Ticking the box to meet the SEC's Rules to Enhance and Standardize Climate-Related Disclosures for Investors?

Wed, March 6th, SEC announcement: https://www.sec.gov/news/press-release/2024-31

"The final rules reflect the Commission’s efforts to respond to investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules."

The race is on and you need to prepare.

As we've experienced in other markets such as Europe, or countries where there are progressive approaches to climate risk management such as Singapore (MAS is always proving to be a leader), the SEC has announced the final disclosure rules for climate-related risk.

In a nutshell

• Scope 1 and 2 emissions will be required for larger SEC-registered firms, while scope 3 emissions are excluded due to concerns over compliance costs.
• Site and supply chain level physical risk reporting i.e., how might your business operations and supply chain be impacted by natural hazards such as floods, wildfire, hurricanes and what are you doing to manage that risk - the focus of this post

If you're a CFO or CIO at a large or listed company that falls into the scope of this ruling, this presents an immediate challenge with just over 12 months to find a solution.

• How should you manage the introduction of a potentially new risk vector into your firm, especially one where there's a lot of uncertainty in the results and how they've been produced?
• How is this going to impact my ability to grow top line and bottom line growth?
• How do you measure ROI on this? Is it even possible?

These are valid questions, and if you're anything like many of our clients as they were just one year ago, you're probably struggling to work out what you need to do next and need help.

Here are my quick recommendations

1. Do not look at this as a pure downside risk or box-checking exercise. Whilst it is an option, it's a dangerous one that ends up causing a lot of pain the following year. Trust me, we know. Our customers who took this approach, know better than us.
2. Doing it properly doesn't mean it has to be any more painful or difficult for you. If you have the right partner, they should make your pain go away, helping you leverage the data to drive great business outcomes and even competitive advantages in the market.
3. Invest in hiring at least one person who understands climate risk and climate modelling (either full time if this is something you need to manage this more fundamentally and daily in the business, or a contractor if you only need to revisit this topic once or twice a year). They'll make your life easier and help you ask the right questions of any vendor you might want to work with.
4. Don't simply rely on FEMA flood maps. That is a better step than doing nothing, but those flood maps don't quite answer the exam question. That's because they usually give you a directional sense of risk (high/medium/low) based on what happened in the past. As we know, climate change is non-linear and non-stationary. So the further you move from the past, the less relevant that data becomes.
5. Translating physical climate risk to financial risk can be incredibly complex and difficult to do. But it is necessary. Think about the asset vulnerability to the hazards it might be exposed to and leverage that information to help you price the risk into collateral valuation and ROI expectations.
6. Physical climate risk isn't only about an asset. If you're looking at top and bottom-line impacts you have to think about P&L. That means looking beyond the asset to business disruption that could be caused by major road, rail, power grid and other critical infrastructure failing. You can leverage downtime risk to calculate site-level revenue and EBITDA impacts.
7. These financial risks can manifest in different ways. That includes not only to the value of your own assets and the revenue generating ability of sites you operate from, but also your supply chain. In some cases the impact won't be a 'day 1' only hit - if you're in the gaming industry and you sell consoles, failure to get your console on shelves in time for Christmas means you'll not only lose sales on the consoles, but also the future sales on membership fees, in-game purchases, accessories and more.
8. Know that there absolutely is ROI and it can be quantified. We're happy to tell you how.

Ultimately physical climate risk is business risk to your balance sheet and P&L. By managing this risk effectively, you can actually drive top-line and bottom-line growth at the same time.

Climate X can help you do that on demand, and within seconds. All you need is a username and password, and you can enable everyone in your organisation to get going instantly. If your teams can use Google Maps, they can already use Spectra.

That means your front line can run their own climate physical risk due diligence ahead of IC meetings, or if you're a bank, you can run hundreds of thousands of properties in your mortgage portfolio through various climate stress scenarios with a simple 'drag and drop' action.

Our mapping of over 1.5bn assets globally means you don't need to know anything about the property - we've got you covered on the financial loss translation. And if you're lending to a corporate, we can deal with site level revenue loss impacts too.

Learn more about how we think about Physical Climate Risk as a Financial Risk (but also opportunity) across the various curated articles we offer for free, on our website: https://www.climate-x.com/articles

Still feeling lost or want to learn more?

DM me and I, or one of the specialists in our team, will be happy to help:

• VP Commercial: Manuel Vicente .

If you're an asset manager:

• Stephanie Handjiiska or Sasu Olli

If you're a bank or insurer:

• Sandro Chen or Alex Harros

If you're a consulting company looking to help your clients:

• Alex Crepault

We know this is a big problem that can be daunting to navigate, but we're here to help. That's why Climate X exists. So, how will you take your next steps?