Navigating the new era of climate disclosures

Even as the future of the SEC climate rules is up in the air, with legal and political challenges likely to continue playing out, investors and the broader industry are demanding consistent, comparable, and useful information about climate-related risks. Forward-thinking organizations are not waiting for rules or mandates to be handed down; they see the value in what the disclosure processes uncover, including driving new efficiencies, better collaboration strengthened resilience, and growth.

While the disclosure requirements from the final rules are less ambitious than those in the initial draft released in March 2022, they draw structural inspiration from the Task Force on Climate-related Financial Disclosures (TCFD) framework and incorporate elements from the Greenhouse Gas Protocol. This means positioning your organization to work through the below five areas of focus and establishing a strategically sound approach.

1. Climate-related risks: disclose your climate-related risks that have had or are likely to have a material impact on their business strategy, results of operations, or financial condition.
2. Impacts of climate-related risks: disclose the actual and potential material impacts of any identified climate-related risks on their strategy, business model, and outlook.
3. Mitigation or adaptation activities: if your organization has undertaken activities to mitigate or adapt to a material climate-related risk, it must provide a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities.
4. Board and management oversight: disclose any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the company’s material climate-related risks.
5. Risk management processes: disclose any processes they have for identifying, assessing, and managing material climate-related risks and, if they are managing those risks, whether and how any such processes are integrated into the company’s overall risk management system or processes.

None of the above efforts can be achieved without enhanced engagement and collaboration. Active stakeholder involvement is critical to ensuring that climate-related disclosures are comprehensive, accurate, and informative. Communication across multiple internal business units and departments is needed – cross-company responsibility and accountability for target setting and data collection are needed. Individuals and groups across the organization need to own and drive many of the disclosure processes, as well as support data and information quality, automation, and governance. Success comes from cohesivity across education and awareness of disclosure frameworks, with a collective agreement and understanding of what role each individual and group needs to play in supporting the end goal.

Now is the time to develop a comprehensive risk-management strategy that addresses current and emerging risks and prepares for the long-term impacts of climate change. The physical impacts of climate change, regulatory changes, and market shifts will continue to pose significant challenges to operations and performance. Extreme temperatures and weather events such as hurricanes, wildfires, and floods not only threaten infrastructure and supply chains but can also lead to significant financial losses.

Climate risk is synonymous with financial risk. Leaders are urged to integrate climate risk management into their overall risk strategies. These disclosures should include the actual and potential impacts of these risks on a company’s strategy, business model, and outlook. This approach ensures transparency and provides stakeholders with consistent, comparable, and decision-full information.

Climate risks will continue to become an essential part of the investment narrative. Firms that aren’t addressing climate risk will be forced to up their game. Organizations need to underpin the risk management processes used to address material climate-related risks. All severe weather events or other natural conditions will become subject to a disclosure requirement, regardless of whether they were caused or partially caused by climate change.

As it currently stands, organizations need to disclose the financial statement effects of severe weather and other natural conditions and the impacts on:

• Income statement (expenses and losses), the threshold of which is one percent greater than the absolute value of pretax income or US$100,000.
• Balance sheet (capitalized costs and charges), the threshold of which is greater than one percent of the absolute value of stockholders’ equity or deficit or US$500,000.
  
  

Organizations need to provide financial statement disclosures regarding carbon offsets or renewable energy certificates when they are material to their climate-related strategy, including:

• Aggregate amount expensed during fiscal year.
• Aggregate amount capitalized during the fiscal year.
• Losses incurred during the fiscal year.
  
  

In addition to this, companies must provide data on greenhouse gas emissions, including Scope 1 and 2 emissions. Unlike other regulatory requirements such as the European Sustainability Reporting Standards (ESRS) as part of the EU’s Corporate Sustainability Reporting Disclosure (CSRD), the SEC does not expect corporates to disclose information regarding their Scope 3 emissions (across their value chain). In addition to data, organizations must disclose their methodology, including the standard used, emissions factors, and boundaries applied. Climate information needs to be disclosed across management reports and included as a footnote for financial statements.

• Disclosing climate-related data and information has become a new business imperative due to widespread recognition and understanding of the financial impacts of climate-related risks on organizations.
• Organizations embarking on their climate disclosure journey should first complete a comprehensive gap assessment, aligning their practices with existing frameworks and proposed regulations. They must also evaluate those gaps against their current processes and ascertain the value of those existing initiatives. This process informs strategic decisions, such as resource allocation. Additionally, establishing a robust review process ensures ongoing efficacy, allowing companies to adapt swiftly as regulations and frameworks evolve. By integrating these steps, organizations can ensure compliance and drive efficiencies.
• Organizations should also leverage the disclosure process to uncover new opportunities that provide benefits beyond compliance, such as gaining a competitive advantage in the low-carbon economy, leadership and brand recognition, differentiation in the market, and innovation.
• Through identifying, evaluating, and addressing tangible climate-change-related risks, organizations can make better-informed investment decisions in areas like asset resilience planning.