As regions around the world are increasingly feeling the impacts of extreme weather, US companies are now feeling the heat of rising expectations around mandatory climate-risk disclosure. In March 2022, the US Securities and Exchange Commission (SEC) approved a landmark proposal to mandate the disclosure of greenhouse gas emissions and financial exposure to climate-related risks for all publicly traded companies.
The proposal is in line with the recommendations of the international Task Force on Climate-related Financial Disclosures (TCFD) and marks a global shift towards legislating for greater transparency and accountability around climate impacts. The SEC has received public comment on the proposal and is yet to reveal the ruling in its final form. The final decision was expected by late 2022, but the timeline was since pushed back. However, SEC has now set April 2023 as the release date of its final climate-related disclosure rule.
“Climate risk is financial risk,” said TFCD lead advisor Mary Schapiro in a March press release. “There can be no healthy economy without a healthy planet, and the time has come for mandatory disclosure in the United States.”
Michael Panfil, Lead Counsel at Environmental Defense Fund (EDF) says feedback on the proposal has been overwhelmingly positive from both companies and investors. After all, he says, the disclosure of financial risk is the bread and butter of a well-functioning economy.
“A lot of companies see the value in providing a credible and standardised mechanism by which parties can describe climate risks and opportunities,” says Panfil. “Many companies already want to disclose. And many investors have already been requiring disclosure for some time.”
Companies should ensure that there are clear communication channels between their risk, sustainability and legal departments.
For this reason, EDF’s legal expert does not foresee major issues around enforceability. Many jurisdictions across the world have already made – or intend to make – rules that are also grounded in the TCFD’s framework, offering the added benefit of clearer comparisons of risk and opportunity internationally.
So, with the SEC’s updated proposal yet to be finalised, what can publicly traded companies do to prepare?
“Companies should ensure that there are clear communication channels between their risk, sustainability and legal departments,” says Panfil. “But at the end of the day, there’s no reason to treat climate risk differently to any other risk.”
“The SEC rule is not climate policy, but financial policy,” says Panfil. Yet as the negative impacts of climate-related disasters mount up, he points out that it’s becoming increasingly impossible to separate the two.
In a two-year span, the US alone experienced over forty extreme weather and climate disasters, each individually causing damages of USD 1 billion (or above). Furthermore, the TCFD’s 2022 Overview estimates that by 2100 up to USD 43 trillion in global value to manageable assets is “at risk as a result of climate change”. Mandatory climate-risk disclosure will make these realities more tangible for both companies and investors. The hope is that by ensuring the financial health of our global economic system, we will also support the health of our planet.
In tandem with mandatory disclosure, the SEC is also implementing other changes that will support sustainability and stymy efforts at “greenwashing”, such as the so-called “fund names rule”, which sets strict guidelines by which entities must be named and described.
When it comes into effect, the ruling will see US requirements move into line with many other jurisdictions that have recently announced their own mandatory climate disclosure rulings.
In October 2021, New Zealand became the first country to legally require banks, insurers and investment managers to report the impacts of climate change on their business. Shortly thereafter, Climate-related Financial Disclosure (CFD) regulations were enshrined in UK law in January of 2022, and the European Union is set to force all large companies listed on the European stock exchange to report their emissions beginning in 2024.
Meanwhile, Brazil, Hong Kong, Japan, Singapore, and Switzerland have all followed suit, with each jurisdiction at various stages of establishing and mandating their own climate-disclosure policies based on the TCFD’s framework.
Rulings and mandates aside, the economic advantages of divestment from fossil fuels and investment in environmental sustainability speak for themselves, and savvy global players have long been transparent about these risks and opportunities.
“What we’re seeing in the US and abroad is that cost driven reasons for clean energy already make it the clear choice. Solar and wind are really affordable energy resources – both internationally and at state level,” says Panfil.
Ultimately, whether it’s the “carrot” of sustainable profit or the “stick” of SEC rules that motivate businesses or not, the shift is already here. Companies wishing to stay relevant must be proactive.
“We need to be prepared today for what is already happening. I think the benefits of that are enormous,” Panfil concludes.
