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Communicating Climate Risk

Narrative matters when implementing new SEC requirements

April 2024

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.

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.

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