A Quantitative Analysis Of Comment Letters Issued By The SEC Concerning Climate Change Disclosures

If you want to print this particular article, you just have to sign up or log in on Mondaq.com.

During the leadership of President Biden, the SEC has made significant strides in addressing the challenges posed by climate change. The agency has put forward a range of proposals aimed at tackling this pressing issue, including mandatory climate reporting and the formation of the Climate and ESG Task Force as part of its enforcement division. These actions have garnered extensive media coverage and have been subject to detailed analysis from experts in the legal and industrial sectors.

The SEC's efforts to regulate climate change also include providing feedback to individual companies on how they report on this issue. In September 2021, the SEC released a "Sample Letter to Companies Regarding Climate Change Disclosures," which emphasized the importance of companies including information on climate-change risks and opportunities in various disclosures. The letter, provided by the Division of Corporation Finance, included sample comments that the Division may issue to companies regarding their climate-related disclosure. The SEC outlined nine areas of focus for this initiative but it has received less attention since its initial announcement.

This blog post presents a study that analyzed SEC comment letters related to climate and ESG issues. The researchers used keyword searches on the EDGAR database to gather relevant letters between July 1, 2021 and March 31, 2023. Each letter was evaluated and assigned a code based on nine SEC-identified topics. The study also included a "greenwashing" category to identify instances where entities falsely portrayed their compliance with sustainability principles. The research team also looked into the characteristics of the companies that received these comment letters.

In general, the SEC didn't issue many comment letters. Specifically, 104 companies were sent letters about issues that were also mentioned in the SEC's Sample Letter, while another 167 received letters solely concerning greenwashing. It's important to point out that the majority (86%) of companies that received greenwashing-related letters were "Investment Entities" - funds, trusts, or other vehicles that focus on investing in other companies or assets instead of traditional businesses. Although the SEC is still focused on greenwashing, most of the comments concerning climate change topics in the Sample Letter were issued either in September 2021 or from May to September 2022. The SEC hasn't asked about these topics since November 2022. Finally, it's interesting that most of the companies that received Sample Letter-related comments come from the Energy & Transport or Manufacturing sectors - around two-thirds of the total.

The subsequent parts of this blog post offer a more in-depth examination of the letters of comments that were given out by the SEC regarding the disclosure of climate change. These letters were identified by the SEC's Sample Letter and were sent to entities that had certain reporting characteristics.

We conducted targeted searches to find SEC comment letters that were relevant. Our research discovered 448 comment letters that were sent by the SEC between July 1, 2021 and March 31, 2023. They focused on nine specific topics mentioned in the Sample Letter, or the issue of greenwashing. These letters were sent to a total of 271 reporting entities, some of which received follow-up letters. Out of these entities, 104 received letters regarding at least one of the nine topics mentioned in the Sample Letter. Additionally, 167 reporting entities received a letter that specifically addressed greenwashing, which involves manipulating data or marketing materials to make a reporting entity appear more environmentally friendly than they actually are.

The SEC sent comment letters to two types of entities: Companies and Investment Entities. We define Investment Entities as funds, trusts, or vehicles that only invest in other companies or assets, and report according to the Investment Company Act of 1940, or are listed as such in the Intelligize database, or both. All other entities were classified as Companies. Among the entities who received comment letters using the Sample Letter, 95.2% were Companies (99 out of 104). Conversely, the majority of entities who received comment letters specifically about greenwashing were Investment Entities, accounting for 85.6% of the total (143 out of 167 entities).

In the upcoming paragraphs, we'll delve into the specific traits of SEC comment letters and the companies that got them. Our scope of interest includes the inquiries made in these comment letters, when they were issued, and the market capitalization and industry of the corresponding companies. Our analysis is centered around the 104 companies that received SEC comment letters akin to the Sample Letter.

SEC's Comments On Climate Change

The SEC's Sample Letter came with nine different inquiries about various aspects of a company's climate disclosures. These questions relate to topics like (1) a CSR Report, (2) Transition Risk, (3) Litigation Risk, (4) Legislation & Regulation, (5) Capital Expenditures, (6) Indirect Consequences, (7) Physical Effects, (8) Compliance Costs, and (9) Carbon Offsets. Although the subject of greenwashing wasn't directly mentioned in the Sample Letter, we can list down each of the questions raised by the Sample Letter in a table, so it's easier to understand.

We've noticed that your CSR report included more detailed and comprehensive information compared to your SEC filings. Can you let us know if you've taken into account the possibility of applying the similar climate-related disclosure in your SEC filings, like what was provided in your CSR report?

Reveal the tangible impacts of transition hazards linked to climate change that could have an impact on your enterprise, monetary status, and end results, including rules and regulations amendments that may increase operational and compliance efforts, fluctuations in the market that could have an impact on business prospects, hazards related to credit, or technical alterations.

Reveal any significant legal challenges that could arise due to climate change and elaborate on how it could affect the organization.

There have been some big changes in the laws that govern environmental issues like climate change, both in the US and around the world. It looks like you haven't talked about those changes in the report you submitted. Can you please update your document to identify any laws, regulations, or agreements related to climate change that may affect your business? And let us know how those changes might impact your company financially or operationally.

Edit your disclosure by specifying all significant expenses made for climate-related projects in the past and/or that will take place in the future. If they have substantial impacts, kindly mention the amount of these expenses.

Discuss the indirect effects of climate-related policies or business trends, including but not limited to: less call for goods or services that produce high levels of greenhouse gas emissions or that rely on carbon-based energy sources; more call for products that are more environmentally friendly; increased competition to create new, eco-friendly products; more call for renewable energy options; and potential damage to a company's reputation if they produce products or practice operations that have high greenhouse gas emissions.

If applicable, describe how your business has been affected by the physical consequences of climate change. This might involve providing information on the following: severe weather events such as floods, hurricanes, rising sea levels, the suitability of farmland, wildfires, and the availability and quality of water. You could also detail any financial losses your company may have experienced due to weather conditions, as well as any potential impacts on your key customers or suppliers. It may also be worth discussing any decrease in agricultural productivity caused by droughts or other weather-related changes, along with any changes to insurance costs and availability due to weather conditions.

Measure the amount of additional expenses incurred due to complying with climate change regulations.

If you have bought or sold carbon credits or offsets, please reveal this information and explain how it has affected your business, financial standing, and performance.

The SEC's Sample Letter covers a broad range of subjects regarding climate change. However, not all of these subjects are related. As a result, there is a significant disparity in the occurrence of each category of questions in the comment letters submitted to the SEC. The bar chart below displays this discrepancy, excluding the category of greenwashing since it was not included in the Sample Letter.

Graph #1: Total Count of Comments Based on the Category of the Comment.

The SEC asked many questions about the physical effects of climate change, with a total of 72 questions. On the other hand, the SEC asked fewer questions about the impact of Legislation & Regulation, with only 39 questions. This means that more reporting entities were asked about the physical effects of climate change than any other topic. However, four categories of questions (Capital Expenditures, Indirect Consequences, Compliance Costs, and Carbon Offsets) were asked in almost equal numbers, while questions about CSR Reports were also similar in number (57). Similarly, Transition Risk (50) and Litigation Risk (47) were asked at similar frequencies.

One reason for the difference in how often the SEC asked about specific topics is that they tended to ask similar types of questions together. The table below shows how often the same categories of comments were made in individual correspondences. For instance, 37.5% of the 104 letters received in response to the Sample Letter had comments about both the CSR Report and Transition Risk. The shading in the table shows how much overlap there was. (Greenwashing-only comments are not included in this table.)

Graph #2: Level of Agreement Among Comment Categories

The chart above shows the overlap between different categories of comments. However, it may actually underestimate the extent of the overlap. The percentages on the chart indicate the number of reporting entities that received letters containing any two categories of comments. For example, 44% of reporting entities received letters that combined comments about Litigation Risk and the Physical Effects of climate change. But when looking only at reporting entities that received comments about Litigation Risk, almost all of them (98%) also received comments about the Physical Effects of climate change. Likewise, the majority of reporting entities that received comments about Capital Expenditures, a CSR Report, Transition Risk, Compliance Costs, and Indirect Consequences also received comments about the Physical Effects of climate change. Comments about Capital Expenditures were often paired with comments about Compliance Costs. However, questions about Legislation & Regulation were often asked without other questions about climate disclosures. The majority of reporting entities that received single comments about climate disclosures received questions about Legislation & Regulation.

Most of the letters sent by the SEC contained various comments on the subject of disclosing information about climate change. Take a look at the bar graph below, which shows the number of categories in which different reporting entities were asked to answer questions. (Please note that this chart covers comments about both greenwashing and other issues identified by the SEC, resulting in ten categories being considered. However, we didn't include the 167 reporting entities that only received comments about greenwashing in this analysis.)

Graph #3: Peoples Who Received Sample Letter Sorted by Quantity of Comments Received.

The data shows that half of all recipients (52) of comments were asked about 6 to 8 categories related to climate change disclosures. However, the most common number of categories that the SEC asked about was only one category, which was the case for 19% (20 reporting entities). Interestingly, 10 out of 12 reporting entities that received two climate disclosure questions were asked about greenwashing. This highlights that almost 29% of reporting entities only received a single question related to the topics covered in the Sample Letter. Essentially, companies were either asked about most of the categories in the Sample Letter (56%) or only one question (29%). Those asked about 2 to 3 categories were a small percentage (16%).

It is important to point out that a significant number of companies received feedback solely about "greenwashing" - 167 companies, which is more than all 104 companies that were asked about the other topics mentioned in the Sample Letter. Out of all the letters that were sent based on the Sample Letter, only 11 companies received questions about both greenwashing and the other topics. This means that 94% of companies asked about greenwashing only received questions about greenwashing, while 89% of companies that received letters about the other topics were not asked about greenwashing. This may be because the majority of companies asked about greenwashing were Investment Entities and the questions related to possible breaches of the SEC's Names Rule regarding fund names.

In general, it seems that the organizations that were asked questions related to the themes listed in the Sample Letter were typically questioned about most of those themes. The topics that were most commonly asked about in relation to climate change were Physical Effects, Capital Expenditures, Indirect Consequences, Compliance Costs, and Carbon Offsets.

"SEC Letter Timing: When To Expect Them"

As expected, a large number of comment letters were sent by the SEC either right before or right after the SEC's Division of Corporate Finance staff released their Sample Letter about climate disclosures on September 22, 2021. This study only looked at the first comment letters sent by the SEC to each reporting entity, and the chart below shows when those letters were sent. The chart includes entities that received comments related to the Sample Letter as well as those that only received comments about greenwashing.

Graph #4: Letters from the SEC with an initial response to comments from July 2021 up until March 2023.

The chart above shows an initial increase in SEC comment letters that corresponded with the Sample Letter in September 2021. This month saw a peak in these kinds of inquiries, with 32 letters sent regarding the categories specified in the Sample Letter. From May to September 2022, the SEC intensified their focus in this area, sending 42 letters in five months, which accounted for about 40% of all letters. However, after October 2022, there was only one letter sent, and the SEC has not sent any letters regarding the categories in the September 2021 Sample Letter since then.

According to the information provided, the SEC sent out letters to 167 reporting entities regarding greenwashing. Throughout the specified timeframe, the peak of this initiative was reached in July 2021 when the SEC sent 22 letters which solely addressed greenwashing. Between July and October 2021, 42% of the letters were delivered. The SEC continued to send letters with only greenwashing comments until the end of the review period, but at a slower pace. From December 2021 until September 2022, the average number of greenwashing-only comment letters being sent was seven per month. After that, the average rate dropped to three letters per month between October 2022 and March 2023.

SEC Targets Various Entities

We gathered data about the sectors and kinds of companies that the SEC aimed at through its comment letter campaign. We studied the types of businesses linked to the recipients of the comment letters using SEC Office and Standard Industrial Classification (SIC) codes. It was expected that the SEC would focus on reporting entities in the Energy and Transportation (31 reporting entities, or 33%) and Manufacturing (29 reporting entities, or 31%) sectors. Most of the other companies that received SEC comment letters based on the Sample Letter belonged to various industries like Structured Finance, Finance, and Technology.

In short, the SEC focused more on industries that have a strong correlation with climate change. These industries either emit a lot of greenhouse gases or are vulnerable to the effects of climate-related changes brought on by sudden technological advancements or shifting consumer attitudes towards concerns relating to climate change. For example, there were seven car finance companies that received comment letters from the SEC. This isn't surprising since these types of companies emit a lot of greenhouse gases and therefore pose a significant climate risk. They are often under the microscope when it comes to SEC requests for climate change disclosures.

: Graph #5: Profession of Individuals Receiving Sample Letters 5: In this chart, we can see the different industries to which the recipients belong who have received sample letters. It gives us an idea of which sectors are more likely to receive promotional or informational letters. The healthcare industry has the most recipients followed by the education sector and the finance field. Other industries, such as media and legal services, also have a considerable number of sample letter recipients.

The blog section discusses how certain industries, such as Energy & Transport and Manufacturing, had letter recipients that were concentrated among specific sub-industries. In the Energy & Transport industry, 30% of recipients were involved in the Crude Petroleum & Natural Gas sub-industry and 16% were engaged in Electrical Services or energy production. These industries are thought to be highly impacted by changes to the environment and consumer attitudes towards fossil fuel production. For the Manufacturing industry, about 20% of reporting entities were involved in automobile manufacture. Otherwise, the letters were dispersed evenly across different subcategories.

We also examined the size of the companies that received letters like the Sample Letter based on their market capitalization. The biggest group of recipients (39 companies or 42% of the total) had a market capitalization between $10 billion and $99 billion when they first received the SEC's letter. A significantly big group (29 companies or 32%) had market capitalizations of between $1 billion and $10 billion. Only a small group of companies (7 companies or 8% of the total) had a market capitalization under $1 billion. The largest group of companies, with a market capitalization of over $100 billion, accounted for 17 companies or 18% of the total number.

Graph #6: The overall value of the companies included in the sample letter recipients in millions of dollars.

The SEC's involvement in climate change issues goes beyond their comment letters on possible inaccuracies in climate disclosures. However, this initiative was not extensive, except for identifying greenwashing. A little over one hundred reporting entities were given these comment letters, primarily in industries that may experience significant consequences from climate change, such as the Energy & Transport and Manufacturing sectors. Since November 2022, the SEC has not released any new comment letters on these issues, but it is probable that more will be published in association with financial reporting for this year.

However, when examined closely, the study also found that there was a recurring emphasis on matters related to greenwashing - and the SEC's investigations into greenwashing were not exclusive to Investment Entities, but also encompassed various Companies across multiple industries. Despite the drop in the volume of letters, the SEC's attention towards this matter could still continue.

It's a possibility that the SEC has given less importance to this kind of comment letters as they are about to make a more comprehensive list of mandatory climate disclosures that will be officially announced. Therefore, it's fair to assume that the SEC will still release comment letters dealing with climate matters, but they will be more in line with the required climate disclosures instead of the Sample Letter.

To conduct their review, the team searched the EDGAR database using specific climate change keywords. They looked for letters sent by the SEC between July 1, 2021 and March 31, 2023 that contained questions similar to those outlined in the SEC's Sample Letter to Companies Regarding Climate Change Disclosures. The team noted the types of comments in each letter, the names of the company recipients, the total number of comments received, and other company-specific details for each recipient. All of this information, as well as the letters themselves, are stored in a database that can be accessed upon request. Our analysis in this article is based on the findings in this database.

The Securities and Exchange Commission suggested an adjustment to Rule 35d-1, commonly known as the Names Rule, on May 25th, 2022. If implemented, this proposal would mandate that particular funds adopt a policy of investing no less than 80% of their holdings in line with the fund's name and purpose. Additionally, the SEC intends to introduce fresh, strengthened disclosure and reporting protocols, as well as upgrades to the existing notice and record-keeping policies.

We have observed that out of the 271 letters we reviewed, 8 of them, which comprises of both comments on the Sample Letter (2) and strictly greenwashing-oriented comments (6), did not mention the date when the SEC sent the letter. As a result, these letters were not included in the graph.

The SEC Office codes are used to represent which division of the economy a company is a part of. These codes are found in a company's EDGAR documents and provide information about the type of business they operate. Meanwhile, SIC Industry Codes also reveal the nature of the company's business.

We employed Intelligize to identify the appropriate SEC category for every person who received a letter regarding the Sample Letter. We observed that data pertaining to this aspect was not accessible for five Investment Entities that obtained a comment letter in connection to the Sample Letter. Therefore, they were not considered for this examination.

We looked at different websites like Macrotrends.com, JSEInvestor.com, and Ycharts.com to find out how much each receiver of a letter similar to the Sample Letter was worth when they got the first letter from the SEC. Sadly, we couldn't figure out the worth of twelve (12) out of 104 companies we looked at, which is about 12%.

This blog post aims to provide a basic understanding of the subject matter. It is recommended to consult with an expert regarding your individual situation.