The US Security and Exchange Commission (SEC) announced yesterday (March 21) that it will require companies to publicly disclose their greenhouse gas emissions and other climate-related financial information.
SEC regulations already require that public companies disclose their financial situation, as well as the potential perils to their business. With the new information, investors will also be better able to understand the specific risks that climate change poses to these companies.
“Our entire economic system is at risk, it’s not just individual business,” said Simon Fischweicher, head of corporations and supply chains for climate disclosure platform CDP. “Climate change poses risk on the planetary scale, and so this is why you’re seeing the entire financial sector talking about the importance of climate change.”
Companies face both physical and transitional climate risks
There are two main categories of climate change risk that companies may encounter: physical and transitional.
Physical risks are those related to the physical impact of climate change, including:
🌪 Increased number and severity of extreme weather events
🌧 Changes in precipitation patterns and weather patterns
🌊 Rising sea levels
🥵 Rising average temperatures
Transitional risks are cased by the transition to a lower-carbon economy, including:
🏭 Increased price of greenhouse gases
👩⚖️ Mandates on, and regulation of, existing products and services
🛍 Changing consumer behavior
🚫 Stigmatization of sector
The climate risk disclosures of Unilever, Shell, and Stanley Black & Decker before the SEC climate rule
While the SEC will now require US-based companies to make climate risk disclosures, some organizations already do this via frameworks like CDP and the Task Force on Climate-Related Financial Disclosures.
Companies that already share their risks often use case studies and scenarios to explain the impact to the business itself. Unilever (pdf), for example, provides a case study for how an extreme weather event might impact palm oil production. The company is one of the largest buyers of palm oil in the world.
Transitional risks will be particularly difficult for large polluting industries to address. Some are starting to articulate these concerns, like Shell, one of the world’s largest fossil fuel companies.
Stanley Black & Decker’s climate disclosures show the company sees risks not just from climate change, but also from other companies adapting to it. It expects a more crowded market for its key components as more businesses transition to green technologies.
Climate change presents business opportunities, as well as risks
For businesses that commit and take action towards a lower-carbon economy now, there are also opportunities (pdf) to be had, not only risks to endure.
They have the chance to pioneer less carbon-intensive markets, create innovative products, and if they proactively change their business, will see less disruption if and when regulations are imposed.
“The first movers, those that are ahead of their peers, are going to benefit more and they’re going to have fewer costs, in terms of disruption to their business model, and they’re going to be recognized by customers and investors as the leaders,” says Fischweicher. “So as others follow suit, they’re one step ahead.”