How will you integrate climate change risks and opportunities into your company’s Form 10-K Management Discussion and Analysis (MD&A)? It’s the trickiest part of the SEC’s new reporting process.
To get it right takes a comprehensive understanding of climate risks to operations, supply chains, partners and customers. Plus the ability to talk analysts and investors through your climate change strategy.
What to expect MD&As will include
Going forward, we expect that companies will need to cover these aspects of climate change action and risks in the MD&A:
- Capital expenditures. What are current and future capital expenditures for climate-related projects, including energy-conservation measures and investments in new energy sources?
- Direct impacts of physical effects of climate change. This section calls for foresight into climate trends in key regions for your business.
Where is severe weather expected to impact your business operations? This includes operational closures due to floods, fires or heat domes. It also includes the risk of energy rationing due to intense hot or cold weather.
Will water shortages cause problem for hydroelectric and nuclear energy production you rely on? Will low water or unpredictable weather increase the shipping costs?
- Indirect consequences of climate-related regulation and impact. What are current and expected future changes in demand for your company’s products and services, impacts on your supply chain, the need to innovate and reputational risks related to climate change.
For example, if the company uses cotton from India or Texas, how will it manage expected shortages in 2023 from the 2022 heat waves?
- Carbon credits/offsets. If the purchase (or sale) of carbon credits is financially material, it needs to be included in the MD&A.
- Regulation. What are the new or existing changes in climate-change related legislation, regulation and international accords that will impact a company’s financial position? To assure consistency, close collaboration with Government Affairs department is required.
What you’ll need to prepare your MD&A:
- Analysis of direct and indirect impacts and responsive strategies. For many companies, this requires starting work now to develop the analysis and strategies for next year’s reporting cycle.
- A balanced view. Although the MD&A section of a Form 10-K is not audited, it must provide a balanced point of view of the positive and negative aspects of the potential climate impacts, including risks to the company’s financial prospects.
- Up-to-date data-driven climate models tailored to your specific geographies and industry. Most companies will need to seek input, analysis and foresights from climate scientists and climate strategy experts. Taking this approach enables a richer analysis and better foresights than one based on previously published IPPC reports and generalist climate predictions.
Questions? For answers, contact us.