While regulators and courts debate disclosure requirements, forward-thinking companies are discovering that comprehensive climate risk management isn’t just about compliance — it’s about survival. From insurance coverage to investor confidence, Mike Eardley, Tara Copas and Kyle Sullivan of EBI, a sustainability consultancy, argue that businesses need to act now, regardless of how the regulatory battle plays out.
Climate-related disasters have reached unprecedented levels of both regularity and severity. In 2023, the U.S. faced a record-breaking 28 individual billion-dollar weather and climate events, resulting in over $93 billion in damages. And then came the September tragedy wrought by Hurricane Helene, the aftermath of which killed more than 200 people in the southeastern U.S. and wiped dozens of towns entirely off the map.
While the SEC’s March 2024 climate disclosure rule aimed to standardize how publicly traded companies report climate-related information, ongoing legal challenges and the Supreme Court’s rejection of Chevron deference have created regulatory uncertainty that companies may be tempted to take advantage of.
However, corporate leaders shouldn’t wait for legal resolution before taking action. Proactive climate disclosure programs are becoming essential to satisfy growing demands from two key stakeholders: investors seeking environmental accountability and insurers requiring more sophisticated risk management.
The key is integrating climate disclosures into existing risk management and financial disclosure programs. By embedding these practices into established reporting systems, companies can leverage existing processes, controls and governance frameworks while minimizing duplicate efforts.
Integrating climate disclosure into existing risk management programs
Notwithstanding the challenges facing the SEC’s climate disclosure rule, the strategic integration of climate disclosure programs into risk management is essential for businesses navigating an increasingly uncertain future, particularly as insurers tighten their requirements for coverage.
To create effective programs, companies should integrate climate disclosure into their existing financial reporting frameworks rather than treating it as a standalone initiative. Treating sustainability data with the same rigor as financial data enhances decision-making, improves risk management and fosters long-term value creation. By systematically tracking ESG metrics, companies can better integrate non-financial risks into their strategic planning, making them more resilient and proactive in addressing regulatory requirements. This approach also unlocks operational efficiencies, cost savings and innovation, as sustainability initiatives often lead to resource optimization and new revenue streams. Moreover, it strengthens investor relations by attracting ESG-conscious investors and providing access to green financing.
Prioritizing sustainability data enhances a company’s reputation and brand image, differentiating it in the marketplace and attracting purpose-driven talent. Transparent and standardized reporting increases accountability, fosters trust among stakeholders and supports alignment with global sustainability goals, such as the UN’s sustainable development goals. By embedding sustainability into core operations, companies can future-proof their business, adapt to market and societal changes and achieve sustainable growth, balancing short-term profitability with long-term value creation.
Financial and climate-related disclosures often intersect, especially in areas like risk assessment and financial projections. By integrating these disclosures, companies can ensure that climate-related information is accurately reflected in financial statements. This integration reduces the risk of discrepancies, enhances overall data integrity and provides a more comprehensive view of the organization’s financial health.
Climate risks can significantly impact financial performance and long-term viability. Incorporating climate-related disclosures into broader risk management frameworks enables companies to better identify, assess, and mitigate these risks. This proactive approach strengthens organizational resilience and prepares companies for a future where climate-related challenges are increasingly prevalent.
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Insurance companies also play a key role driving climate-related risk management and disclosure. They are using innovative approaches, leveraging advanced technologies and data analytics to better understand and mitigate the risks posed by climate change.
At the heart of this shift is a more disciplined approach to risk management in underwriting. Insurers are relying on more thorough risk assessments to guide decisions on everything from renewal quotes to adjustments in coverage. These assessments go far beyond routine transactions, helping insurers prevent losses by developing targeted risk mitigation strategies that protect both their clients and their financial stability.
State regulators, such as the New York Department of Financial Services (NYDFS), play a crucial role in guiding insurers through this evolving landscape. NYDFS has published guidance for institutions on how to assess and manage climate-related financial and operational risks. The guidance directs insurers to assess climate risks across both their underwriting and investment portfolios.
As insurers gain a deeper understanding of climate risks, NYDFS expects them to evolve their risk management strategies. NYDFS has called for a shift from basic, qualitative assessments to more comprehensive approaches that integrate both qualitative and quantitative analyses.
NYDFS has also called on insurers to create climate-risk management frameworks that mirror the structures required by SEC’s disclosure rule. These frameworks should include senior management oversight, clearly defined risk limits, public disclosure and a strong focus on how climate risks impact existing risk factors. Insurers must integrate climate risks into their broader risk management functions, aligning them with board-approved risk profiles and ensuring that these risks are regularly documented, reported and monitored.
To do this effectively, insurers are expected to gather systematic information from both internal and external sources. This data should be used to inform scenario analysis and stress testing, allowing companies to assess both short- and long-term climate impacts on their business models. Moving beyond reliance on historical data, insurers are encouraged to consider future trends to better inform their risk assessments.
Incorporating climate risks into an organization’s risk appetite, tolerances and limits is no longer optional — it’s crucial. Insurers must use quantitative tools and metrics to assess exposure to physical or transition risks, evaluate the carbon footprints of their investment portfolios and regularly update their risk appetite and strategies in response to the rapidly changing nature of climate risks.
For insurers, this means crafting credible plans for mitigating climate risks and adjusting their policies accordingly. Understanding the impacts on customers, counterparties and investments is essential, and integrating climate risks into existing risk management functions across the organization is a must.
Public disclosure of these risks is also vital for maintaining market transparency. Insurers must enhance the visibility of their climate risk management strategies, making sure to disclose how these risks are integrated into corporate governance, risk management and business strategies. Emphasis should be placed on both physical and transition risks, with a keen eye on emerging opportunities in the shift to a low-carbon economy. Insurers are encouraged to engage with frameworks like the Task Force on Climate-related Financial Disclosures (TCFD), now the International Sustainability Standards Board (ISSB) standards.
As the climate-related disasters continue to intensify, the insurance industry’s ability to adapt, innovate and lead on climate risk management will be essential in shaping a more resilient future.
Conclusion
The evolving landscape of climate-related risks underscores the need for comprehensive and transparent climate disclosures and risk management programs. The SEC’s proposed rule aims to provide investors with essential information to assess how climate change impacts companies’ financial health and operational strategies. While facing legal challenges and industry pushback, the need for such disclosures remains critical as climate risks continue to intensify.
Proactively integrating climate disclosure into existing risk management frameworks should be seen as a strategic imperative. This approach can enhance investor confidence, improve market reputation and help companies mitigate climate-related risks. Additionally, the insurance industry’s focus on climate resilience highlights the growing importance of advanced risk assessment and disciplined management processes.
Ultimately, businesses that embrace comprehensive climate disclosure and sustainability practices will be better positioned to navigate the uncertainties of a changing climate, securing a competitive advantage in a marketplace increasingly focused on long-term sustainability.
Kyle Sullivan
