Communicating Climate Risk

In one of its most anticipated rules, the SEC last month adopted a requirement for companies to disclose climate-related risks, completing a process that began two years ago with the release of the agency’s proposed climate disclosure rule.

While the final rule is more narrow than initially proposed, it requires publicly traded companies to disclose comprehensive information regarding their climate-related risks and impacts. The rule, aimed at enhancing transparency and accountability, requires companies to report on greenhouse gas emissions, the climate-related risks to their businesses and the strategies employed to mitigate them.

Comprehensive Climate-Related Disclosures Required

Under the rule, companies are expected to provide detailed insights into how climate change affects their operations, supply chains and financial performance. This includes disclosing both direct and indirect greenhouse gas emissions and any potential physical risks posed by climate change, such as extreme weather events or sea-level rise. Companies are also required to outline their plans for transitioning to a low-carbon economy and the potential financial implications of such steps.

The role of the company’s board in overseeing the assessment of climate risks and their implications for operations and strategy are an important part of the rule, as well.

We have followed the SEC’s rulemaking on climate risk for some time and have written previously about the rise of carbon accounting, the state of voluntary company disclosures (based on our survey of US corporations) and, more recently, the long reach of EU climate and sustainability regulations. Now that the SEC has acted, how should companies approach these new requirements? And more important, how can companies ensure the information they provide is understandable and useful to investors who must make portfolio-allocation and risk-management decisions?

Guideposts for Presenting Clear, Useful Information

We recommend companies keep several considerations in mind as they prepare to disclose climate-related risks.

• Focus on the narrative, not just the data.
  The new rule will require companies to report new data on their emissions, asset valuations and business scenarios. Many have already begun the complex process of identifying and measuring this information. While data measurement and collection are critical, companies should also consider the narrative where the data will be presented. A strong narrative can help investors understand what information is most important to the company’s strategy, as well as the trends and changes that it is monitoring most closely.
• Look to enduring principles for guidance.
  Complying with a new disclosure rule is often a daunting task. Many companies have a lot of work ahead – particularly small- and mid-size firms that may lack staff and resources compared with larger companies. As they develop their climate disclosures it can be helpful to rely on principles that have long served as reliable guideposts for effective communication. Clear writing, simple language, graphic illustrations and above all a logical, well-structured narrative can convey important information and give investors and other stakeholders confidence in the company’s approach.
• Don’t overlook governance.
  The SEC rule also mandates that companies discuss how the board of directors provides oversight of the company’s climate risks. While it might be tempting to rely on general, boilerplate language, a more substantive approach is preferable. In our experience, investors value a robust discussion of the board’s processes for assessing climate risks and their implications for company strategy, as well as the climate expertise of directors.
• Engage investors.
  The form and substance of climate disclosures will evolve as companies get feedback. Companies should welcome it. An active dialogue with investors and other relevant stakeholders to understand their expectations and concerns regarding climate disclosure can help companies improve the quality and usefulness of their climate reporting.

Overall, the SEC climate disclosure rule marks a significant step toward integrating climate considerations into mainstream financial reporting, fostering greater transparency and comparability, and helping investors make more informed decisions in a rapidly changing climate landscape. Effective communication can help ensure companies not only fulfill their regulatory obligations regarding climate risks but gain investor confidence as well.