- Regulating climate disclosures. The SEC’s new proposal for climate-related disclosures is extensive and will affect every public company in the United States.
- HR will play a key role. If the proposed rules go into effect, HR and compensation professionals will be tasked with aligning the organization and holding key stakeholders accountable and engaged via goal setting and incentives.
- Support through hiring and talent development. HR professionals will need to find climate expertise and risk management skills in the market or develop them internally.
- Managing governance and board relations. HR and compensation professionals regularly interact with the board and its committees and will be asked to help determine that company employees and the board have the needed expertise to address climate-risk issues, and to provide information on these issues.
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The Securities and Exchange Commission’s (SEC) recently released proposal for climate-related disclosure for investors is one of the most extensive sets of disclosure regulations to be released in many years. It will affect virtually every company filing in the United States, and many quite substantially.
Compensation and HR professionals should be prepared to be involved in several key ways:
Understanding and Alignment
It’s important to have a basic understanding of the proposed rules, language and areas of focus. If these rules are implemented, they will quickly become part of our daily business lexicon and decision-making process.
Climate related issues are extremely controversial, with wide ranges of understanding and opinion about importance, materiality, levels of risk and opportunity, urgency and priority. Board members, executives, managers and employees will have their own views and levels of understanding. Part of the HR professional’s job will be to help foster greater alignment and understanding among and across these and other groups. This may be done with employee sensing, polls and focus groups to gauge the degree of alignment, and then providing education and discussion forums targeted at the key climate issues most pertinent to the company.
Accountability and Engagement
Many companies have made or will make meaningful commitments to lowering carbon emissions, reducing climate-related risk, or other long-term goals. Actionable metrics and targets will need to be developed, built into business goals, translated into team and individual objectives, and incorporated into performance plans and incentives. As with any new corporate objective, some business units, teams and individuals will have greater accountability than others for their achievement. Compensation and HR professionals will help build these goals and measures into how people and teams are evaluated and rewarded.
Hiring and Talent Development
The proposed rules require significant discussion on the skills and expertise a company has in climate and risk areas. Experts in climate science, risk management, risk mitigation, new technologies, sustainability and other areas may be needed and may be in higher demand. Compensation and HR professionals will need to be knowledgeable on these positions, skill sets and functions, as well as where to either find these skills in the market or develop them internally.
Governance and Board Relations
One key area highlighted in the proposed rules is governance. Companies will be required to disclose who on their board has climate and risk expertise, which committee(s) addresses climate-related risks and strategies, what measures and metrics they review, and how they get information from management and make key decisions.
HR and compensation professionals regularly interact with the board and its committees and will be asked to help determine that company employees and the board have the needed expertise to address climate-risk issues, and to provide information on these issues.
A Summary of the Proposed Rules
Some of the key points of the proposed rules are briefly summarized here. A more detailed summary can be found here.
The two main components of the proposed rules are:
Climate risk (and opportunity) disclosure. This follows the detailed protocol called Task Force in Climate Related Financial Disclosure (TCFD). There are four main categories of disclosure:
- Governance — how the board and management provide governance over climate issues
- Strategy — how the company’s strategy will accommodate and incorporate climate issues
- Risk Management — how the company quantifies, prioritizes and mitigates climate related risks (and opportunities). This includes physical risks (what the climate can do a company and its assets) and transition risks (risks associated with the transition to a low/zero carbon environment.
- Metrics and Targets — what climate-related measures the company uses and discloses, what goals and targets are established, and progress towards those targets.
Greenhouse Gas (GHG) Emissions. These proposed rules follow the GHG Protocol and require disclosure of three types:
- Scope 1 emissions — those produced by the company in its operations
- Scope 2 emissions — those produced by direct suppliers, mainly of electricity
- Scope 3 emissions — those produced up and down a company’s supply chain (NOTE: the SEC acknowledges that disclosure of Scope 3 emissions is much more difficult to quantify and provides both more time to comply and allows for a materiality standard to determine what has to be disclosed.)
Other key aspects of the proposed regulations:
- Materiality — all of the disclosures in item 1 above are subject to the company’s determination of which climate issues and risks have material impact on the business. That is not the case for Scope 1 and 2 GHG emissions, which must be disclosed regardless of materiality — but is for Scope 3.
- Risk focus — the proposed regulations are very focused on climate-related risk and risk management. Climate-related opportunities can be disclosed, but the preponderance of the regulations is about identifying and managing risk.
- Financial Statement Disclosure — the impact of climate-related risks will have to be disclosed in the 10-K, in line items where it is material, and in footnotes. The intent seems to be to bring all relevant climate-related information into the core financial statements.
- Commitments — if a company has made a climate-related commitment, such as net-zero carbon by 2050, it must provide extensive disclosure as to how it plans to meet that target, and what progress it is making towards the target.
This summary is by no means comprehensive, but it should make it easier for HR and compensation professionals to be conversant in this rapidly changing and evolving arena.