Analysis of SEC Staff comments on climate

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Here’s an excerpt from this memo by Ron Kral summarizing this MyLogIQ analysis of Corp Fin comments on climate:

Be prepared to discuss the physical effects of climate change on operations and related costs

By far, this conclusion relates to the most common themes seen in climate-related comment letters (refer to the Report for specific comment letter example to each of these themes):

• Physical effects of climate change on operations and cost of insurance
• Material effects on transition risks related to climate change
• Material litigation risks related to climate change
• Identify past or future material capex on climate related initiatives for each period
• Indirect consequences on business trends
• If there is evaluation on indirect consequences on business, how did you evaluate the factors
• Cost of insurance due to weather conditions
• Compliance costs related to climate change
• Nature of business, climate change regulations and legislation, including difficulty in assessing timing and effect of pending legislation
• Disclosure on purchase/trading of carbon credits

Simply stated, the SEC wants public companies to identify and disclose all material effects of environmental and climate-related developments, especially relating to the business, financial condition, and results of operations. This includes the direct physical effects of climate change on operations and financial results, such as droughts, floods, windstorms, hurricanes, extreme fires, water availability, water quality; and any weather-related impacts on the cost or availability of insurance. As some insurers are moving away from underwriting certain carbon-intensive businesses, insurance premiums are likely to become more costly and a material disclosure.

An important consideration is a focus not just on the past, but more importantly what future risks are lurking (i.e., ‘transition risks’), such as regulatory changes, market trends, credit risks, technology changes, etc.; that could reasonably usher in additional operational and compliance costs. Also, ‘indirect consequences’ of client-related regulation or business trends, such as changing demand for goods or services that produce significant greenhouse gas emissions or those related to carbon-based energy sources, are being questioned in terms of materiality for disclosure purposes. Controls over the judgements of materiality conclusions should be in place.

Other types of costs SEC staff is questioning pertain to compliance and regulatory activities, and the costs (or income) associated with carbon credits. Corp-Fin is looking for quantitative information on these transactions if deemed material.