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How Regulation Can Encourage Climate Action

October 13, 2022

As the low-carbon transition accelerates, more companies are considering climate change in their operations and decision-making. Part of this shift is due to regulation. In many jurisdictions, governments are requiring businesses to disclose climate-related information in their periodic filings. 

Climate-related disclosures inform companies’ key stakeholders of how they’re approaching the challenges and opportunities related to extreme weather and the low-carbon transition. These disclosures provide transparency on how organizations think about climate change, what they’re doing to respond to it, and what they’ve committed to. 

Organizations typically use at least one climate-related reporting framework as a guideline to structure their disclosures. These help companies produce coherent, decision-useful disclosures and allow users to compare and contrast climate actions across companies. Popular frameworks include the world-leading Task Force on Climate-related Financial Disclosures (TCFD), as well as those published by the Sustainability Accounting Standards Board (SASB, now part of the International Sustainability Standards Board), the Global Reporting Initiative (GRI), and CDP, formerly known as the Carbon Disclosure Project. This alphabet soup of frameworks is consolidating gradually, with many now aligning with the TCFD’s recommendations.

Climate disclosure requirements emerge around world

Over the last year, several jurisdictions have moved toward mandating corporate climate-related disclosures based on the TCFD. By requiring disclosure, authorities intend to increase the number of organizations reporting climate-related information, ensure comparability across companies and sectors, and reduce gaps and other discrepancies related to voluntary disclosure frameworks. 

In March, the US Securities and Exchange Commission (SEC) released a climate reporting proposal for all US-listed companies. The SEC’s proposal came after several other jurisdictions — Canada, Switzerland, the UK, and New Zealand — announced moves to mandate TCFD-aligned reporting.

Also in March, the International Sustainability Standards Board (ISSB), founded by the International Financial Reporting Standards Foundation (IFRS), released draft sustainability- and climate-related disclosure standards. These have the potential to become the global template for both voluntary and mandatory corporate sustainability and climate reporting requirements.

How regulation can foster change

Changing regulations will shift how companies approach and respond to climate-related issues. They could also put businesses on a level playing field and help solve the collective action problem preventing organizations from taking concerted climate action. Since all businesses will be required to report similar metrics and make the same specific disclosures under these regulations, every organization will be incentivized to maximize climate action in order to stand out among their peers and satisfy stakeholders. 

The standardized climate disclosures brought about by regulation will ensure companies’ reports contain decision-useful information and help close current data gaps, like those around corporate emissions. More consistent disclosures will help investors compare companies’ climate-related data and get a full picture of how they are responding to climate-related risks and opportunities.

Once investors understand how organizations are identifying, assessing, and managing their climate risks and opportunities, they can set certain expectations for companies related to climate action. For example, if investors see that companies are lagging on how executive-level pay is linked to climate action, they can push for changes. This is similar to how some investors of oil and gas companies pushed firms to bolster their climate strategies when they thought they weren’t good enough.

Additionally, investor interest in companies’ climate-related data extends beyond publicly listed firms. Private companies should also expect investors to press them on their climate-related information, if they haven’t already. 

Companies can encourage climate-related action

As climate disclosure expands, minimizing climate risks and leveraging climate opportunities will be positive differentiators for companies. Plus, there are many ways that organizations can get ahead of the curve and act on climate.

One way that companies can stay on top is to preemptively improve their climate-related disclosures and sharpen their climate messaging. It may be helpful for firms to learn from organizations that are advanced in this area, like those in the insurance industry. Since this sector is highly exposed to climate-related risks, it’s relatively forward-thinking when it comes to climate disclosures. Companies in other sectors that are still beginning their climate journeys can look to insurance companies to determine best practices for climate reporting.

Another way that companies can get ahead is by acting on climate change. There’s benefits to minimizing your organization’s climate risks and to integrating climate risk into your business strategy, operations, and management processes. The best business strategies also identify opportunities that will emerge from the massive industrial changes that will result from the low-carbon transition. 

To help encourage climate action, companies can also align their lobbying efforts with global climate targets, like those outlined in the 2015 Paris Climate Agreement. This way they can push regulators to implement climate risk management guidance, transition plan requirements, and more. Together, these policies could make it easier for firms to take climate action and investors to understand where to allocate capital to support the shift to net zero.

How Manifest Climate can help

If companies don’t know where to start on their climate journeys, Manifest Climate can help. Our leading Climate Risk Planning solution allows firms to identify their climate risks and opportunities, build internal climate competence, better align disclosures with global reporting frameworks, and stay on top of market developments and peer actions. Request a demo to learn more.