The SEC Climate Rule Is Responding To Investors — And Good Business

In 2023, NOAA, the National Oceanic and Atmospheric Administration, reported that the U.S. had the highest number of weather and climate disasters over a billion dollars in damages. 28, costing a total of over $93 billion. Over the last 30 years, that total is about $3 trillion. Think of all the homes, businesses, schools and communities damaged or even destroyed by these hurricanes, wildfires, tornados, floods and droughts we see in the news every day – like the recent devastation caused by Hurricane Helene in Asheville, North Carolina, Tennessee and Florida.

Those pictures, videos and NOAA estimates reflect the massive financial impact of climate change, and why the investment community is demanding more and better data on it.

That investor demand is at the root of the Securities and Exchange Commission (SEC) climate risk disclosure rules finalized earlier this year. Kristina Wyatt, who led the SEC’s Task force developing the original climate risk disclosure rules, told me last year that investors have been clamoring for comparable, reliable, consistent data they can use to make informed investment decisions. It’s been a hodgepodge of standards and frameworks, and frankly, mostly voluntary, with companies changing how they report this data for public relations purposes.

Even though the SEC climate risk disclosure rules are being challenged in court, we know that some version of them will survive because of these demands by investors. In addition, most of the companies that are required to comply with these rules are global and have to comply with the European Union’s (EU) climate-related rules too. California also recently passed its own climate laws that may apply to any company over $500 million in revenue doing business in California. Executives and board directors ignore these rules and laws at their and their organization’s peril.

Beyond compliance, the data these rules and laws require have bonafide business value. They could reveal valuable trends, risks, opportunities, markets, and issues.

To get a reality check on the SEC climate rules and the legal challenges it’s facing, I spoke with Tara Giunta, Esq., Global Co-Chair of the ESG and Sustainable Finance Practice and a Litigation Partner at Paul Hastings law firm, in an exclusive interview on Electric Ladies Podcast.

Here are key points from my conversation with Giunta about the SEC rules:

· How to look at the SEC climate rules: “The SEC’s climate rule needs also to be viewed in the broader context of globally, what’s happening, what’s coming out of the EU, and then also what’s happening at the state level,” Giunta said, referencing that the EU has the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive that require reporting and disclosure. “What I think a key takeaway I hope today will be is, these are all issues, these risk areas, are interconnected and need to be understood from that perspective.”

· What the SEC climate rules ask for: “It requires material disclosure of material, climate related risks and their impacts on your business,” Giunta said, and “what activities have you done to try to mitigate those risks?” That includes material expenditures incurred or expected to address those risks. There’s a role for boards too: “What is the board’s oversight of climate related risks? How do they oversee it? Is there a climate committee? Does it sit in nom-gov (the nominating and governance committee)? Does it sit in audit? What is their role in guiding management? What’s management’s role in terms of managing material, climate related risks?”

The SEC rule is also about the process, she said, “They want the registrants also to describe the process by which they identify, assess, manage, material, climate related risks,” clarifying that, “You have to tell investors and the market how you have approached assessing your climate related risks and addressing them.” And, if you put in climate-related targets, you need to explain the costs and potential financial losses to achieve them.

· What executives and board directors need to do: “If you are sitting on a board, a corporate board, or you’re in management, really the challenge is making sure that you understand the full range of material risks that may be facing your business today, your industry down three to five years, depending upon what your strategic plan and goals are. And how do you make sure that you really understand the ones that are material,” Giunta explained. “Material,” briefly stated, is what an investor would need to know to invest in the company; and the numbers need to be verified by an independent third party.

It’s critical to understand all types of risk, Giunta added: “You need to make sure you’re stepping back and understanding geopolitical risk, social, cultural risk, legal, regulatory, risk, activism. What are the activists looking at?” That includes considering “all the different stakeholders in your ecosystem,” from employees to suppliers to customers, regulators, investors and activists. ”You don’t want to be reactive, you want to be proactive,” she emphasized. There are a lot of unknowns, of course, but being able to manage ambiguity is a key qualification for being in a leadership role.

· The impact that the SEC rules will have when they are in place: “I think it (SEC climate rules) will have impact,” Giunta opined, based on her 30 years of experience. “Many, many companies are already being responsive and putting the procedures and processes in place. They know it’s important for their business. They know that in the war for talent, that they need to be able to show that they have environmental, social as well as governance policies.” But, she added, “The SEC rules, they apply to a broad range of reporting companies, and so it will force those companies that are kind of lagging and holding back, it will force them to move forward and say, ‘we’ve got to get serious and do this.’ “

Giunta reviews these reports day in and day out and pointed out, “In my opinion, it should not be underestimated the value of having some kind of uniformity in the reporting,” even considering the differences in industry, location, supply chain, customer base, etc.. That uniformity “will go a long way.”

Giunta reminded us of the important role we each have, no matter where we sit: “All of these risk areas are so incredibly important, not only for corporate America, but for all of us,” she insisted, “To really understand the role that each of us plays in achieving success financially, and job expansion, but also being respectful of our climate and, protective of our climate.”

Listen to the full interview with Tara Giunta of Paul Hastings on Electric Ladies Podcast here.