SEC climate disclosure rules: 4 strategies to kick start your climate-risk management plan
May 21, 2024
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While the Securities and Exchange Commission rules are on hold for now, companies can use this roadmap to start managing climate risk
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Back in March, the U.S. Securities and Exchange Commission (SEC) finally issued its climate risk disclosure rule, the first mandated climate risk reporting regulation for US public companies. What should we make of it?
After all, the SEC has already issued a stay. Does it mean companies should put less emphasis on climate risk compliance or simply shelve any work on climate risk? Definitely not.
Regardless of the SEC rule’s fate, it is only a matter of time before each medium and large company will get requests for information about its consideration of climate risks. These requests may come from regulations in places like California, Europe, the UK, and Asia. Or they may be prompted by investors who understand that climate change could pose financial risks to their investments.
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Hurricanes are becoming more powerful with a warming planet, posing risks to infrastructure, manufacturing, and other company assets. A Climate Change Risk Assessment can help a company best adapt to climate change.
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The SEC rule is just one of many climate reporting standards around the world. So, this is clear: Companies need to consider the anticipated impacts of climate change on their business.
We’re going to share four strategies you can use to start your climate-risk management strategy. They include developing a deep understanding of the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD); making a business case for your strategy; embedding climate risk with other practices; and determining materiality thresholds for your company.
But why kick-start your strategy now? We face an uncertain future but with opportunities
Before we get to those four strategies, why is it so important to act now?
The SEC rules are an invitation to prepare for an uncertain future. Consider how the world—and companies—were unprepared for the COVID-19 pandemic. As our Stantec health science team knows well, outdated risk-management functions fell severely short when they were most needed.
Today, it would be difficult to find a large or medium-sized company that doesn’t have a pandemic continuity plan in place. When it comes to climate change, we don’t have to wait for the worst to start preparing for its impacts.
Last year was the world’s warmest year in the National Oceanic and Atmospheric Administration’s 1850–2023 climate record. We are seeing the implications of climate change that scientists have warned about for decades. Companies can—and should—prepare for climate risks now.
But it’s not just about risk. There are opportunities generated by acting now. Here are two examples involving transportation and mining companies.
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Wildfires are increasing posing risks to communities and companies in fire-prone regions.
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First, our ESG advisory team recently worked with a transportation company that operates in a region where climate change is expected to cause more powerful hurricanes. The company knows that flooding impacts its operations. It is looking to use nature-based solutions, such as wetlands, to mitigate flooding and reduce future repairs.
Here’s a second example. This time, we’ll look at mining and its emissions. Over the long term, companies should think about their competitive advantage in a low-carbon economy. We know that certain minerals are critical for the energy transition. But mining them requires a lot of energy and produces emissions. Mining companies that adopt renewable energy and reduce emissions will be more attractive to customers. And they’ll be responding to customers requiring low-carbon products.
Now let’s take a deeper dive into our four strategies to start your climate-risk management strategy.
1. Your foundation starts with TCFD
Your foundation starts with a solid understanding of TCFD. TCFD guides sustainability disclosure rules around the world, including the new SEC rules. TCFD was recently absorbed by the International Sustainability Standards Board, but it hasn’t changed much. It allows companies to report climate risks in clear and comparable ways.
It helps companies identify, assess, and manage both physical and transitional climate risks. It is organized around four key pillars: governance, risk management, strategy, and metrics and targets. These four areas help companies socialize and integrate climate risk management across their business functions.
Adopting the TCFD framework isn’t hard. With modest resources and training, companies can use TCFD to manage climate risk similarly to their other business risks.
" }Regardless of the SEC rule’s fate, it is only a matter of time before each medium and large company will get requests for information about its consideration of climate risks.
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2. Make a business case and assemble the right team
Your business case for starting a climate risk management strategy can rely on a variety of drivers. It could be the EU’s sweeping Corporate Sustainability Reporting Directive and its climate-change standards. Or the SEC rule, requiring climate risk reporting as soon as 2026 for some companies. Or the California rules, which go beyond the SEC rule and have Scope 3 greenhouse gas reporting requirements. Perhaps it is requests from investors with a strong incentive to understand your climate-related risks or who may face their own sustainable finance rules. And it may simply be to meet the needs of customers.
You should aim for an inclusive sustainability team. That team ought to involve staff with access to company data, business forecasting, operations, strategy, and revenue drivers. Your team should consider a company’s policies, practices, and risk management processes—down to the asset level. You should engage board and investor representatives at key milestones. This helps align with their expectations.
3. Embed climate risk with other risk-management practices
Align with organizational practices from the start and you’ll bring the right people into the process. They can help map risk drivers and mitigation measures. Be sure to incorporate the results of your Climate Change Risk Assessments (CCRA), a rigorous analysis of how your company can best adapt to climate change, into your company’s business strategy planning.
A CCRA requires lots of data and expertise to interpret it, so it is important to know your objectives ahead of time. The best climate science is critical to a CCRA, but it should also be informed by a deep understanding of infrastructure design. For example, a power company’s transmission lines may be vulnerable to damaging winds. It’s likely that wind is less of a concern for a concrete bridge or a manufacturing facility.
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According to the National Oceanic and Atmospheric Administration, there are both stronger and more frequent abnormally heavy precipitation events that cause flooding.
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4. Determine the right materiality thresholds for your company
What is material for climate change risk? The SEC states that “a matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities.” This leaves room for interpretation.
Companies need to define materiality thresholds in a systematic way. This might include aligning with definitions for other business risk areas. You may look at scenarios over multiple periods of time under a variety of future emissions profiles. You may also need to study double materiality. For example, what if your company has European operations? Regulators may require an assessment to understand not only the potential financial impacts to your company but also your contributions to climate change and lack of broader societal adaptation.
Expect your strategy to shift and grow
Companies’ material climate risks and mitigation strategies will continue to shift as their business, technologies, and climate science evolve. For example, the transportation industry is testing new fuel types such as hydrogen fuel cells and renewable diesel. We still need to learn about their implications for climate and environmental risks.
Regulations, like the SEC rule, are an invitation to start. Over time, this work will become a regular input into business decision-making. It will save money and help your company stay competitive in an increasingly unstable climate.
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