TheCorporateCounsel.net

This excellent LinkedIn Newsletter from Persefoni’s Kristina Wyatt reminds us that climate disclosures in SEC filings aren’t totally dead. Requirements live on in the form of Items 101 (Description of Business), 103 (Legal Proceedings), 105 (Risk Factors) and 303 (MD&A) of Regulation S-K — plus the 2010 interpretive release. (History buffs should check out the newsletter’s timeline for SEC environmental and climate disclosure developments!)

Even though the 2010 guidance is the SEC’s last official statement on climate before the 2024 rule, other developments are worth noting. First, Reg. S-K has been amended since, which just means that you have to “read the 2010 climate guidance in the context of the amended items,” which didn’t change “the essential proposition” of the 2010 guidance. Second, and more importantly, she notes that the “broader landscape for climate-related disclosures has changed” — with many new standards and requirements.

Particularly, she points to ISSB’s S1 and S2, which multinational companies may be complying with currently — or required to in the near future. She says companies facing material climate risks or events can look to these standards as they apply the 2010 guidance. To do that, Kristina provides this helpful roadmap linking S1 and S2 to required SEC disclosures.

Business Description – Item 101 of Regulation S-K. A company might adjust its business strategy to mitigate climate risks or take advantage of climate-related opportunities. If those changes reflect a material change to the company’s business, the company must consider disclosure of those changes in its business description and/or MD&A. Its assessment of its strategy under the guidance of the ISSB standards can help the company formulate its plan and, in turn, its disclosure.

Moreover, as the 2010 interpretive release provides, Item 101 of Regulation S-K requires companies to discuss “The material effects that compliance with government regulations, including environmental regulations, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries, including the estimated capital expenditures for environmental control facilities.” The evaluation of a company’s legal compliance obligations as part of its ISSB assessment of transition risks and strategy can help shape the company’s disclosure under Item 101 of Regulation S-K.

Legal Proceedings – Item 103 of Regulation S-K. Item 103 requires disclosure of material legal proceedings, including “administrative or judicial proceedings arising under any Federal, State, or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment.” Ordinary, routine litigation incidental to the business need not be disclosed.

However, Item 103 presumes that proceedings are not ordinary or routine if they are brought by a government entity and involve potential penalties above specified thresholds as described in Item 103. Just as the company’s disclosures related to its business under Item 101 of Regulation S-K ties to is ISSB risk and strategy disclosures, so too should the Legal Proceedings disclosures under Item 103 be aligned with the company’s disclosure of its risks and strategy under ISSB S2.

Risk Factors – Item 105 of Regulation S-K. Many companies will consider whether climate risks represent material risks that they should disclose in their Risk Factor section. They can usefully draw on the ISSB standards in evaluating their acute and chronic physical and transition risks and their strategies to mitigate those risks. This can help inform their Risk Factor disclosures, including disclosure of how climate risk affects the company.

MD&A – Item 303 of Regulation S-K. Climate events and risks should be disclosed in a company’s MD&A if they represent material events and uncertainties that are reasonably likely to cause the company’s reported financial information to not necessarily be indicative of future operating results or financial condition. This includes matters that have had a material impact on reported operations as well as those reasonably likely to have a material impact on future operations. The company’s assessment of its physical and transition risks and strategies to address those risks, conducted pursuant to ISSB S2 can help to inform its MD&A disclosure.

– Meredith Ervine