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Companies should disclose more than just climate risk

Companies should disclose more than just climate risk

Companies should disclose more than just climate risk

On March 21, the Securities and Exchange Commission proposed rules that required publicly traded companies disclose their climate risk. According to the SEC Press Release:

Today, the Securities and Exchange Commission proposed rules changes that would require registrants make certain climate-related disclosures. These include information about climate risks that are reasonably likely have a material affect on their business results, financial condition, and financial condition. Additionally, registrants must include certain climate metrics in a note attached to their audited annual financial statements. Climate-related risks would also require disclosure of registrants greenhouse gases emissions. These are commonly used metrics to assess registrants’ exposure to such risks.

I am happy to see the recognition of the financial consequences of environmental conditions. Wall Street knows that serious money is at risk when they pay attention. There will be Wall Street Journal editorial writers and ideologues who believe these risks are exaggerated. There is an ideological component to climate finance. Investors must have the information they need to evaluate and understand the risk exposure in an external environment. Some of these risks are market-related, while others are related to socio-cultural, political and environmental conditions. Companies that have abandoned their Russian operations in the wake of Russia’s brutal and senseless invasions of Ukraine will report the losses and the prospects of recovery in the next financial reports. Politics creates financial risks, and the ecological environment also creates financial risks.

The SEC proposal has one major problem. It only addresses climate risk. It doesn’t address all environmental risk. A recent report highlighted the need for a wider framework of metrics that measure environmental sustainability. Wall Street JournalInterview conducted by Ed Ballard, a reporter about Alison Bewick (head of risk management at Nestle). According to Ballard

A Nestl SAA Nestl executive who helped to create a new framework for biodiversity reporting stated that companies should release integrated disclosures on climate change and natural hazards, as the two are interrelated. Nestl’s head of risk management Alison Bewick was part of the Taskforce on Nature Financial Disclosures, which created the initial framework. Published last week. This framework was developed by businesses in collaboration to non-profit sustainability standard-setters and scientific organizations. It is meant as a guideline for companies regarding reporting on natural-related risks and opportunities. It is based on the framework for climate-related financial disclosures that was developed by the Task Force on Climate Risk.

The overall issue is, as Bewick clearly knows, environmental risk. While climate change is considered the most significant risk and a major threat, some also consider it to be an existential danger. But it’s silly to compare environmental risks. There are many risks that could pose a threat to us at any one moment. Recently, we began to consider the possibility of radioactive contamination by nuclear power plants that have been damaged by war. COVID-19, an invading virus, is still a risk to our health. There are many environmental risks that modern technology has unanticipated. Nestles Bewick calls for integration of the biodiversity measurement and disclosure framework with climate framework. In the Wall Street JournalInterview, she observed that:

Many of the solutions to our carbon footprint can be found in nature-based ways. It goes beyond the greenhouse-gas measurement. It also includes the availability of water. This could include the soil profile, the way you approach land-use in terms rotation of crops, and other things. The underlying principle of integrated disclosure is that there should be strong interconnectivity and dependence between climate and nature.

The resistance to climate science seen in the political world as well as in fossil fuel companies reminds of the resistance to medical science connection between smoking and cancer. Although the relationship is obvious and has been established for many decades, economic interests continue to dominate health issues. In 2019, 1.1 billion people smoked tobacco, and 7.7 millions died from it. Science? Well, so much for science. Climate change is similar and, if anything the economic interests at stake are stronger than those of the tobacco industry. Perhaps this is why climate change has become such a pressing environmental issue. To mitigate climate change, fundamental changes must be made in the technology that drives our economy.

Climate science is fairly straightforward and some of its impacts are well understood. The relatively simple physics of climate changes intersect with much more complex biological or ecological systems at a certain point. These changes and the damage to ecosystems that are caused by non-climate-related human impacts are less well understood and more difficult to measure. The complex web of relationships within the living world of ecology is subtler than the enormous impact of greenhouse gasses. Yet, millions of subtle changes in our biosphere can have an impact as large as that caused by climate disruption.

Bewick’s call for integrating biodiversity and climate measures in a single framework makes sense, as the two sets have interconnected impacts. It also allows biodiversity impacts, which are less well-known, to profit from the fame and currency of climate impacts. The most important thing is to get past this stage of environmental sustainability metrics. Accounting terms are defined and regulated in the world of corporate finance by the government and not by non-governmental organizations. The SEC was responsible for developing Generally Accepted Accounting practices when it was established during the New Deal. Either the SEC, or any other federal agency in the United States, must initiate the process of establishing Generally Accepted Environmental Sustainability Metrics. These metrics will be routine elements of corporate disclosure and companies must have clear definitions of what they are required to disclose. This might start with the climate disclosures, but it should continue to expand to more measures of risk and environmental impact.

The SEC rule’s purpose is to provide clearer metrics for climate disclosure. Richard Vanderfords report in Wall Street Journal:

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The [SEC Climate Disclosure]Rule is meant to put an end to the disparate climate reporting of public companies. Instead of using handpicked metrics for voluntary sustainability reports, companies would be required to disclose more details about how much carbon they produce and how they plan on addressing climate risks. Investors could then make better comparisons between businesses.

He does note, however, that the rule could expose firms to litigation for errors in reporting. CommentIt is the:

500-page proposal for a climate disclosure requirement set that, if adopted would be among The most complex and extensive disclosure requirementsThe agency has not yet proposedObservers have already pointed out that the new system would require companies spend significant resources to prepare these disclosures.

It is obvious that adding sustainability metrics into management will be complex. We will make many mistakes as we learn. As financial reporting keeps accounting firms in business and allows them to report on environmental sustainability metrics, compliance will also cost companies significant amounts of money and help fund a growing number of sustainability professionals. We must do a better job measuring and managing our environmental impact if we want our economy to grow without destroying the planet. This is a good thing.

Druckerism says that to manage something you must be capable of measuring it. Without measurement, it is impossible to tell if management actions are making things worse or better. Without these measures, there will be no adequate management of environmental sustainability. The SEC proposal is a significant first step. It must be implemented, but it must also be improved.

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