How COVID disclosures provide a climate risk disclosure roadmap
– How companies approach COVID risks is similar to how they can approach climate risks
– Here’s a simple disclosure roadmap that you already have at hand to evaluate climate change risk for SEC disclosures
Here’s a write-up from our advisory board member, Ginny Fogg: There is lots of debate on the “when,” “where” and “how” of climate change disclosure – and some are still debating the “why.” But all companies have a simple roadmap in their hands to get started on assessing the risk to their financial condition.
The COVID disclosure roadmap that companies developed quickly in 2020 is a great process roadmap that can be applied to climate change risk assessment right now. When the pandemic unfolded in 2020, companies evaluated the risk and uncertainty of COVID-19 on their operations, their customers and their supply chain.
There was a lot of uncertainty around the severity and duration of the pandemic and its impact on companies. Many companies began to disclose the potential impact in a new risk factor, usually in qualitative terms. Soon thereafter, the disclosure was integrated into forward-looking statement disclosures.
Disclosure committees began talking frequently about the impact of COVID, and some companies formed subcommittees to evaluate it even more frequently. As the first quarter ended, qualitative assessments were added to trend disclosure in the MD&A section of the 10-K to explain the impact on revenues, expenses and cash flows. Gradually the disclosures became more quantitative, and quarterly disclosure on the impact of the pandemic was added to the financial statement notes.
All along the way, the disclosure committee, the CEO and CFO and the auditors were engaged and driving the process. COVID disclosure was anything but simple as it unfolded. But looking back, the process is familiar and can be applied to any emerging risk:
- First, evaluate the risk for risk factor disclosure and forward-looking statement disclaimers.
- Second, evaluate nearer-term impact for disclosure as a known trend in the management discussion and analysis section.
- Third, evaluate any current period impact for disclosure in the notes to the financial statements.
- At each step, begin with qualitative assessment and then move toward quantifying the risk as more information unfolds.
Use the materiality framework for assessing the risk at each step along the roadmap. Perkins Coie’s graphic depiction of materiality is a fantastic tool for this assessment and for assessing climate change disclosure outside of SEC-filed periodic reports.
Applying this roadmap to climate change risk, many companies may need to be at the second step already. EY’s recent board survey of 500 global board members found that 33% of boards expect that climate change will more than moderately impact their businesses in the next twelve months, an increase from 26% two years ago. This outlook is certainly ripe for a materiality assessment and evaluation as a known trend.
This roadmap is not groundbreaking – it’s just the basic disclosure process. But thinking of climate risk disclosure process as a repurposing of the COVID roadmap can serve as a reminder of how much progress companies made in disclosing a rapidly emerging risk last year. And that shows how quickly companies can move forward now on climate change risk assessment and disclosure.
Of course, companies will want to follow the SEC’s interpretive guidance on climate risk that came out over a decade ago. And note that my thoughts cover climate risk disclosures. They don’t extend to the change in business operations and strategy that might soon be coming for most companies. And obviously, they don’t cover the disclosures that might soon be required by new SEC rules.