April 12, 2022
April 12, 2022
The past two years have been a vivid example of how a systemic risk—the COVID-19 pandemic—can cause enormous disruption for some and, for others, enormous opportunity.
But as significant as the pandemic has been, climate risk has the potential to be even more disruptive and damaging. In 2021 alone, weather and climate disasters in the United States caused an estimated $145 billion in economic losses. The need to address climate risk exposure is with us today, not in the future. It is both urgent and pervasive.
However, as the adage goes, you can only manage what you can measure. Companies and investors need access to industry data that is consistent, accurate, and reliable, and the current state of voluntary climate disclosure does not meet this standard. Some companies already offer climate disclosure plans—in fact, 92 percent of S&P 500 companies published a sustainability report in 2020—but each uses its own methodology. Without consistency in reporting, how can management identify climate risks and opportunities? How can investors compare the company’s approach to that of its competitors to ensure their investment approach is properly informed?
To that end, the US Securities and Exchange Commission (SEC) released a proposed rule in late March to ensure investors, directors, employees, and other stakeholders have a common basis for climate information. The proposal is based on recommendations from the Task Force on Climate-related Financial Disclosures (TCFD), which highlights the role of board oversight of climate-related risks and opportunities.
If the final rule tracks with the proposal, the SEC will require disclosure about board governance of climate-related risks and, if a company desires, relevant opportunities. Here are three initial takeaways for directors:
When the SEC was established 88 years ago, our country did not have standardized requirements for financial reporting in place. Public US companies did not always file balance sheets or other common financial statements, with many arguing this would be burdensome, expensive, and complicated.
As the result of thoughtful work over many years, standardized financial reporting is now required, enabling market participants to get the consistent financial information that is necessary for an active and vibrant marketplace. In a comparable way, this proposed SEC rule will remedy the current lack of standardized transparency in climate-related risk disclosure.
This is a complicated issue with many nuances, such as on the role of materiality and indirect emissions data, but directors would be wise to familiarize themselves with these broad ideas.
The comment period on the SEC’s proposed rule closes on May 20—you can submit your comment here. Consider the long-term strategic interest of the company you serve. Will it be better off with consistent information from others in the industry? Will it benefit from a full picture of climate-related financial risks? If so, protect your company and other companies as we face a decisive decade for climate risk.
Steven M. Rothstein is the managing director of the Ceres Accelerator for Sustainable Capital Markets at the sustainability nonprofit Ceres.
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