The SEC is expected to release new climate change disclosure regulations in November 2022. Your company’s Board of Directors needs to effectively oversee climate change risk and new regulatory disclosures.
Which begs the question: are they ready?
To be ready, Boards require:
- The best information available on probable climate impacts
- Preparedness for increased disclosures
- Governance structures that support these new demands.
Insight
Climate risk is real for companies across almost all sectors. So are potential opportunities to innovate with new products and services and to reconfigure supply chains and partnerships.
To get a handle on the near- and medium-term financial and operational risks, directors need a solid understanding of climate change, one that goes well beyond what’s covered in standard media and IPCC summary reports. They’ll need to address these questions:
- What do models indicate for the risk of disruptions in the companies supply chain, transit routes or client base?
- How can the company capture innovation opportunities?
- Is the innovation process ready for this new challenge?
Drafts of SEC regulations suggest that Boards should designate a Climate Expert, either an internal resource or an external advisor. If you designed a Climate Expert, triple-check that he or she is truly an expert, not just a generic ESG consultant. Companies require region-specific and up to date data, much more granular than that which is commonly available.
Governance
New SEC reporting requirements are expected to require a heavy lift across many parts of a company to perform data gathering and analysis. The Board needs to get comfortable with this new level of disclosure.
This increased disclosure leaves nowhere to hide for companies that have not yet adopted advanced climate change goals or set appropriate goals.
If your company has:
- Not yet published voluntary greenhouse gas disclosures or reduction goals, it’s time to get the Board ready for and comfortable with the need to disclose more on the Form 10-K. Executives need Board support to move quickly and prepare immediately.
- Aspirational greenhouse-gas reduction goals but has not done much work to advance towards these goals, the Board needs to see an updated plan to dial up activities.
- Goals in line with science-based targets and progress towards significant milestones, the Board needs to be ready for any additional disclosures required by the SEC regulation.
The Board may need to update its governance structure and ensure that the roles are clearly defined. Do the roles and responsibilities of the board committees that oversee climate risk need to be revisited? Does this responsibility reside with the best committee?
For example, If the Governance Committee has general environmental, social and governance (ESG) oversight, climate risk might be added to this committee’s mandate. If so, what role will the Audit Committee play under this new regulation?
Regardless of committee structures, most boards will find that they need to change their meeting agendas to ensure regular reports to the full board and at the committee level. We recommend that climate risk be on the Board Meeting agenda at least twice a year, so that the committees and executives can keep the entire board updated.
Summary
Changing investor expectations and new regulations in the United States, Europe and elsewhere are driving new disclosure needs.
Boards need to prepare for this. But this is only a fraction of the effort required.
An effective Board will oversee and guide the company to manage the risks and opportunities inherent to climate change, since these risks and opportunities directly impact the company’s financial performance.
It’s time to make sure that your Board is ready for this new agenda.
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