Full Disclosure: Why Companies Should Report Their Climate Risks

Imagine an investment manager responsible for preserving and growing your retirement savings trying to make sound investment decisions blindfolded. Without robust corporate disclosure reporting (in annual reports and 10-K filings with the Securities and Exchange Commission) of potential risks to companies’ financial results and business models, investors would be flying blind. Similarly, corporate boards responsible for governing, managing and oversight issues need to know what could have a material impact on the company’s financial performance, shareholder value and longevity. If board members cherry pick which issues to focus on, they could literally be blindsided by a wildfire or tsunami, as in the case of climate change related risks.  

Increased frequency of climate-related natural disasters is causing greater damage to property and critical infrastructure, harming human health and productivity, negatively impacting industries such as agriculture, forestry, fisheries, tourism, and more.  Climate related events often trigger increased  loan defaults and insurance losses.   As the US transitions to renewable energy, building and vehicle electrification, carbon sequestering, and other innovations to slow the rate of climate change, there are transition risks and technological obsolescence that will occur as high emission producers are phased out,  growth constrained, or faced with higher regulatory/capital/insurance costs.

 A TIAA/Nuveen Survey of 800 global institutional investors & consultants found that 71% agreed that “climate risk is investment risk.” Britain, Japan, Europe, Canada, Brazil, Hong Kong, New Zealand, Singapore, and Switzerland require or are in process of requiring climate risk reporting.

Thus, the SEC, whose mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation, released its latest proposal to enhance and standardize of climate-related disclosures for Investors, on March 21, 2022. The proposed Climate Reporting Enhancements (factsheet, full text) calls for public companies to provide greater clarity (descriptive and quantitative) about climate-related risks, potential financial and business model impacts, (board level) governance, risk management, GHG emissions levels, goals, and transition plans.  This proposal calls for strengthening climate-related disclosure and financial reporting to be more complete, standardized, and useful. The proposed climate reporting enhancements are most certainly material and are consistent with existing required disclosure of other material risk factors, including impairments (aka damages, diminished values), operational trends, events triggering financial obligation, customer, supplier, partnership, contractual, legal/regulatory, credit rating, employee benefits. While the SEC estimates that one-third of corporate annual reports contain some type of climate disclosures, the majority are by larger (S&P 500 sized) companies.  There is also a lack of consistency with some companies reporting at the firm level and others reporting on a particular business unit. The SEC’s proposed rule outlines a phased implementation of mandatory, more standardized climate disclosures and attestations for publicly listed companies, according to company size, starting in 2024 (for fiscal 2023).

Opponents, including US senators and attorney generals from states with a substantial fossil fuel industries or with political/financial ties to fossil fuel interests, claim that the proposed climate disclosure enhancements are not material to investor decision making and that they place an undue administrative burden/cost on companies, especially small to midsize firms. It is hard to imagine that any company would want to stick their head in the proverbial sand when it comes to preparing for property, technological, public health, employee safety, competitive, supply chain, customer, legal, financial, and reputational risks. With the existential threats posed by climate change, companies of all sizes and stripes really need to lean into understanding, reporting, and managing the climate-related risks, impacts, and innovation opportunities for their firms. Supporters of the SEC’s proposed Climate Change Reporting Rule recognize that enhancing existing public company climate-related disclosures are essential to the future wellbeing of capital markets, our economy, investors, citizens, and our planet. Key supporters include: SSV, Sierra Club, SASB, B-Corp, thought leaders across investment, business, environment, and academic disciplines, as well as government officials representing greener and bluer states.

SSV supports the SEC proposed climate disclosure rule and several refinements to strengthen the standardization elements. We will submit a letter of support and so can you. Here is the link to the SEC web page where you can submit your views by the May 20, 2022, deadline.