02/25/2021 - Legal Analysis - Private Sector Project

Entering a New Era in Climate-Related Disclosure and Financial Risk Management in the U.S.

by Hana Vizcarra

Since Mark Carney’s Lloyds of London speech on the “tragedy of the horizon” and the formation of the Financial Stability Board’s “Task Force on Climate-Related Financial Disclosure” (TCFD) in 2015, mainstream members of the financial sector have come to recognize the need to consider climate-related risks in corporate risk management, disclosure, and investment decisions. Activity in this space has been brisk. The private sector has dramatically improved its understanding of how efforts to transition to a lower carbon economy and the physical consequences of a changing climate will impact the economy and the role that industry plays in mitigating and adapting to climate change. The financial sector is grappling with how to understand and account for such risks in investment, lending, and other financial decision-making and regulators must consider how these risks affect markets and the economy as a whole.

In the context of public company disclosures to investors, the conversation has moved beyond whether to disclose to how to disclose. Many standard-setting bodies have emerged to demand different types of disclosure, filling a gap left by governments. Meanwhile, uptake of the disclosed information has increased: shareholders and asset managers have improved how they incorporate climate-related information into investment and voting analyses. In addition to qualitative assessments, they are incorporating quantitative information into their analyses from other data sources.

Yet there is still no international or national consensus on the optimal climate risk disclosure regime, nor in the United States is there any federal regulation requiring line-item climate-related financial risk disclosure, or providing guidance to reporting companies on how to assess the materiality of climate-related information. Since releasing its framework for improving climate-related financial reporting in June 2017, the TCFD has emerged as the leading framework for disclosures of climate-related information. However, it does not provide the detailed guidance needed for companies to confidently integrate such disclosures with mandatory financial reporting in the U.S.

During the Trump administration, different federal agencies took distinct approaches, ranging from research and consideration to actively erecting barriers against incorporating climate change concerns into decision-making. But President Biden has committed to taking bold actions on climate change, including in the financial sector and on corporate disclosure requirements. With new leadership in the federal government, including at independent agencies like the SEC, significant shifts are underway in regulatory direction that will change what is required of companies and financial institutions.

Read my recent piece, prepared as accompanying material for the climate change panel at the American Law Institute’s Environmental Law 2021 conference, describing the state of play in the various federal financial regulatory bodies and how we are entering a new era in climate-related disclosure and financial risk management in the U.S.

On February 24, 2021, SEC Acting Chair Allison Lee announced the SEC would update its 2010 guidance on climate-related disclosures and begin a process for “developing a more comprehensive framework that produces consistent, comparable, and reliable climate-related disclosures.” This announcement indicates the changing focus at the SEC noted in my summary is already leading to quick action to require better incorporation of climate change information into corporate and financial risk management.

Read more:  Entering a New Era in Climate-Related Disclosure and Financial Risk Management in the U.S., February 17, 2021, Hana Vizcarra