate filings to determine whether more information should go in the financial reports.

The recent round of questions are similar to the queries the SEC’s staff sent dozens of companies in 2022, said Kyle Moffatt, professional practice group leader at PricewaterhouseCoopers LLP and former chief accountant in the SEC’s Division of Corporation Finance.

“They’ve not indicated they’re going to back off,” Moffatt said. “When they see a company respond and say, ‘It’s not material,’ they say, ‘OK, well, prove it’s not material. Give us the numbers. Where is the data that supports this?’”

Agency reviewers are sticking to what they can ask that’s covered by existing rules, Moffatt said.

“They’re not going after companies, saying ‘You must disclose your emissions,’” he said.

Not Material Yet

Eli Lilly, Estée Lauder, and Oracle, among others, deflected SEC questions on extreme weather cleanup costs, saying the amount so far hasn’t materially affected their coffers. SEC reviewers, in response, asked them to say exactly how much they’ve spent, the letters show.

In most cases, SEC staffers accepted the companies’ explanation for omitting specific details, like dollar figures to combat climate risks, in their annual 10-K reports.

When the reviewers asked retailer Beyond Inc., for example, why it didn’t include details about the risk of customers voting with their wallets and heading to competitors if they are perceived to emit too many carbon emissions, the company said product quality, costs, and shipping were bigger competitive factors. The company said it analyzed about 4.3 million customer reviews, and greenhouse gases or emissions appeared in only 11 of them.

At least one company, however, said it would include a new disclosure after receiving questions from the agency.

Penn Entertainment Inc., a casino and hotel operator, said it would spell out in future filings that it may continue to be adversely affected by the severity of precipitation or temperature fluctuations because it leases facilities in locations prone to extreme weather. It proposed listing in its disclosures the money it spent to clean up hurricane losses that weren’t offset by insurance proceeds, according to its response letter to the SEC.

Reporting on the Rise

Independent of the SEC’s inquiries, companies have been including more details about climate risk in their financial reports than ever before, according to academic research.

Of companies in the S&P 500 index, 150 included new standalone climate-related risk disclosures in their 2022 10-Ks, according to a report from Deloitte and the University of Southern California’s Marshall School of Business.

The companies didn’t just mention risks about their ability to meet sustainability goals, but also physical risks related to climate change. Climate risk is clearly on companies’ radar, and what companies reveal will give the SEC fodder to ask more questions, said Kristen Jaconi, a USC Marshall School of Business professor who studies corporate reporting.

“There’s a significant amount of investor interest and regulatory interest in this area,” Jaconi said. “You see severe weather events happening and the physical risk of climate change. Companies say, ‘What are we going to do?’”