March 4, 2021

Climate Disclosures: Comment Letter Focus Areas Following SEC’s 2010 Guidance

Last week, John blogged about Acting SEC Chair Allison Herren Lee’s statement directing Corp Fin to scrutinize climate change disclosures. Many companies had already been focused on their climate-related disclosures given the increased focus coming from investors and other stakeholders. But, with Corp Fin now directed to look closer, a recent Audit Analytics blog looked back what happened with SEC comment letters following release of the Commission’s 2010 guidance.

Corp Fin could scrutinize more than they did a decade ago, after all company initiatives and disclosures relating to climate risk have changed in that time. Still looking back at comment letters is one way to help gauge potential focus areas. Here’s what Audit Analytics had to say about comment letters issued back around the time of the 2010 SEC guidance:

The most common area of focus for climate change comment letters was the risk factors section. This was followed by the business overview section, reserves reporting, and the liquidity section of the MD&A. And top five concluded with the accounting for contingencies. This was to be expected as these were the areas focused on in the 2010 guidance.

In terms of industries most likely to receive comment letters, the findings weren’t surprising – the Mining and Extraction sectors, including oil and gas companies, topped the list. They were followed by Power Generation and Manufacturers, respectively, with Insurance being the only other notable industry.

Looking at things today, Audit Analytics predicts we’ll see many of the same industries bear the brunt of potential SEC comment letters. But, the firm also says companies in industries that were largely spared the last time around will likely see more scrutiny this time. For those sharpening pencils for possible updates in their upcoming Q1 reports, check out our “Climate Change” Practice Area for the latest memos and other resources.

Do Social Boycotts Influence Board Turnover?

According to an academic study, researchers say social boycotts can lead to increased board turnover at targeted companies. The study’s abstract provides an overview explaining that researchers studied how personal social values affect directors’ willingness to serve on boards. The researchers found when director ideologies are aligned with those of activists targeting a company on which they serve, a director is more prone to leaving.

The findings aren’t that surprising as one would hope directors and companies are somewhat aligned with their values. In terms of what this could mean, the researchers note social values may become an even more central part of future director recruitment as millennials and younger generations tend to place more emphasis on social impact. This excerpt from the Academy of Management Insights (subscription required) summarizes the study’s findings:

– Boycotted firms experienced a 7% increase in board director turnover

– Boards faced a greater likelihood of director turnover among directors who shared ideologies with boycotters (liberal directors were more likely to leave after liberal boycotts, and vice versa)

– Directors became more loyal to firms that were targeted by movements from the opposing ideology. Conservatives, compared to liberals, were especially prone to loyalty when their firms faced challenges from liberal activists

– The link between shared social values and director exits was stronger after boycotts that caused stock prices to drop

Audit Committee Oversight: 10 Topics for Leveraging Internal Audit

Now that March is here, many audit committees might be reflecting on their workload over the last couple of months as, among other things, they wrapped up tasks related to year-end reporting. To help understand company-wide risks and mitigation activities, many audit committees lean on internal audit to provide insight into whether company risk mitigation efforts are effective. 2020 brought increased attention to risks that previously weren’t always top of mind.  Besides focusing on financial controls and operational audits, a PwC memo says some internal audit departments have expanded their work to areas beyond the traditional internal audit world.

The memo outlines 10 areas for audit committees to consider leveraging internal audit, with examples of internal audit focus areas for each.  To help ensure audit committees are providing effective oversight, here are a few topical areas that audit committees might consider tapping internal audit for help:

Organizational culture, values and compliance: effectiveness of the compliance program considering new guidance from the DOJ and with a deeper focus on the state of the risk and compliance culture, key reporting indicators of company culture, assessment of culture as part of routine internal audits, review of the organization’s process and controls related to diversity and inclusion metrics and reporting

Health and safety: sufficiency of return to the workplace plans, including the process undertaken to create and vet the policy as well as compliance with any applicable regulations, assessment of health and safety protocols, process for monitoring and reporting of ethics and compliance hotline activity related to health and safety

Brand management: management’s processes for monitoring and responding to content on social media and its impact on reputation, the organizations policies around employee use of social media

Human capital and talent management: mechanisms to monitor and obtain feedback on programs focused on employee satisfaction and well-being, processes to measure workforce productivity, the company’s recruitment and retention programs

– Lynn Jokela