SEC climate disclosure rules: How insurers can prepare

New rules from the U.S. Securities and Exchange Commission (SEC) are designed to standardize climate-related disclosures about greenhouse gas emissions and weather-related risks by public companies and in public offerings. These rules were first introduced in 2022, and will require companies to make disclosures about climate risks.

SEC Chair Gary Gensler said in a release: “These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”

Gensler also noted that the SEC has updated these disclosure rules, and guidance on those requirements, periodically over the last 90 years.

Some of the disclosures required in the SEC’s final rules (found in full here) include:

• Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
• The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
• If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities;
• Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
• Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
• Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
• The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;
• The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements; and
• If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.

In the final SEC rule, these changes are attributed to the impact of climate-related risks. The ruling states: “Climate-related risks, their impacts, and a public company’s response to those risks can significantly affect the company’s financial performance and position. Accordingly, many investors and those acting on their behalf—including investment advisers and investment management companies—currently seek information to assess how climate-related risks affect a registrant’s business and financial condition and thus the price of the registrant’s securities. Investors also seek climate-related information to assess a registrant’s management and board oversight of climate-related risks so as to inform their investment and voting decisions. In light of these investor needs, the Commission is adopting rules to require registrants to provide certain information about climate-related risks that have materially impacted, or are reasonably likely to have a material impact on, the registrant’s business strategy, results of operations, or financial condition; the governance and management of such risks; and the financial statement effects of severe weather events and other natural conditions in their registration statements and annual reports. This information, alongside disclosures on other risks that companies face, will assist investors in making decisions to buy, hold, sell, or vote securities in their portfolio.”

How can insurers prepare for SEC climate disclosure changes?

When the FCC rule changes were first proposed in 2022, Deloitte released advice for insurers on the actions they can take to prepare for the rules’ enactment, including:

• Establish or refine climate governance by identifying oversight on climate-related issues as well as defining clear roles, responsibilities and charters.
• Include people with the right skill set, and engage stakeholders by providing education on climate risks, data collection and target setting.
• Build reporting agility by standardizing governance and controls to enhance data quality, timeliness and relevance.
• Establish controls over climate-related data. To do this, insurers must assess the readiness of their current control environment in order to identify any gaps in reporting.
• Think strategically, and work to understand the disclosure requirements for climate targets in preparation for transparency on progress and transition plans.
• Identify physical and transactional climate risks and opportunities to the business.
• Be transparent and establish a plan to obtain or increase the level of assurance in their reporting.

“The U.S. Securities Exchange Commission’s climate disclosure rule marks a significant milestone in climate reporting for investors, and while much of the dialogue about the new rule has centered on GHG emissions, disclosures related to the potential impacts of physical climate risks are also included,”  Diya Sawhny, managing director-strategy, at Moody’s, shared in a statement. “Such risks can have financially significant effects – for example, climate events are resulting in increasing damage and loss amounts each year, according to Moody’s analysis, stressing insurers’ capacity to manage their approximately US$133 trillion in insured exposure to the U.S. real estate market, and underscoring the need for attention to the escalating physical risks of climate.”

On March 15, the New Orleans-based 5th U.S. Circuit Court of Appeals temporarily paused the SEC’s new disclosure rules as it considers lawsuits against them from oil companies Liberty Energy Inc. and Nomad Proppant Services LLC, according to Reuters.

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