SEC Climate Rule didn’t need to be Revolutionary
Climate change adaptation and mitigation has and will continue to impact all businesses in some form for many years. Companies need to understand what climate risks impact them, and how to adapt and manage those risks.
And those risks are piling up. Physical, transition risks, and legal risks connected to climate change will only increase.
Higher Costs and Industry Transformation
Climate change is an economic problem as well as an environmental one. Companies face physical risks from climate change, with weather events and flooding damaging physical assets at an increasing rate. The National Oceanic and Atmospheric Administration (NOAA) and National Centers for Environmental Information (NCEI) released their 2022 billion-dollar Weather and Climate Disasters report in early 2023. According to the report, the total cost of U.S. billion-dollar disasters over the 5 years from 2018 to 2022 was $600 billion, an average of $120 billion per year. That is more than double the inflation-adjusted annual average cost per year ($57.7 billion) for the past 43 years.
Transition risks are equally concerning. Each industry has its challenges. The automotive industry will continue an evolution from the internal combustion engine to hybrids and electronic vehicles. Electronic Vehicles (EVs) made up about 10 percent of passenger vehicles sold in 2022. As the pace of this transition quickens, automakers, their suppliers, and national grid operators will have to adjust.
Litigation risk is a growing concern as well. The UN Global Climate Litigation Report: 2023 Status Review, shows that people are increasingly turning to the courts to combat the climate crisis. As of December 2022, there have been 2,180 climate-related cases filed in 65 jurisdictions.
SEC Delivers Politically Cautious Climate Reporting
Financing the changes needed in business models to address physical, transition and legal risks will be a challenge for many companies, and in some cases prove too much for companies to survive.
The recently released Securities and Exchange Commission (SEC) climate change disclosure rules disappointed some investors, who wanted the United States’ securities regulator to include scope 3 emissions and make scope 1 and 2 emissions reporting mandatory.
The truth is the SEC climate rule didn’t need to be revolutionary. With the Corporate Sustainability Reporting Directive (CSRD) in Europe, California’s 2023 climate rules covering both public and private companies, and the IFRS S2 standard, most large global companies were already covered by a climate reporting regime. This also means that the supply chains of these companies will be covered. The SEC did not need to be bold, so it wasn’t (they also had to consider the US political landscape and anti-ESG backlash).
Opportunities from Reporting
The spotlight will be on companies to meet these standards. Expect a rush for companies to gear up for reporting. That means an increased emphasis on measuring and managing carbon emissions and climate risks across the globe.
Physical risk, transition risk, legal risk and even increased geopolitical risk due to climate change are all likely to grow along with the CO2 ppm in our atmosphere. Companies and investors who can understand those risks have the most opportunity to survive and thrive.