ESG

Public US Firms Must Prepare For Mandatory Climate Risk Disclosures

Tom Burroughes, Group Editor, 12 August 2021

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The powerful US regulator is mulling the idea of forcing US public companies to disclose the climate risks of their businesses, as soon as by the end of this year. Where the US leads, the rest of the world often follows.

US listed companies must set aside time and money to prepare for potentially compulsory climate risk disclosures possibly as soon as this year, Willis Towers Watson said in a note that underscores how ESG issues are taking up more board and C-suite time. 

In a speech on 28 July, the chairman of the Securities and Exchange Commission, Gary Gensler, said: “I have asked SEC staff to develop a mandatory climate risk disclosure rule proposal for the Commission’s consideration by the end of the year. I think we can bring greater clarity to climate risk disclosures.”

In a commentary by Willis Towers Watson, Steve Seelig, senior director, executive compensation (Arlington), and Gary Chase, director, retirement and executive compensation, said: “While there is hope that the SEC will provide lead time for companies to comply, the Biden administration’s focus on climate change makes it plausible that these disclosures will be made effective as soon as the regulations are finalised, perhaps as early as mid-2022.”

Gensler’s comments came a few days before the UN Intergovernmental Panel on Climate Change (IPCC) this week said in a report that under the best-case scenario the Earth can expect a temperature rise of 1.5C by 2040 and 1.6C by 2060 at the current rate of emissions. Global warming continues to be a big public policy talking point, while wealth managers regale the media and investors with their efforts to promote environmental, social and governance (ESG) themes almost daily.

Gensler that said many firms are already disclosing climate risk policies, but the approaches need to be standardised to make it easier for investors to make meaningful comparisons. 

The authors of the Willis Towers Watson note said that although the timing is uncertain for final regulations, it is “reasonable to expect that these disclosures will be required at some point during 2022 for fiscal-year companies and by the 2022 year-end for calendar-year companies”.

“While Gensler wants climate change disclosures to be mandatory, his statement did not go so far as to say those disclosures must be in annual Form 10-Ks, suggesting the SEC might accept them disclosed elsewhere, like in a company sustainability report. If disclosure is required in Forms 10-K and 10-Q, these disclosures would be considered as 'filed', bringing with them a higher level of scrutiny from SEC staff and the potential for plaintiffs to sue if those disclosures were inaccurate or misleading to shareholders,” the Willis Towers Watson note said. 

“Gensler’s speech indicates meaningful movement by the SEC toward required climate change and climate risk disclosures, with the only questions being 'what’ they must contain, 'where’ they will appear and 'when’ companies must comply. Regardless of the answers, companies now know they must budget time and resources toward meeting these SEC requirements,” the note said.

(Editor's note: A related point for those tracking boardroom and C-suite remuneration and incentives is how, and whether, climate risk and other metrics such as around ESG themes will be used to set compensation in future. This news service expects this to be a growing area, and a difficulty will be in obtaining accurate, timely and objective data. These topics remain controversial, for all the refrains about how the "science is settled" on human-caused global warming.)

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