Climate disclosure and accountability are gaining traction overall as illustrated by a recent ruling ... [+]
Last month, the U.S. Securities and Exchange Commission adopted new climate disclosure rules that require public companies to take a proactive and transparent stance on climate change’s impact on their stakeholders. The rules aim to support business models that can thrive in a low-carbon economy, contributing to overall sustainability and weather-resilient businesses.
Climate risk management is a key element of corporate stewardship and presents some of the most material financial risks businesses must manage. While there are ongoing legal battles around the new rule, one thing is clear: the public is interested in how companies and government leaders address climate change.
What is the SEC Climate Disclosure Rule?
Two years in the making, the new SEC rule states public companies must report “the financial effects of climate-related risks on a registrant’s operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules.” This also applies to public offerings.
Climate risk disclosure covers two major types of climate risks. Transition risks are tied directly to direct and indirect greenhouse emissions. It also includes the total amount of fossil-fuel related assets and the impact on valuation from climate change policy and legislation. These transition risks are where companies have historically focused any reporting efforts.
Physical risks are the second part of climate disclosure and include extreme weather events, sea level rise, and changes in climate patterns. Historically, these risks are more challenging for companies to report. However, they are important to consider, as new data shows that extreme weather events linked to increasing average global temperatures represent the biggest physical risks for S&P 500 companies. Today, nearly 60% of these companies have at least one asset at high risk of physical climate change impacts.
The new rules are not without numerous lawsuits challenging the regulation, both from a cross-section of industries and environmental groups.
While the new rule isn’t set to go into effect until 2026, the SEC recently told an appeals court it would stay the requirements for public companies to report on this new rule, pending judicial review, as many legal challenges are being made to it.
Legal Accountability for Climate Change
While we wait for implementation, or modification, of the new SEC rule, climate disclosure and accountability are gaining traction overall. Recently, an international court handed down a decision confirming that countries have an obligation to protect people from the effects of climate change. A group of Swiss senior citizens called Senior Women for Climate Protection brought the suit, arguing that they were particularly affected because older women are most vulnerable to extreme heat. The ruling found that Switzerland “failed to comply with its duties” to combat climate change, and it was a violation of women’s rights. The ruling noted that the European Convention on Human Rights guarantees people “effective protection by the state authorities from the serious adverse effects of climate change on their lives, health, well-being and quality of life.”
Here in the U.S., a group of young people in Montana recently won a lawsuit when a judge ruled that the state was violating the group’s constitutional right to “a clean and healthful environment,” as well as their rights to dignity, health, and safety, and equal protection of the law.
The plaintiffs, who are between the ages of 5 and 22, argued that the state of Montana was violating their constitutional rights by permitting fossil fuel development without considering its effect on the climate, which in turn harmed them mentally and physically. The group claimed that climate change affects young people disproportionately through longer exposure to the negative effects of climate change, such as air and water pollution and extreme heat. The judge’s ruling for the young people is partially rooted in the Montana Constitution, which explains that the “state shall maintain and improve a clean and healthful environment for present and future generations.”
Action Companies Can Take Now to Address Climate Change
While U.S. companies wait for legal rulings around the new SEC rules, there are actions companies can take today by using weather analytics to reduce environmental impact, particularly along the supply chain. For example, ship companies can use optimized weather routing to save fuel and reduce greenhouse emissions. Airlines can use integrated weather intelligence to reduce adding unnecessary miles and fuel usage to avoid weather risks, and transportation companies can better plan and prepare for delays impacted by severe weather.
The private weather industry already supports climate risks for many customers in high-risk, high-impact sectors and municipalities, as it is a natural extension for meteorologists to devise and consult on the physical risks of weather and future climate risks. These risk plans are tailored to the individual company’s assets, infrastructure, and operations, which creates a more targeted prevent - prepare- respond plan.
Regardless of the final SEC climate risk disclosure regulations, it is certain that companies should prepare to operate in different environments in the future, and immediate actions can be taken to better plan and prepare for the impact of today.
