Getting prepared for climate risk disclosure

The SEC’s long awaited guidance on climate-related risk disclosures in the United States was recently released, calling for corporations to report their physical and transition climate risks, impacts and targets.

The guidance is significant because, if the legislation passes, this is the first time US corporations will be required to deliver transparency around their climate impact, positioning them to be held accountable to a much greater degree by both investors and consumers. Disclosure framework measures were previously announced by other countries, including the UK, Japan, Canada, and the EU.

Sust Global’s climate experts reviewed the SEC’s lengthy 500-page proposal, which contains many expected disclosure recommendations but also some details that some other summaries have missed. We want to make sure you are set up to comply with the next chapter of climate disclosures, so we’ve pulled together our top eight learnings from the full report.

Key learnings

Climate risk is financial risk.

For the first time, climate-related disclosures will become integral to financial disclosure documentation. Corporations will have to disclose the financial impacts that the changing climate will have on their business within the financial statement notes, rather than in separate ESG documentation, as is often the case today. These financial impacts disclosures must include the impact of severe weather events on relevant line items, such as flooding, wildfires, heatwaves, cyclones, water stress and sea-level rise.

No more double-standards.

Climate-related disclosures will be held to the same standards as financial reporting. Climate-related financial impacts will be subject to a 1% materiality threshold, aligning with financial disclosures which are considered material if they are 1% or more of the total relevant line item for that fiscal year. Even if items do not meet the threshold, companies must still undertake the analysis, underscoring the need for robust climate data. Why is this important? Historically, climate-related disclosures were voluntary in nature, so there is a high chance that many significant climate risks have not been reported. As a result, investors have not had access to accurate data to inform their decision making. The 1% materiality rule is groundbreaking as it means climate disclosures are no longer at the whim of the reporting company, and they will be held to the same standards as financial reporting. Disclosures will therefore become comprehensive and comparable, ensuring that investors are better informed.

Granular, asset level disclosures.

Organizations must now disclose the ZIP codes of assets exposed to material climate-related risks. While most climate-related disclosure frameworks have called for general information on an organization’s operations, the SEC is pushing for greater granularity. Companies will be required to include the specific locations of affected properties, processes, or operations in their risk assessment.

Multiple time horizons.

Companies must analyze the likelihood of material climate impact over the short, medium and long term. Specific time horizons are left up to the reporting companies, so it will be essential to have access to a breadth of forward-looking information. The IPCC’s low emissions (1.5º global warming), middle of the road (2.5º) and high emissions (4º) scenarios are the benchmark used for many of the current scenario modeling frameworks (e.g. the UK Bank of England’s Biennial Exploratory Scenarios).

Peril specific, sector specific.

Climate-risk disclosure will vary depending on sector but can include hazards such as flooding, water stress, heat waves, cyclones, wildfires and sea level rise. This increase in specificity is crucial for enabling meaningful measurement of the real-world economic impact of climate-related risks.

Business continuity impacts will be disclosed.

Companies may be required to disclose what proportion of their assets are at risk from each hazard, and relate physical risk metrics to business disruption, e.g. days of heat wave exposure. This will vary depending on sector. They will also need to specify expenditures to mitigate these physical risks, such as the cost of relocating people or assets from areas of high wildfire risk.

Climate risks versus other risks.

Companies will be required to compare the impacts of climate risks versus other financial risks. One possible way to do this is to calculate the Value-at-Risk (VaR). VaR is a metric which quantifies the possible losses due to a specific risk. For example, this enables a comparison of the relative significance of the risk of sea level rise to the risk of mortgage default and provides a common monetary unit.

Greenhouse gas accounting will be treated in the same way as financial reporting.

Scope 1 and 2 emissions will be audited, but there is a “safe harbor” for Scope 3 emissions.

It is important to highlight that this guidance is not official, and there is increasingly an expectation of push back. The TCFD and GHG Protocol as reporting frameworks leave room for greater specificity and actionable data driven metrics on climate impacts. Based on our live engagements with TCFD reporting partners, Sust Global is responding directly to the SEC with our input on how this guidance could be more actionable. If you would like to feed into our response, please get in touch.

How we help you measure, manage and report on climate risks

Sust Global provides validated, geospatial climate data to help organizations structure climate-related targets and transition plans, meeting auditing and attestation requirements.

We know that climate risks are going to increasingly impact company strategy, business models, and outlooks over the short, medium, and long term. Sust Global can help you to identify climate-related risks and provide you with the data to meet climate-related risk requirements, and to enable Scopes 1 and 2 GHG Emissions Metrics disclosures.

Specific to the SEC guidance we offer the following capabilities:

  • Granular risk exposure analysis for anywhere on earth, enabling you to report on critical risks at asset, ZIP code or portfolio level for physical risks such as sea level rise, wildfire (weather conditions and burnt area), heat waves, droughts, floods, cyclones and water stress.

  • Forward-looking climate risk projections until the year 2100, enabling scenario analysis across multiple time horizons.

  • Value-at-Risk analysis, highlighting the monetary impact of climate risk.

  • Atmospheric CO2 emissions monitoring for global industrial assets

  • All of this is available via our dashboard or API.

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