SEC moves to normalize climate risk as financial risk

The net outcome of the 3-1 vote by the SEC on March 21, 2022 for proposed rule changes would make climate risk assessments and disclosures a routine part of public financial disclosure rules in the US. The proposed rule aims to standardize climate considerations into financial disclosures to help investors gain a better picture of the companies they’re investing in by including mandatory disclosure of direct and indirect greenhouse gas emissions as well as a company’s governance structure for managing climate risks.

The SEC believes that by incorporating this wider climate-risk lens in ordinary financial disclosure rules, investors can make better risk-informed decisions that take into account:

  • understanding of the physical risks that the stock issuer could face based on its operations and facilities, i.e., exposures and vulnerabilities to severe weather, flooding, etc., and
  • near- and long-term transition risks to the company’s business model, i.e., the impacts of changes in policy towards decarbonization and net-zero targets.

Beyond improving the risk profile of publicly traded companies, the SEC also aims to create a baseline of climate-related information for investors in the marketplace to compare and contrast. Today, disclosures are a hodge-podge of voluntarily disclosed information that lack consistency and reliability. The proposed amendments systematize climate considerations into the world of finance and will, no doubt, trigger a cultural shift that make climate risks a normative consideration instead of “nice to have.” The proposed change also follows the lead of financial regulators and institutions in Europe and Asia that have adopted a similar TCFD-aligned framework to help companies tease out their climate risks and strategies.

While this rule is squarely aimed at large public companies required to report to the SEC, smaller privately held companies who do business with these companies (directly or indirectly) or who are within their supply chain should consider the likely downstream impacts as well as the opportunities. Procurement of goods and services will have to align accordingly; perhaps not tomorrow or even by the end of this year, but, inevitably, greener and more sustainable goods and services will prevail.

Procedurally, the SEC is accepting comments on the proposed rules changes for 30 days after the date of publication in the Federal Register or May 20, 2022, which is 60 days after issuance, or whichever period is longer.

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