March 8, 2024

A landmark climate risk disclosure ruling by the US SEC: What does it mean for your business?

The United States Securities and Exchange Commission (SEC) has enacted a landmark rule mandating company disclosures on climate risks, a first-of-its-kind national climate disclosure rule in the US. The rule aims to provide investors with consistent climate information, potentially affecting 40% of US public companies and 60% of foreign private issuers. This means that as early as 2025, larger businesses will need to report both immediate and future climate-related risks to their assets, including potential vulnerabilities to hurricanes and droughts. According to the Morning Star, “Companies will need to disclose climate-related risks material to their operations, financial conditions, or strategies, the impact of those risks, and any plans they have to mitigate or adapt.”

The SEC's climate disclosure rule will require US-listed companies to be equipped with clear metrics for assessing their climate risks. Businesses will then have to adopt more systematic approaches, including climate strategy settings, risk stress-testing, and management of these risks. However, the impending disclosure rules find many companies unprepared, emphasizing the urgent need for comprehensive data collection, processing, reporting, and verification.

The reality is, governments and regulatory bodies globally are already taking significant steps to address climate change. Many jurisdictions now require companies to disclose their climate-related risks and strategies. The United States is the latest but not the first country to require climate risk disclosure reporting. Chile, China, Egypt, the EU, Hong Kong, India, New Zealand, the UK, and some Southeast Asian countries already have climate disclosure reporting in place. Compliance with these regulations is not just a legal necessity but also contributes to making businesses more resilient in an increasingly warming world where climate impacts are already being felt.

What is climate risk disclosure important for businesses?

The need for the rule stems from the accelerating risks associated with climate change. In 2023 alone, the US experienced 28 confirmed weather and climate disaster events with losses exceeding $1 billion, highlighting the escalating threat of climate change related disasters. Without active disclosure of climate risks by companies, investors lack crucial information about what impacts they will face and how it will affect their companies and in turn, how they would address potential problems. It leaves companies vulnerable. For instance, during the 2021 Texas cold snap, companies in communications and transportation were unable to provide services due to the electric grid failure.

Understanding and disclosing climate risks allows companies to manage potential impacts on their assets and operations effectively. This knowledge is crucial for risk management. Climate risk disclosure is not merely a compliance checkbox; it is critical for businesses looking to thrive in a world shaped by climate-related challenges. By embracing transparency, businesses can navigate current complexities, build resilience, and contribute to a sustainable future. 

How EarthScan can help your business

This is how climate risk expert and EarthScan product manager Dr Gillian McCusker interprets the ruling: ‘’This long-awaited SEC ruling represents a landmark shift towards transparency and accountability in US climate-related disclosures. These disclosures open the door for businesses to understand the risks to their operations from the changing climate, truly realise the benefits of sustainable investment decisions, and ultimately protect their bottom line.’’

The significance of climate risk disclosure has never been more critical, driven by financial, regulatory, environmental, and societal factors. With the new US ruling in place, and with other countries following suit, businesses must adapt their reporting practices in response to evolving regulatory landscapes. Knowing how to navigate this will be at the core of businesses in the years to come, and having evidence-based and data-driven reporting will be crucial not just for reporting but in ensuring the resilience of businesses in the face of climate change impacts.

EarthScan is a self-serve platform to analyse, report and act on your portfolio’s exposure to climate risk. In a few seconds, you will gain customised, asset-level insight into acute and chronic risks such as flooding, droughts and extreme temperatures. Bringing together world-leading climate science, data modelling and machine learning, EarthScan helps you to comply with disclosure regulations like the SEC ruling and make confident investment decisions across time horizons and future climate scenarios. Contact us to book a demo.

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