In a move that will have come as no surprise to those tracking developments in the wake of November’s US election, the SEC Chairman’s announcement on February 11th put the metaphorical nail in the ‘climate rule’ coffin last week.
Now that the climate rule is history, it’s worth thinking briefly about how that will impact things. As a good analyst, I’ve mapped that into a quadrant, as follows:
Some US businesses that wouldn’t have needed to report as a result of the climate rule already disclose their climate risks – gold star for them. Some businesses that would have had to report are already reporting – great. Other businesses wouldn’t need to report, and aren’t reporting already – fine, nothing lost really. It’s that last group that’s a concern: large firms that would have needed to tell investors about their climate risks, and aren’t already doing it – and presumably might not now start. That’s a problem.
Until a large firm produces reporting about their climate risks, we don’t know whether they:
a) are even aware of the physical and transition risks that impact them
b) understand the nature of those risks, or
c) have taken any efforts to address those risks.
Those can be gaping holes.
An example: After Hurricane Helene smashed into the Appalachian states in 2024, business leaders joked on LinkedIn “who had hurricane leads to flooding in Appalachian mountains on their 2024 bingo card?” As it turned out, many climate models had predicted this. This is the kind of thing a climate risk analysis would uncover.
That event impacted one small producer of high purity quartz – a key supplier, in fact, of semiconductors to the likes of Intel. Fortunately, its production was only halted for about ten days; a longer delay would have had a major impact on semiconductor production. Did Intel have this risk in any of its sustainability reporting? No. Should it? You be the investor and tell me!
Though organizations and leaders may feel they’ve dodged the SEC climate rule bullet, they should feel prepared to answer questions like:
- How is climate change likely to impact your, or your key suppliers’, operations?
- What are the relative potential costs and risks of climate-change-related impacts?
- Have you undertaken any measures to address those risks?
Some people might say that reporting these risks creates a litigation risk. That is, if the risk comes to pass, then the liability for not having undertaken any endless level of investment to avoid it could be high (i.e. “you knew!”). Arguably, however, that would be less bad than the combined costs of absorbing an avoidable (knowable) impact, plus litigation from investors who feel that the firm should have known about those risks (i.e. “how could you not have known?”).
That is to say: sooner or later – probably sooner – corporates will be hurt by what they don’t know.
For more information about the kinds of technology vendors that can support firms’ climate risk analysis, see the 2024 Verdantix report on physical climate risk analytics vendors.
