Why the risk of climate change is a business risk
Today, climate risk has firmly established itself as a real business risk and is no longer just a theoretical worry. It covers many issues, from transitional risks related to changing regulatory environments and market shifts to the direct physical effects of climate change, such as extreme weather events and rising sea levels. Ignoring these risks can have serious financial consequences, harm your reputation, and even put you in legal danger. In this situation, climate risk is crucial to contemporary business strategy and goes beyond being an ethical or environmental concern.
As a result, the urgent need to address climate change is becoming more widely acknowledged, and regulatory bodies worldwide are already taking action by requiring businesses to adhere to standards for climate disclosure. Under the Corporate Sustainability Reporting Directive (CSRD), the European EFRAG has completed its Sustainability Reporting Standards for climate disclosures, and the International Sustainability Standards Board (ISSB) has also finished its standards.
The US Securities and Exchange Commission (SEC) proposed new climate-related disclosure rules in March 2022 to improve and harmonize disclosure requirements for listed public companies. The objective is to increase consistency, comparability, and reliability in businesses' disclosures of climate-related risks, primarily to provide clarity in the face of inconsistent disclosure practices. The SEC has modeled the proposed rules using the Task Force on Climate-Related Financial Disclosures (TCFD) and GHG Emissions Protocol frameworks.
Since the proposal has sparked considerable debate and is currently under review for comments and feedback from various stakeholders, there is no certainty when these rules will be passed. Still, their enactment is expected soon.
These regulations primarily address three key disclosure subjects:
Disclosure of Climate-Related Risk: Public companies must disclose whether and how they identify climate-related risks that have the potential to have a material adverse effect on their business, financial statements, and strategy over the short, medium, and long term. This includes outlining the processes for identifying, assessing, and managing climate-related risks and integrating them into the business risk management system. Along with describing any mitigation measures and transition plans, including metrics and targets to manage physical and transitional risks, it also entails outlining the governance to oversee these risks, from management to board level.
Emissions of greenhouse gasses: Public companies are required to disclose their emissions by scopes 1, 2, and, if relevant, scope 3 emissions.
Climate-Related Financial Metrics: Public companies must make public their plans for allocating resources to reducing climate risk and how, through scenario planning, GHG emissions are connected to financial metrics.
Most publicly traded companies already disclose this information, so these new regulations are just here to formalize and set a standard for what many public companies already disclose.
A recent study shows that 96% of S&P 500 companies already report climate-related risks or some form of climate-related risk*. By bringing clarity and uniformity, these regulations produce comparable and trustworthy data that enables investors to make well-informed decisions.
Impact of Regulations on Private Companies
These regulations affect private companies, including small and middle-market businesses, in addition to public companies. Companies that provide goods or services to publicly traded companies are increasingly asked to submit assessments regarding climate-related issues because they are regarded as part of the supply chain. These rules will also apply to startups and businesses thinking about an IPO.
If your company seeks funding or plans to sell, investors increasingly demand reports on climate-related risks. Those who do not include this in their presentations risk having their valuations reduced. The demand for accountability on these matters is also rising among customers and employees. This may affect a private company's brand reputation, talent recruitment, and retention.
Additionally, California lawmakers, renowned for their progressive stances on climate change, recently passed bill SB253, which mandates full value chain emissions disclosure for large businesses (and most likely asset managers) conducting business in California. Unlike the SEC's proposed rule, which focuses on public companies, this bill applies to private companies and includes Scope 3 emissions. The Governor, who has already made it known that he will sign this bill into law, is currently considering it for his signature.
A Call to Action
Adaptability is crucial for sustainability in today's rapidly changing global business environment. As we find ourselves on the cusp of a transformative era, the significance of proactively addressing climate change risks and disclosing them cannot be emphasized enough. This pivotal transition extends beyond just public companies; it resonates equally within the private sector.
Amidst this shifting landscape, mandatory climate disclosure is a powerful mechanism to compel companies to take substantive action against climate change within their operations. It is a tangible catalyst for driving meaningful change, pushing organizations to acknowledge the climate crisis and actively integrate sustainability practices into their core strategies.
Across the globe, many businesses are already experiencing the tangible impacts of this evolving regulatory landscape. With governments worldwide tightening the reins on climate-related reporting, it's not a question of "if" these regulations will affect your business but a matter of "when."
Three Steps You Can Take Today
What steps can you take in your company to prepare for these new regulations?
1. Education: Your best asset in this age of transformation is remaining knowledgeable. Your duty as a business leader is to inform your staff and yourself about how these new regulations will impact your business.
2. Measure Your Footprint Now: Education is the beginning of what you can do. If you have not already, start keeping track of your carbon emissions. Calculate your impact on the environment, pinpoint areas for improvement, and establish reduction goals. Carbon tracking is now a concern for compliance and risk management rather than just a corporate buzzword.
3. Integrate It Into the Reporting Frameworks You Already Use: The time has come to incorporate climate disclosures into your current reporting frameworks. Transparency in this area will promote trust among investors, clients, and stakeholders while assisting your business in adhering to evolving regulations.
As we embark on this journey towards a more environmentally conscious business environment, remember that you don't have to navigate it alone. We are here to assist businesses in adjusting and thriving in this quickly changing environment. Together, we can create resilient companies that guide, change, and pave the way for a greener, more sustainable future.
The future belongs to those who dare to embrace it, and the time to act is now.