Climate risk is financial risk, according to the Securities and Exchange Commission, and publicly traded companies are on the precipice of having to disclose how they’re safeguarding against these challenges.
The agency aims to aid investors by helping them more clearly understand and quantify how companies are managing climate issues, and what impact those decisions might have on a company’s stability and bottom line.
To do this the SEC is moving quickly to require companies to disclose specific information and data about their approach to climate change in various existing corporate filings such as 10-K and registration statements. These final reporting rules could be announced as early as October 2022—less than one year after draft proposals were released in March.
Regardless of when precisely the rules are made official and the legal wrangling and tweaks ensue, there’s already a broad understanding that the SEC will mostly get its way. Publicly traded companies must immediately prepare to make more robust climate disclosures now and corporate leaders can begin to lay the groundwork for these changes by considering these key questions and potential solutions.
Supporting Corporate Leaders
Companies should evaluate the appropriateness of board-level oversight of climate risk, including how their board should spearhead these efforts. The assessments also should review any environmental, social, and governance oversight responsibilities already identified in committee charters and a board committee’s capacity to take on more duties.
This process may reveal that a company needs new perspectives or different experience from its leadership ranks—either by adding new members or providing training to those already in place. Some options to consider include revising recruitment strategies to better target potential director-level hires with climate expertise, offering ongoing training on climate best practices from internal and external sources, or various combinations.
Formalizing or strengthening existing management-level oversight of climate-related disclosures and potentially forming a disclosure subcommittee for climate and other ESG matters are other ideas to assess.
This work also will raise important personnel questions such as would it be beneficial to add staff, can people be retrained, or is staffing already sufficient.
Estimating Costs
Cost is another major area to evaluate.
There’s some concern by issuers that the final rules would significantly underestimate the cost of compliance. The draft rules estimate a first-year compliance cost of $640,000—$180,000 for internal expenses and $460,000 for those outside—for those that are not smaller reporting companies. These estimates appear to assume that companies already have the required internal personnel to support compliance and do not take into account costs associated with employing additional personnel or of implementing new processes, controls and procedures to satisfy the proposed reporting obligations.
While the rules are still under review, companies should discuss with their auditors the likely financial statement implications. Budget planning will have to be adjusted to assess the needs and costs associated with any personnel changes, recruitment efforts, or training activities, including hiring potentially pricey external consultants.
Interestingly, the pending proposals are silent on using climate metrics to determine executive pay, but even if the idea isn’t broached directly it’s possible that once the final versions are announced they may help accelerate the trend of making ESG metrics a larger factor in corporate compensation packages. Consider whether and how a company may incorporate this concept into future executive compensation planning.
Building on Existing Actions
It will be important to anticipate where gaps or inconsistencies exists between current, voluntary and public company climate risk standards and the proposed new requirements. First, to identify whether changes may need to be made to any current disclosures about the company’s own direct, controlled climate emissions or risks, and secondly, to begin potentially mitigating these risks.
One straightforward example in this vein is when a company is already voluntarily sharing its sustainability reports. This could be an opportunity to learn if it’s feasible to time these releases with required annual reporting deadlines closer to 10-K/proxy statement filings to better align their current efforts with the new disclosures with respect to overlapping information.
Be aware, however, that the SEC’s draft guidance isn’t always predicated on materiality so it’s possible any currently voluntary reports could shift to mandatory in a final iteration.
It’s also worth flagging that the final rules are expected to create scenarios where voluntary disclosures or actions could trigger additional reporting if a company has set a climate emissions reduction target or goal for its supply chain, so-called Scope 3—or any climate-related goal for its business—or adopted an climate transition plan.
Change Is Near, More to Come
Companies should not assume SEC’s final rules will be substantially different from the draft versions or that parts wouldn’t apply retroactively. It’s critical to know that the pending proposal as written could require corporate reporting for the time frame before the rules are finalized.
The prospect of mandated, detailed climate-risk disclosures may feel overwhelming to corporate leaders right now, but smartly planning ahead will instill good ESG-related governance practices generally and help leaders feels less inundated when the moment finally arrives.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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Sehrish Siddiqui is member in the Memphis office of Bass, Berry & Sims. She counsels a wide variety of public companies primarily in the areas of corporate finance, compliance and governance. She regularly advises clients on ESG disclosures and related internal processes.