The SEC climate rule: 3 things boards need to know
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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Numbers That Matter
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