Your CPA and CFO tell you the Securities and Exchange Commission (SEC) issued the final climate risk disclosure rules and your business needs to take a lot of steps to comply with them. On top of that, they tell you that California, where you do substantial business, recently signed into law two climate laws that you also need to comply with. Your stress level rises, and you wonder what it’ll cost you. You’ve known these rules were coming, since the SEC proposed them two years ago, but now they’re here. Policy, regulations, reporting requirements, it may make your eyes glaze over, but you can’t dismiss them.
Now what?
For a sophisticated primer on what business leaders need to do and where the opportunities might be, I spoke with Kristen Sullivan, an audit and assurance partner at Deloitte, who leads the firm’s sustainability and ESG services (environment-social-governance). She also serves as the firm’s Global Audit And Assurance Sustainability And Climate Services Leader and the Integrated Reporting Community Of Practice Leader.
Why the SEC issued these rules
The SEC launched these climate risk disclosure rules because investors have seen the financial impacts of extreme weather events. The National Oceanic and Atmospheric Administration (NOAA) reported that 2023 had the highest number of $1billion extreme weather events in one year: 28, costing $93+ billion.
Investors are seeing the financial effects of climate impacts in loss and damage, rebuilding, labor costs, and real property damage, etc. They see some companies reporting in greater detail than others and in response investors have been clamoring for reliable, consistent, comparable and timely data on these issues, as Kristina Wyatt explained to me when the proposed climate risk disclosure rules were released. She led the SEC task force developing those proposed rules.
An Opportunity
These rules may make your eyes glaze over and blood pressure rise, but you can look at the need to obtain and report what the SEC (and California) is asking for as an opportunity, not just a burden. That’s because the data you collect in the process can help you identify inefficiencies and market opportunities that can give you a competitive advantage, and therefore, affect your bottom line.
This is especially true today, because your company may be able to leverage the new ~$3 trillion in potential federal financial incentives from the trifecta of the Inflation Reduction Act, Infrastructure Act and CHIPS and Science Act to do so.
“It’s a pivotal moment,” Sullivan said in an exclusive interview, explaining that, “Regulation can really be a catalyst for transformation, for business transformation, because this is so much more than a disclosure and compliance exercise.”
“When you think about the mechanisms, the infrastructure, the data that will emerge from, you know, instituting more discipline and rigor around these disclosure objectives (that) is absolutely critical to surface more timely where risk disruption can emerge, they give insight into choices that can be made.” They also present an opportunity to integrate the organization’s functions more, she said.
They can also reveal competitive advantages. Sullivan added that, “a lot of our clients are talking about, how do we use this to instill discipline, rigor, just infrastructure to better capture and identify the strategic opportunities before our competitors.”
These build trust
Disclosure builds trust with all an organization’s stakeholders. The independent validation, or assurance, such as from a firm like Deloitte, required by the SEC rules for climate-related financial data (and greenhouse gas emissions where applicable), increases that trust.
No entity is perfect. Showing progress on the way to the organization’s strategic objectives helps employees, customers, suppliers, regulators, and investors trust the organization and its management. Trust builds loyalty and loyalty breeds success.
Increased transparency around “the financial relevance of climate related impacts and risks,” is “an avenue to drive trust and strengthen sort of strategic focus,” Sullivan explained. It’s an opportunity, she added, to “really communicate with stakeholders around how organizations are increasingly understanding, prioritizing, measuring, and then ultimately acting on, as well as disclosing, information around climate related risks and opportunities.”
Need to prepare asap
Even though these rules are being challenged in court, Sullivan said, investors are still demanding this information. Preparing to report this data is a complicated, lengthy process that takes time, systems, processes and internal resources, and waiting until the legal challenges are settled may leave an organization behind and scrambling to get it done – as well as potentially missing out on the opportunities seeing this data can provide.
“Those who are thinking about this really strategically are going to think about, ‘how do we do this as quickly as possible so that we can be the fast movers, those early movers who are going to capture the opportunity?’ “ Sullivan emphasized. “Because there’s pretty much little question that we are moving rapidly towards a decarbonized economy.”
Think strategically
Therefore, think strategically in your preparation in order to reveal the insights and data that can support the organization’s strategic goals and all its stakeholders, that is, to seize the opportunities, not just comply.
“It’s thinking about not only your operational context, but how that really integrates into the dependencies that you have, whether it’s on suppliers, whether it’s on the environmental conditions of the parts of the world that you operate in,” Sullivan added. Each of which can reflect both risks and opportunities.
“While compliance will be a critical component, this is such a catalyst for opportunity, for thinking about business and your strategy in new and different ways,” Sullivan insisted. “And really, that transformation mindset is absolutely critical.”
