Climate Risk Disclosure Safeguards Our Investments
Authors: Amber Bieg, Deb LaSalle, and the Warm Springs Consulting Team
On March 21, 2022, the Securities and Exchange Commission (SEC) announced a draft of new rules that require all publicly traded companies to disclose risks attributed to climate disruption. Applauded by many in the global finance sector, this step acknowledges that the changing climate is a global threat to corporate profitability as well as shareholder investments – and that a firm’s unique climate risk must be included in other financial risk disclosures.
While this could be viewed as a cumbersome task that places a burden on companies during a time of inflation, these concerns are unfounded for three reasons:
- Climate Risk Disclosure Safeguards Our Investments
- Most Businesses Affected by the New SEC Rule Already Disclose Climate Risk or Greenhouse Gas (GHG) Emissions
- It’s Not a Significant Burden to Disclose Climate Risk
1. Climate Risk Disclosure Safeguards Our Investments
Just like disclosing other risks, disclosing climate risk and anticipated impacts helps investors make better-informed decisions that safeguard their investments.
With so much of our economy depending on agricultural products and natural resources, Idaho is uniquely vulnerable to climate change.
The recently published Idaho Economy Impacts Assessment by the McClure Center shows how significantly our economy in Idaho is impacted by climate change. The health section of the Assessment states that “the direct health costs of air pollution and climate change in the U.S. exceed $800 billion per year and are anticipated to increase as temperatures rise.” For many Idaho companies, their greatest asset is their employees, and employee health is often directly linked to a company’s economic performance. But it’s more than just lost labor. Idaho faces real economic threats to our energy systems and supply chains – which all contribute to price inflation. As impacts from climate change are often financially material, it’s essential that it be included in financial disclosures.
In their 2018 Sustainability Report, Idaho Power, the state’s largest public utility, acknowledged that not only was climate change happening and human-caused, it posed a risk to the company’s future operations. Because Idaho Power is heavily dependent on yearly snowpack for hydroelectric power generation (which makes up 41 percent of its generation), using climate model forecasts to plan risk mitigation scenarios is highly strategic and puts Idaho Power in a position to adapt to the changing climate. Since 2018, the company has been reporting to the Task Force on Climate-Related Financial Disclosure (TCFD), publicly acknowledging the economic risks of climate changes, and making commitments to mitigate GHG emissions. Idaho Power has committed to producing 100 percent clean energy by 2045.
The investment community continually has demanded transparency when it comes to climate risk. Larry Fink, chief executive at BlackRock, the world’s largest fund manager, acknowledged “climate risk is investment risk,” and published a letter in 2020 stating the group would “place sustainability at the center of its investment approach.” During her keynote talk at the American Exploration & Mining Association (AEMA) Conference in Reno Nevada in December 2021, Allison Forest at Resource Capital Funds stated “if mining companies want to get capital from us and other institutions like us, climate disclosure is important.”
“[Without standards] there would be no consistency, no comparability, little transparency and a lack of trust in the information, which would lead to higher costs of capital and increased risks for investors.”
– Edmund L. Jenkins, Financial Accounting Standards Board (FASB) Chairman
Like the rules of modern accounting, climate disclosure standards are important tools that improve economic efficiency in markets – improving our ability to compare products and make smart investment choices. To ensure fairness in a free market economy, risk disclosure is important for investors to make wise decisions. It’s important that disclosures are consistent so that investors are able to compare apples to apples. Per SEC Chair, Gary Gensler, “[c]ompanies and investors alike would benefit from the clear rules of the road.” With more than $649 billion in investments in ESG funds, investors have called for companies to be consistent in disclosing climate risk. This is exactly what SEC rules produce.
2. Most Businesses Affected by the New SEC Rule Already Disclose Climate Risk or GHG Emissions
In Idaho, the SEC rule applies to 12 companies. In total, eight out 12 of the Idaho companies are already disclosing climate risk – as shareholders have been demanding this for years. Larger companies that these rules apply to would need to report all disclosures in fiscal year 2023 filings, while medium-sized companies need to meet this requirement one year later. Out of the nine companies in Idaho that fall into the large filer category, only two don’t currently disclose GHG emissions or climate risk.
|Idaho Large Accelerated Filer Companies|
|Company||Market Value (Jan 7 2022)||Industry||Current Climate Disclosure|
|Micron||$105 billion||Technology||CDP; Sustainability Report|
|Albertsons||$14.6 billion||Food||CDP; ESG Report|
|Lamb Weston||$10.26 billion||Food||CDP; ESG Report|
|IDACORP||$5.7 billion||Energy||CDP; ESG Report|
|BMC Holdings||$3.6 billion||Construction||None|
|Clearwater Analytics||$3.5 billion||Technology||None, but commit to ESG|
|Boise Cascade||$2.7 billion||Construction||ESG Website; SASB Disclosures 1 | 2|
|Hecla||$1 billion||Mining||ESG Report|
|US Ecology||$1 billion||Waste||ESG Website; ESG Report|
|Idaho Medium Accelerated Filer Companies|
|Company||Market Value (Jan 7 2022)||Industry||Current Climate Disclosure|
|Pennant Group||$540 million||Healthcare||None|
|Perpetua Resources||$280 million||Mining||Sustainability Report; Roadmap|
Per the ruling, smaller publicly traded companies would need to be prepared by fiscal year 2025. It is important to note that small reporting companies would not yet be required to disclose supply chain emissions – however, vendor or shareholder pressure may already require them to do so and as such, many are already making these disclosures.
3. It’s Not a Significant Burden to Disclose Climate Risk
GHG emissions and climate risk disclosure may seem complex, but in reality, it is straightforward with clear standards and guidance. SEC rules would make this even more streamlined and clear. For most large companies it is assessed utilizing financial accounting, with only a marginal increase in effort to include climate disclosure. Like with financial accounting, many companies will look to outside consultants to support their accounting efforts.
The primary frameworks in climate risk disclosure are (1) Task Force on Climate Related Financial Disclosure (TCFD) and (2) Carbon Disclosure Project, both of which guide companies on how to disclose risk; and (3) the GHG Protocol, an international protocol for how to disclose a company’s GHG emissions. The proposed SEC rules streamline the assessment by using the methodologies from these frameworks.
GHG accounting costs depend on complexity and data management. Many large companies already spend millions on financial accounting. Sustainability consulting firms, like Warm Springs Consulting in Boise, charge anywhere between $10,000 to $100,000 to support a large company in assessing and disclosing climate risk and GHG emissions. Simple GHG accounting and disclosures can be prepared using spreadsheets. More complex accounting requires software like Microsoft Cloud for Sustainability, SAP Carbon Impact, Optera and others. For smaller companies (less than 200 employees), consultants may not be needed and the costs are low when utilizing free GHG accounting tools like Aclymate.
To learn more about how to account for GHG emissions and assess climate risk disclosure, join the Idaho CleanTech Alliance on June 22, from 11am to 12pm Mountain Time for a free webinar with GHG accounting experts Ty Colman from Optera and Amber Bieg from Warm Springs Consulting.