Climate Change Risks Heat Up Legal Obligations for Financial Disclosures

December 13, 2021 Publications

Climate change has spurred the beginnings of new laws, regulations, and industry standards in a wide variety of industries, both foreign and domestic, including global financial markets. Now entering the fray, is the U.S. Securities and Exchange Commission (SEC).

On July 28, 2021, SEC Chair Gary Gensler directed staff to develop a rule making climate-related disclosures in public filings mandatory. The disclosure rule could be released by the end of the year or early 2022. Such a rule would not be novel. As Gensler noted, the SEC released guidance in 2010 on climate change risk disclosures, but that guidance has been mostly aspirational as few companies have submitted disclosures that quantified climate change risks in a meaningful way.

On Sept. 22, 2021, the SEC Division of Corporation Finance (the Division) reminded companies that “a number of its disclosure rules may require disclosure related to climate change,” and provided an illustrative letter containing sample comments that the Division could issue to companies “regarding their climate-related disclosure or the absence of such disclosure.”

Importantly, the Division explicitly relied on the 2010 letter which “summarized a number of Commission rules and regulations that may be the source of a disclosure obligation for registrants under the federal securities law.”[i] In total, the SEC identified five general “disclosure rules that may require disclosure related to climate change”[ii]:

  1. Description of Business—then found at 17 C.F.R. § 229.101(c)(1)(xii);
  2. Legal Proceedings—17 C.F.R. § 229.103;
  3. Risk Factors—17 C.F.R. § 229.503;
  4. Management’s Discussion and Analysis of Financial Condition and Results of Operation—17 C.F.R. § 229.303; and
  5. Foreign Private Issuers—found in Form 20-F.

Some of these regulations have been revised since the 2010 letter, but the revisions are not meaningfully different in the context of climate-related disclosures. Further, careful analysis of the five regulations reveals that the SEC—in both its 2010 letter and its September 2021 sample letter—has strayed so far from the text of these regulations that they provide little guidance on predicting what the SEC will require in the near future.

For example, in its 2021 letter, the SEC expects compliance with “the topics addressed in the Commission’s 2010 Guidance”—not with existing regulations. In the 2021 letter, the SEC requires companies to make very specific disclosures not required by the plain text of the regulations. As such, there is little value for companies and their counsel in analyzing the current language of the five regulations listed above when the 2021 letter requires specific disclosures that are not explicitly required by the regulations themselves. Any rule that the SEC proposes in 2022 will very likely not be based on the language of the regulations referenced in the 2010 letter.

Given the SEC’s mission of protecting investors, expect the new disclosure requirements related to climate change to include broad categories of information that will increase investor knowledge regarding the financial implications of climate change on public companies in the United States.

The SEC’s climate-related disclosure requirements will likely include rules relating to governance, strategy, risk management, and metrics and targets. For example, in the context of governance, the SEC’s rules may require companies to describe their governance around climate-related risks and opportunities including management’s role in assessing and managing climate-related risks and opportunities.

In the context of strategy, the SEC’s rules may require companies to describe the climate-related risks and opportunities the organization has identified over the short, medium and long term, including the impact of climate-related risks and opportunities on the company’s businesses, strategy and financial planning.

Regarding risk management, the SEC’s rules may require companies to describe the companies’ processes for identifying, assessing and managing climate-related risks.

Finally, as it relates to metrics and targets, the SEC’s rules may require companies to disclose the metrics used by the company to assess climate-related risks and opportunities in line with its strategy and risk management process, and describe the targets used by the company to manage climate-related risks and opportunities and performance against targets.

The Biden administration is moving closer to its campaign promise to require public companies in the U.S. to account for the risks associated with climate change. Despite referencing the regulations included in its 2010 letter, the SEC appears ready to implement disclosure requirements that expand the scope of these regulations.

In his July 28 remarks, Gensler noted that he asked SEC staff to lean on external frameworks like the Task Force on Climate-Related Financial Disclosures (TCFD) when compiling recommendations for disclosure requirements. The TCFD published a more than 70-page report, outlining a framework and recommendations for compliance including specific guidance on how organizations can implement the disclosure frameworks. Public companies and their executives should prepare now to disclose broad categories of information relating to climate change-related risks.


[i] Commission Guidance Regarding Disclosure Related to Climate Change, Exchange Act Release No. 33-9106 (Feb. 2, 2010) [75 Fed. Reg. 6290 (Feb 8, 2010)] (2010 Climate Change Guidance) at 21.

[ii] Id. at 12.

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