17 June 2022

3 key takeaways from the SEC’s proposed climate-related financial disclosure rule

Sachin Kapila

By Sachin Kapila

3 key takeaways from the SEC’s proposed climate-related financial disclosure rule

Earlier this year, the United States Securities & Exchange Commission (SEC) proposed a rule requiring publicly registered companies to disclose climate-related financial information, including risks and metrics. After publishing the details of its proposed “Enhancement and Standardization of Climate-Related Disclosures for Investors rule, the Commission invited public comment amendments to be filed by June 17.

According to SEC Chairperson Gary Gensler, the 490-page rule aims “to provide decision-useful information to investors about the impact of climate risk on their investments.” Not surprisingly, the rule has been met with as much criticism as support – some constructive, some not so much.

We, like many others, welcome the proposed rule as a positive step. Legislation that helps facilitate the exchange of quality information on how companies are measuring and managing climate risk, particularly as it relates to the material impacts on a company’s business operations and financial condition, can only serve to strengthen investment decisions and further enhance public confidence in those decisions.

As a climate tech company squarely committed to putting Climate Intelligence at the core of every business and investment decision, Cervest welcomed the opportunity to submit comments. Drawing on insights gained from five years of research and conversations with hundreds of business, financial, policy and climate science leaders, we outlined our recommendations for improvements, clarifications, and positive change.

While the SEC’s proposed rule makes a solid case for why greater disclosure transparency and measurement of climate-related risks are necessary, given the increased financial risks and impacts caused by both short-term weather shocks and longer term climate-related stresses, it raises questions around “how” companies are going to accomplish it. One answer is through Climate Intelligence (CI).

CI is business intelligence for managing asset-level climate risk. Using CI, organizations and entire markets can access highly granular, science-backed insights to make better informed decisions that enable them to confidently adapt with climate change.

With this in mind, our public comments focus on three key CI principles that the SEC could adopt to help companies better manage and benefit from disclosure:

1. Defintions

We believe the SEC rule should require transparency around the analytical tools and data analysis a company uses, and define climate risks by including reference to Climate Intelligence. Why? Because CI is rooted in scientific evidence and assesses the range of physical and transition risks, including their possible financial impact, on an asset and portfolio level. This is key because physical risk often gets overshadowed by carbon transition planning for a Net Zero world. Yet, the impacts from physical climate risk (e.g. damage to buildings from flooding, storm damage and wildfires) are non-reversible. They are already locked into our system, and will continue to intensify over time in frequency and severity.

2. Tools

We believe analytical tools that facilitate measurement of physical and transitional climate risk analysis are highly necessary and currently available. Climate risk analysis – especially physical risk analysis – is not easy to quantify. Most companies cannot afford to hire an army of scientists and environmental engineers to help quantify their risk. There are tools available today, such as EarthScan™, to arm companies with meaningful risk insights about fundamental material impacts. These tools will enhance the accuracy and comparability of disclosure across companies and between reporting periods.

3. Science

We believe the analytical tools used by companies should be science-backed and the methodologies behind them should be transparent to help facilitate scientific validation, comparability and quality-controlled data processes. Climate-related disclosure should embody sufficient transparency, depth of analysis and analytical rigor to ensure that investors and the public have access to meaningful and investment-relevant information. At the same time, it should not inhibit the continued development and refinement of evolving areas of climate science and climate risk analyses.

These are the highlights of our response. All the details are in our full public comment. We believe this is just the beginning. As the U.S. and other countries around the world grapple with how to quantify, report and manage climate risk – within their own countries and cross-border – we will see an even greater need for disclosure consistency and compatibility. At Cervest, we think Climate Intelligence can be that harmonizing force.

Share your thoughts with Sachin about the SEC's ruling on LinkedIn and tag @cervest.

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