The new Securities and Exchange Commission (SEC) Climate Disclosure Rule has been a hot topic since the approximately 800-page document was finalized on March 6, 2024*.
Is water addressed in the Rule?
Yes, water is included in the Rule.
The SEC’s Climate Disclosure Rule aims to standardize and enhance the climate-related disclosures of public companies in response to investors’ demand for reliable and comparable information. The Rule mandates disclosures about climate-related risks that are likely to have a “financially material” impact on a company’s business, strategy, and financial performance.
As water-related risks are integral to understanding overall climate risk, the Rule requires companies to report information on water risks if these risks have a material impact. Links to the fact sheet and full Rule.
What does “Financial Materiality” mean?
The concept of financial materiality serves as a guiding principle to determine which information companies must disclose. Information is considered material if “there is a substantial likelihood that a reasonable shareholder would consider it important” in deciding how to vote or make an investment decision. This definition is intentionally broad and flexible, so that the details of such disclosures are determined by each company based on its unique context and circumstances, encompassing qualitative and quantitative aspects.
There is a global trend towards mandatory climate disclosures, and water disclosure is included depending on the type of report and company. The EU regulations are among the most comprehensive, mandating a double materiality assessment. The UK and Canada have adopted requirements aligned to TCFD, and Japan encourages voluntary disclosure with ongoing discussion about making it mandatory. The SEC Rule is a significant step towards aligning the US with global standards.
More information about water sustainability reporting requirements can be found in this article.
What companies are required to disclose information?
The Rule applies to publicly traded companies registered with the SEC. This includes around 2,800 US and 540 foreign companies with securities listed on US exchanges. The full Rule requirements apply to large accelerated filers and accelerated filers, with scaled reporting requirements for non-accelerated filers and smaller reporting companies. The largest companies must begin reporting in 2024, with phased reporting, emissions, and assurance requirements in subsequent years based on company filing status.
Understanding the water disclosure requirements in the Rule
The SEC Rule defines climate-related risks as encompassing both physical and transition risks, which are detailed below for water.
Water-related physical risks can be acute or chronic:
Acute: Short-term events such as severe weather with flooding, a catastrophic release of contaminants, water supply interruption due to power or infrastructure failure, etc.
Chronic: Longer-term issues such as sea level rise, drought, decreased availability of freshwater, declining water quality from impacts of land use and pollution, etc.
Transition risks are related to regulatory, technological, and market changes to address climate-related risks:
Regulatory: Increased costs attributable to climate-related changes in law or policy
Reputational: Impacts resulting from customer or business counterparts that might trigger changes in market behavior, consumer preferences, or a company’s behavior.
It’s important to highlight that assessing water risks requires gathering and consolidating updated external and internal data at the local facility level.
More information on measuring water risks can be found in this article.
The Rule requires companies to identify these risks when material and to disclose how they are being managed or mitigated. This includes reporting on impacts across business, governance, board oversight, risk management strategies, and related targets and goals.
Key actions you can take to be ready for the SEC requirements
The good news is that there are synergies between different sustainability reports. Suppose you are already reporting information to CDP Water Security and ESRS, for example. In that case, the information about water risks and mitigation strategies you have can help prepare for the SEC reporting requirements.
Below are some recommendations on actions to address water-related risks and comply with SEC disclosure requirements.
Understand water risks and opportunities
Conducting assessments of water-related risks across your business operations and supply chain is crucial to identify the correct mitigation responses. For this, it’s important to gather external local water data about hazards that may impact operations, such as water shortages, flooding, or quality issues, and integrate it with internal data to understand the local site’s vulnerability to external risks. After this analysis, high-risk sites can be prioritized for further assessment and development of mitigation strategies. More information on assessing water risks can be found in this article.Evaluate financial materiality through scenario analysis
This is particularly important for high-risk sites. Scenario analysis can help evaluate potential future situations and calculate the value at risk (financial impact). This analysis is based on water consumption, the cost implications of water usage, and the site’s specific vulnerabilities. The assessment can provide valuable insights to plan mitigation efforts.Establish water targets to track the progress of your water strategies
Setting appropriate water targets is essential for defining impactful strategies, tracking progress, and remaining aligned with regulatory standards and stakeholder expectations. To establish targets, it’s essential to consider each site's internal and external water context and overall company priorities and needs.
The opportunity to leverage technology
Technology presents a key opportunity to streamline the gathering, centralization, and assessment of water-related data, enhancing decision-making and reporting processes. By establishing a centralized system to manage information on external hazards, site-specific vulnerabilities, and historical data, you can effectively evaluate water risks, prioritize mitigation actions, and ensure compliance with SEC reporting requirements. This streamlined approach can save significant time, improve team collaboration, better inform decision-making, and enable you to leverage synergies across different sustainability reports, which generally require similar data types.
Conclusion
The SEC Rule mandates companies to measure and disclose various water-related risks with potential material impacts on their businesses. Specifically, the Rule requires measuring material physical (acute and chronic) and transition (regulatory and reputational) risks. Effective measurement, management, and reporting of water risks depend on gathering accurate local water data and fostering collaboration with internal and external stakeholders. You can leverage technology to significantly streamline this process.
You can learn more about water risks in this article and about water sustainability reporting in this article.
*As of April 4, 2024 the SEC announced that it will pause implementation of its final Rule requiring companies to disclose their climate-related risks pending the results of a legal challenge in GOP-led states. According to the SEC, this does not represent an abandonment of the Rule, as the agency will continue to defend against a court challenge.
