SEC Comment Letters on Climate

At long last, the Securities and Exchange Commission is starting to provide a glimpse of the questions that SEC staffers are asking companies about the risks of climate change — and so far, the companies receiving such questions are doing their best to give the usual imprecise answers. 

That glimpse came in the form of several comment letters the SEC published earlier this week to Matson Inc., a global transportation business; and to Cintas Corp., maker of uniforms and cleaning supplies. The comment letters had asked both companies to provide more specifics about the effects of climate change on their operations, and both then replied with answers that were thoughtful, diplomatic, and rather evasive. 

This is news because so far SEC officials have given plenty of speeches touting the importance of disclosing climate risks, and SEC chairman Gary Gensler has promised that new rules requiring more extensive disclosure of climate change risks will arrive sometime soon. But those proposed rules haven’t arrived yet, so these SEC comment letters are the only examples we have so far of what companies might be asked to do. 

Let’s start with Matson, which is headquartered in Hawaii and does about $2.38 billion in sales annually. The SEC asked Matson several questions, including:

• Why did the company provide more expansive climate change disclosures in its annual corporate sustainability report than was included in its 10-K filing? 
• Does the company expect any material decrease in demand for services that produce significant greenhouse gas emissions? 
• Could Matson discuss any significant physical effects of climate change on its operations and results, such as effects from weather-related events? 
• Could the company please quantify any material increased compliance costs related to climate change? 

Matson replied several weeks later, essentially telling the SEC that none of its climate-related risks or expenses were material to investors; so the company had nothing more to add to its disclosures. For example, here’s an excerpt of Matson’s answer to the question about significant physical effects of climate change:

In all periods covered by the 2020 Form 10-K, the company did not experience any material weather-related damages to our property or operations. From time to time, severe weather events such as hurricanes or typhoons may cause ports to be closed temporarily or may force our vessels to alter their routes to avoid such severe weather which could delay their port arrival schedules. However, these port closures or late vessel arrivals generally have resulted in delays rather than cancellations and have not had a material effect on the company’s operations.

Likewise, Matson said the company does incur compliance costs generally, but “to the extent that these compliance costs may be related to climate change, any increase in such costs in the periods covered by the 2020 Form 10-K were not material to the Company’s financial results.” 

That was the overall gist of Matson’s response: that it does have some climate-related expenses and risks to its business, but none were material and needed disclosure in the 10-K. The SEC then sent another letter, asking Matson to provide more specifics and data to back up that materiality claim.

Matson did that in a second reply to the SEC. For example, to demonstrate that compliance costs were not material, the company discussed how it spent $1.02 billion on a new generation of shipping vessels that burn cleaner fuel. Yes, those clean-burning ships cost more than high-emissions vessels still on the market, but the incremental costs to purchase the newer ships was less than 1.3 percent of Matson’s total operating costs, and most of that expense was recovered through a fuel surcharge. So, not material. 

To further explain its claim that Matson suffered no material costs due to weather events, Matson said that the company suffered only about $200,000 in damage to its ships, terminals and other physical assets in 2020 — roughly 0.01 percent of Matson’s total operating costs. 

Those responses in the second letter seemed to satisfy the SEC, which closed the conversation in January. 

Comment Letters to Cintas

SEC staff asked mostly the same questions of Cintas, which does about $7.1 billion in sales annually selling corporate uniforms as well as assorted cleaning supplies (mops, mats, first aid kits, restroom materials, and so forth). That said, the SEC also raised several additional points:

• The potential for indirect weather-related impacts that have affected, or may affect, Cintas’ major customers or suppliers; 
• Increased competition to develop innovative new services that result in lower emissions;
• Any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions;
• Disclose the material effects of transition risks related to climate change that may affect the business.

In Cintas’ first reply letter to the SEC, the company made essentially the same argument that Matson did: sorry, SEC, we just don’t have any climate-related costs that are material and worth disclosing to investors. One excerpt that reflects the overall tenor of Cintas’ letter: 

In the Form 10-K, the company also provided quantitative disclosure regarding environmental spending related to water treatment and waste removal, as well as capital expenditures to limit or monitor hazardous substances. As of the filing of the Form 10-K, however, the company had not identified any material capital expenditures related to the company’s efforts to lower its energy use and GHG emissions.

Again, however, the SEC followed up with a second letter asking for more detail. So Cintas wrote a second reply trying to say more, but still peppered its answers with a lot of “did not identify” and “did not experience” references to climate risk. 

For example, in response to the SEC’s question about changing demand for Cintas goods and services due to climate risk: “While the company has had inquiries from customers and investors about its fleet and laundry processes with regards to GHG emissions and other carbon-based energy impacts, the company did not identify and has not identified any material reputational risks resulting from these inquiries.”

As for that SEC question about the costs of transitioning to a low-carbon future, Cintas noted that it disclosed numerous risk factors in its 10-K about that transition. It even included those risk factors again in its reply, even though the answers were (as we so often see with risk disclosures) vague and non-specific. Then Cintas added:

While the company disclosed in the Form 10-K that certain transition risks could potentially, materially and adversely affect its business and financial performance, at the time of the filing of the Form 10-K and to date, the company did not identify and has not identified any specific and quantifiable material effects of transition risks related to climate change.

That second letter was enough for SEC staff, which then closed the conversation. 

General Observations on Climate

First, it’s interesting to see that in both cases, the SEC asked why the company said one thing in its sustainability report and another in the 10-K. That means SEC staff are actually reading those sustainability reports and cross-checking to see if the disclosures match, or at least make logical sense. 

Second, the SEC is pushing companies to be clear and specific in how they decide something isn’t material. If you can provide dollar amounts and percentages to prove that point (which Matson did), all the better. Then again, if you truly have no examples or data at all that suggest materiality (which Cintas didn’t), it seems viable simply to tell the SEC, “Folks, nothing significant happened and nobody is asking us about this. There’s no ‘there’ there.” 

That said, Cintas’ repeated use of the phrase “the company did not identify” gives me pause. That phrase could lead SEC staff (or other interested parties) to question whether your assessment of climate risks is sufficiently robust. Even if your assessment process is solid — and I assume Cintas’ process is — a person can’t blame the SEC for expressing skepticism. That is the agency’s job, after all. 

Overall, however, these comment letters underline the need for the SEC to get moving on whatever new disclosures it wants companies to make. Right now companies are shooting in the dark, and SEC staffers are returning equally murky fire. (I mean, asking Cintas how climate change might change demand for its products? They sell shirts and mops.) A more fulsome, structured disclosure requirement would be illuminating in all sorts of ways.