Climate risks are not the only environmental risks companies should disclose
On March 21, the U.S. Securities and Exchange Commission (SEC) proposed rules requiring public companies to disclose their climate risks.according to SEC Press Release:
“The Securities and Exchange Commission proposed rule changes today that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that could materially affect their business, audited financial statements Operating or financial condition and certain climate-related financial statement metrics in the notes. The required information on climate-related risks also includes disclosure of a registrant’s greenhouse gas emissions, which has become a common metric for assessing a registrant’s exposure to such risks. ”
I am delighted to see the significant impact of one of the many financial risks posed by environmental conditions being recognized. When Wall Street pays attention, we know big money is at stake. There are sure to be theorists and Wall Street Journal editorial writers in the U.S. Congress who think these risks are exaggerated and merely expressions of opposing ideologies. The climate finance debate does have an ideological component. Nonetheless, investors must be provided with information to assess and understand the risk exposure that exists in the company’s external environment. Some of these risks are related to market conditions and some are related to social, cultural, political and environmental conditions. Companies that abandoned Russian operations in the face of Russia’s ruthless invasion of Ukraine will disclose losses and prospects for recovery in their next financial reports. Politics creates financial risks, and our ecological environment also creates financial risks.
My only objection to the SEC proposal is that it is limited to climate risks, not all environmental risks. A recent report highlights the need for a broader framework of environmental sustainability indicators. Wall Street Journal Interview by Ed Ballard, reporter for Alison Bewick, head of risk management at Nestlé. According to Ballard:
“A sort of Nestle arrive Executives who helped create a new framework for biodiversity reporting say companies should publish comprehensive disclosures related to climate change and nature because the two things are so interconnected.Alison Bewick, head of risk management at Nestlé, was one of the executives involved in creating the original framework for the Nature-Related Financial Disclosure Task Force, which was Posted last week. Designed by business in partnership with scientific organisations and non-profit sustainability standard setters, the framework aims to provide guidance for companies on reporting on nature-related risks and opportunities. It follows the Climate Risk Framework model designed by the Task Force on Climate-related Financial Disclosures. ”
Ms Bewick clearly understands that the overall issue is environmental risk. Climate change is seen by some as the most important risk and an “existential” threat, but it’s a bit silly to contest environmental risks. Any number of risks may threaten us at any time. More recently, we have begun to consider the risk of radioactive contamination from war-damaged nuclear power plants. We are still living at risk from an invasive virus called COVID-19. The unintended impact of modern technology has no shortage of environmental risks. Nestlé’s Bewick specifically called for the integration of the biodiversity measurement and disclosure framework with the climate framework.inside Wall Street Journal During the interview, she observed:
“When we think about how to address our carbon footprint, a lot of it is through nature-based solutions. It’s not just greenhouse gas measurements, it’s around water availability, it’s probably soil profiles, how do you treat the land based on crop rotations Utilization, things like that. I think the underlying principle is that this should ultimately be an integrated disclosure because there is a very strong interconnection and dependency between nature and climate.”
The resistance to climate science we see in politics and fossil fuel companies reminds me of the resistance to the links between medical science and smoking and cancer. The relationship is clear and has been established for many years, but financial interests continue to dominate health concerns. In 2019, 1.1 billion people smoked and 7.7 million people died from tobacco. Science is so important…climate change is similar, if anything, the economic interests at stake are far stronger than the tobacco industry. Perhaps this is why climate change is such an important environmental issue. Mitigating climate change requires fundamental changes in the technologies that drive our economic system.
Climate science is relatively simple, and some of the effects of climate change are well known. But at one point, the relatively simple physics of climate change intersected with more complex organisms and ecosystems. These changes and disruptions to ecosystems caused by non-climate-related human impacts are not well understood and more difficult to measure. Compared to the huge impact of greenhouse gases on our climate, the web of relationships in the ecological world is more nuanced and complex. Yet millions of small changes in our biosphere could easily have an impact as large as climate change.
Ms Bewick’s call for climate and biodiversity measures to be integrated into one framework makes sense because the two sets of impacts are linked. It’s also a way for relatively less “popular” biodiversity impacts to cash in on the currency and “reputation” of climate impacts. Most importantly, we move beyond the improvisational stage of environmental sustainability metrics. In corporate finance, accounting terms are defined and regulated by governments, not NGOs. When the SEC began during the New Deal period, it was responsible for developing generally accepted accounting practices. The SEC or some other agency of the U.S. federal government needs to begin the process of developing generally accepted environmental sustainability metrics. If these are to become regular elements of corporate disclosure, companies need to clearly define what they must disclose. This could start with climate disclosures now proposed, but should then be extended to broader measures of environmental impact and risk.
The purpose of the SEC rules is precisely to provide clearer metrics for climate disclosure.According to Richard Vanderford in Wall Street Journal:
“This [SEC Climate Disclosure] The rules are designed to bring order to uneven climate reporting by different public companies. In lieu of voluntary sustainability reporting using hand-picked metrics, companies must disclose in greater detail how much carbon they emit and how they plan to address looming climate risks. In theory, investors can make more informed comparisons of businesses. “
However, he noted that the rule would expose companies to lawsuits for reporting errors, and he also Commentd:
“…A 500-page proposal for a set of climate disclosure requirements, if adopted, would become The broadest and most complex disclosure requirements The agency has yet to propose…Observers have noted that the new regime will require companies to expend considerable resources to develop these disclosures. ”
There is no doubt that adding sustainability metrics to management will be complex, and we will make mistakes in learning how to do it. Just as financial reporting keeps accounting firms in business, compliance with environmental sustainability metrics reporting requirements will cost companies a lot of cash and provide funding for a growing number of sustainability professionals. But if we want to grow our economy without destroying the planet, we need to better measure and manage our environmental impact. I’m encouraged that these disclosure and measurement issues are finally making their way onto the political agenda. To quote “Druckerism,” “In order to manage something, you have to be able to measure it.” Without measurement, you can’t tell whether management’s actions are making things better or worse. Without these measures, we would not be able to adequately manage environmental sustainability. The SEC’s proposal is an important first step. It has to go on, then build and improve.
