Requirements of the Climate Risk Disclosure Act
The Act is legislation introduced by Congressman Sean Casten (D-IL) and supported by Senator Elizabeth Warren (D-MA).
It requires the Securities and Exchange Commission (SEC) to issue rules, within two years, on climate risk reporting for all public companies; US companies will need to disclose information about their exposure to climate-related risks in their annual (10K) reports. They will also need to detail their strategies to mitigate these risks.
The Act also has a “backstop” in that if the SEC has not issued regulations within the two year period, regulated entities would be deemed to comply with the Act if their annual reports satisfy the recommendations of the Task Force on Climate-related Financial Disclosures. (If you want more information on the TCFD requirements, you can read the details in our boardroom guide to the topic.)
Background to the Climate Risk Disclosure Act
The Act’s passing followed the Securities and Exchange Commission (SEC)’s request for public comment on climate risk disclosure rules. Congressman Casten and Senator Warren had submitted a comment letter in response to this request, suggesting that the current voluntary framework was not sufficient and urging the SEC to mandate climate risk disclosure for public companies.
Drivers for the Climate Risk Disclosure Act
Commenting on the passing of the Act, Congressman Casten’s office said that:
“Despite escalating calls for action from scientists, economists, business leaders, and investors, the U.S. lags far behind our global partners in safeguarding our financial system against the climate crisis.”
The Act, then, hopes to bring US climate reporting in line with other global and regional laws and best practices on climate reporting.
As Casten noted, “When it comes to making the transition from fossil fuels to cleaner, cheaper energy, markets are some of the most powerful tools we have.”
Investors and consumers want to make choices based on transparency around climate-related performance; there’s a growing realization that ESG is good for business. ESG ratings form a growing element of the investment decision-making process, and with ESG risk recognized as one of the biggest business risks of 2022, the Act comes at an opportune time.
Who Is Impacted by the Climate Risk Disclosure Act?
The Climate Risk Disclosure Act applies to all US regulated (public) companies. This will require many organizations to report for the first time on their climate-related exposures and risk mitigation strategies. Although large companies tend to publish annual corporate social responsibility (CSR) reports or ESG reports and therefore already make their ESG performance public, SEC filings done by many of their smaller counterparts do not currently include this information.
For smaller businesses, therefore, the Climate Risk Disclosure Act may require a significant change in their approach to climate risk management and reporting. They will need to consider their climate risks, ensure they have mechanisms to collect the climate-related data they need, and create an integrated risk management plan to mitigate the risks they identify.
What Do US Companies Need To Do as a Result of the Climate Risk Disclosure Act?
The SEC will need to require impacted companies to report on:
- Their direct and indirect greenhouse gas emissions
- The total amount of fossil-fuel related assets that they own or manage
- How their valuation would be affected if climate change continues at its current pace or if policymakers successfully restrict greenhouse gas emissions to meet the 1.5 degrees Celsius goal
- Their risk management strategies related to the physical risks and transition risks posed by the climate crisis
As a result, business leaders will need to double down on their oversight and understanding of climate-related risks, strategies and frameworks
Enhance Your Ability To Oversee Climate Risk and Strategy
As we noted above, this degree of methodical, data-led climate risk management will be a new challenge for many organizations — and even those used to producing ESG-focused reporting will need to be confident that their approach meets the new requirements.
With climate risk reporting set only to grow in importance, Diligent has launched a new Climate Leadership Certificate Program, which empowers board members and executives to better oversee climate risk and strategy.
The Program will optimize corporate leaders’ ability to respond to pressures from regulators, investors and shareholders on climate-related imperatives. You can find out more about the program and the benefits it delivers to boards and leaders, here.