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The SEC climate rule: 3 things boards need to know

March 25, 2022, 12:19 PM UTC

The Securities and Exchange Commission proposed new guidance to standardize climate-related disclosures earlier this week. The agency’s first-ever requirements on sustainability, carbon footprint, and climate risk go beyond just reporting facts and figures; they mandate that companies provide material information on how they’re assessing and addressing these risks.

The proposal includes specific requirements for boards, such as descriptions of….

  • The processes and frequency by which the board or board committee discusses climate-related risks  
  • How the board is informed about climate-related risks
  • How frequently the board considers such risks
  • Whether and how the board sets climate-related targets or goals 
  • How it oversees progress against those targets or goals

These rules “really highlight disclosures around how boards operate, which is fascinating,” Friso van der Oord, senior vice president at the National Association of Corporate Directors, tells Fortune. “That’s a big leap in my eyes.”

Here’s what boards must keep in mind if the proposed climate disclosures become law:

Internal networks are critical

Even though the first reports under these new guidelines will not be due until 2024, businesses need to start preparing “yesterday,” says Maria Moats, PwC’s governance insight center leader. Companies that already release climate impact information will still need to adjust and evaluate their strategy in light of these new rules.

Moats advises that companies form a cross-functional team of individuals from throughout the company to develop strategies around these new requirements.

“They will need to build a comprehensive, more integrated approach to addressing climate risk,” says van der Oord, “Because they’re going to have to disclose how much they do and what they do.”

Every industry is affected

While some industries have more exposure than others, all public companies will have to improve their ability to assess how climate risks may affect their business. These risks range from business continuity during a natural disaster to losing out on investment capital due to climate disclosures, Moats says.

Seize the opportunity

The SEC said investor appetite for climate-related data drove its decision to propose new rules. This is evident in the rise of ESG investing and other socially responsible investment offerings. Institutional investment groups have also stated a desire to align financial results with stronger environmental standards.

“I agree that investors are looking for this. Whether it’s a tidal wave or a giant storm…is open to debate,” Thomas Gorman, a partner in the D.C. office of Dorsey & Whitney and former senior counsel in the SEC’s division of enforcement, tells Modern Board.

Van der Oord says day traders are not likely to change their activity due to these disclosures, but permanent capital players like Vanguard and Black Rock most likely will. “You don’t want to be a negative outlier,” he says.

Moats agrees. “I think as companies start to put out their disclosures, you’ll start to see differentiation,” she adds. “And if you really go big on opportunities for quality of disclosure, you’ll start to differentiate within competitors.”

The SEC anticipates that these disclosures will allow the market to determine how material this information is in the absence of penalties or setting emissions standards or limits. “There’s a lot more to business than just crunching numbers,” Gorman says. “And these kinds of proposals are a reflection of that.”

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Aman Kidwai
aman.kidwai@fortune.com

Headlines

Starbucks' CEO search. The coffee chain's board is on the hunt for a new CEO, and that search will be trickier than expected. The next chief executive will have to contend with a growing unionization drive and a shareholder push to change how it approaches those efforts. Fortune

Microsoft, Okta hacked. Identity verification company Okta confirmed that a hacker accessed an employee laptop in January, affecting  2.5% of its customers. Microsoft’s hack reportedly involved source code for Cortana and Bing maps, as well as server data. Engadget

Boost team creativity. Ohio State professor Angus Fletcher recommends a few simple exercises that managers can use to inspire creativity among their teams. The recommendations include asking people to anonymously share something they like but are afraid to admit to the group. This “stimulates teams to actively appreciate nonconformity,” according to Fletcher, and primes the brain to value anomalies, which are “the most potent biological source of creative inspiration.” HBR

Congress inquires within. Congresswoman Maxine Waters sent a letter to bank leaders and industry groups requesting information on steps they've taken to end business relationships in Russia. The industry’s Russia response has been mixed, with some pulling out and others taking a more phased approach. Reuters

New EU tech policy. The EU is implementing the strongest controls for tech platforms of any regulatory body in the world. The Digital Markets Act will require tech platforms to monitor their platforms more closely, and places tight restrictions on how platforms can collect user data. New York Times

Suisse shakeup. Vice chair and lead independent director Severin Schwan is leaving his post amid scandal at Credit Suisse. The company’s chairman departed at the beginning of this year after publicly breaking COVID-19 protocols. The Swiss financial services firm took a $5.5b loss after the liquidation of Archegos Capital Management and has experienced losses of 22% and 14% over the last two years, respectively. Reuters

Board Movement

Awo Ablo, executive director of the Tony Blair Institute for Global Change, is joining the board at Oracle…Claire Hughes Johnson, former COO of Stripe, has joined the HubSpot board…XPEL has appointed Stacy Bogart to its board…Eaton SVP and GM Cari L. Jaroslawsky and Troy A. Stoner, CEO of a Boeing subsidiary, are joining the board of Graham Corporation…Darden Restaurants appointed Juliana Chugg, former chief brand officer at Mattel, to its board…Global energy company Occidental has elected Vicky Bailey, president of Anderson Stratton International to its board…Esteban C. Iriarte, SVP and COO at Millicom International Cellular, and Vicki Villacrez, incoming EVP and CFO at TDS, are joining the board of US Cellular. Beverly K. Carmichael, former chief people officer at Red Robin Gourmet Burgers, has joined the board of Blue Apron.

Numbers That Matter

77%

More than three-quarters of the companies in a PwC survey have either implemented or are implementing A.I. in hopes of reducing their hiring needs. Another 16% are developing plans to do so. 

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