Over the last few years, with growing interest in reliable, decision-useful, ESG information, the Center for Audit Quality has been focused on ESG reporting and assurance: analyzing reporting and assurance trends among S&P 500 companies, highlighting the role of the auditor in climate-related information and responding to key requests for comments on relevant proposals from the SEC and exposure drafts from the International Sustainability Standards Board and the International Auditing and Assurance Standards Board. In this blog, we share our recent analysis of SEC correspondence with corporations regarding the climate-related disclosures in their 10-Ks.
The SEC staff continued to correspond with companies regarding their climate-related disclosures through the end of 2023. The CAQ analyzed the comment letters for almost twenty companies that the SEC initiated correspondence with from January 1, 2023, through December 31, 2023,1 regarding their climate-related disclosures in Form 10-K filings. The number of companies that the SEC initiated corresponded with regarding their climate-related disclosures in Form 10-K filings decreased from almost 30 in 20222 to almost 20 in 2023.
During 2023, the SEC staff asked a smaller subset of questions compared to 2022 and largely focused their questions on four areas within these letters. These areas included questions about why companies had more expansive disclosure in standalone ESG report(s) or the company website compared to Form 10-K, the impact of climate related regulation or business trends on the company, the physical effects of climate change on the business, and the purchase/sale of renewable energy credits (“RECs”) or carbon credits and offsets. The SEC staff asked all but two of the companies about each of these four areas.
The SEC staff corresponded with small, mid and large-cap companies. Roughly 35 percent of the companies were in the consumer staples and consumer discretionary industries and approximately 24 percent of the companies were in the finance industry. The remainder of the SEC’s correspondence was across a variety of industries.
The CAQ reviewed certain climate-related quantitative disclosures companies provided in their response to the SEC and reviewed how companies described those climate-related items. The CAQ observed that when companies provided quantitative climate-related information within their correspondence with the SEC, that information most often pertained to losses associated with physical risks or insurance costs, and carbon credit or offset costs. Of the almost 20 companies analyzed, a few takeaways the CAQ identified in its review of climate-related quantitative disclosures are:
- When a company described costs associated with physical climate-related risks they were typically costs incurred due to property damage from severe weather events like hurricanes.
- Roughly 60 percent of the companies indicated that they purchased RECs, or carbon credits/offsets of various amounts during the reporting period, all deemed immaterial for reporting purposes.
We explore each of these items in greater detail below.
Costs associated with physical risks
The types of costs associated with climate-related physical risks that companies disclosed in their comment letter correspondence were mostly related to property damage due to severe weather. Other costs included lost revenue, lost production or increased operating costs resulting from severe weather. Four companies provided an indication of what the costs associated with climate-related physical risks were as a percentage of certain revenue or expenses. Two companies noted that the costs were less than 0.01% of total operating expenses and another noted that the costs were less than 1% of net income. The last company was an insurance company and noted that natural catastrophe losses accounted for 4.9%-9% of revenue for the three years presented in their 10-K.
In response to the SEC’s question about weather-related impacts on the cost or availability of insurance, many companies indicated that they had not experienced any material change in cost or availability of insurance due to climate related matters. Almost a dozen companies reported quantitative figures and noted that property insurance costs ranged from less than 0.003% to 0.2% of total operating expenses, cost of sales, or total selling, general and administrative expenses. One company provided their cost of insurance relative to income/loss before taxes and noted that their property insurance costs represented 2-14% of income/loss before taxes for the years presented in their 10-K.
RECs and carbon credit/offset costs
Roughly 40 percent of the companies analyzed indicated that they did not purchase RECs or carbon credits/offsets during the reporting period. The remaining companies purchased carbon credits or offsets of various amounts all deemed immaterial for their reporting purposes. One of the companies that purchased RECs purchased enough to completely match their electricity consumption for the year. Almost 20 percent of the companies analyzed provided an indication of what their carbon credit/offset costs were as a percentage of certain revenue or expenses, indicating that such costs represented less than 1% of revenue, net income, or operating expenses.
Conclusion
During 2023, compared with 2022, the SEC corresponded with fewer companies and focused on a subset of the questions noted in their sample letter to companies regarding climate change disclosures. When companies provided quantitative climate-related information within their correspondence with the SEC, that information most often pertained to losses associated with physical risks or insurance costs, and carbon credit or offset costs which companies generally indicated were immaterial for disclosure purposes. Companies noted that they would continue to evaluate these matters in future periods and consider the need for additional disclosure should amounts and risks become more material to their financial statements.
Endnotes