The SEC’s decision to require publicly-traded companies to disclose climate change risks is a major development in corporate accountability and transparency. Companies already participating in initiatives like the Carbon Disclosure Project will likely see their early-mover advantages pay off as other companies scramble to meet this new requirement. Similarly, those companies not currently releasing information on their environmental, social, and governance (ESG) performance may find the SEC disclosure requirements just the incentive they need to pull together and report on other aspects of sustainability. Also, recalcitrant companies beware, this is a big win for socially responsible investors who have been pushing for such a ruling since 2007 and will no doubt find renewed vigor in their efforts, already underway in this year’s proxy season, to encourage companies to put out a sustainability report.
What does this mean for supply chains?
Essentially, the SEC is asking companies to consider the following trends that may impact their business as a result of climate change:
- The impact or potential impact of existing or pending laws and regulations
- The impact of international accords
- Indirect consequences of regulatory or business trends
- Physical impacts
Based on these areas, here are a few suggestions on what issues a company engaged in sourcing products or materials from abroad, might consider ‘material’:
· Importing requirements may impose additional liability for knowing that a product, even down to its raw materials, did not cause negative environmental impacts in its manufacture (the Lacey Act prohibiting the importation of goods made with illegally logged wood is a perfect example)
· Carbon emissions reporting may require information from suppliers to measure the full carbon footprint of products
· Business interruption due to severe weather events in countries or regions where the product or materials are sourced
· Possibility that the product itself or a material in the product is harmful to the environment (see, for example, what Greenpeace did for leather and beef traced to the Amazon)
· Consumer demand for environmentally-friendly products
· Customer requirements for reductions in packaging
· Increased manufacturing costs where suppliers have to comply with changing national regulations
Interestingly, the SEC also mentioned opportunities, encouraging companies to consider new products and markets that could result from an increasingly carbon-constrained world as potential sources of competitive advantage. Indeed, many of the issues listed above can be re-framed into opportunities, especially where early action is taken in anticipation of consumer and regulatory trends.
Companies who are ahead of the curve and already meeting the new disclosure requirements should be content with the fact that the SEC’s decision is leveling the playing field. Companies who were planning to write a sustainability report but just weren’t getting around to it, can use these developments to get more traction internally. And for companies who were hoping they could fly under the radar indefinitely, this should serve as a wake up call that, like it or not, calls for transparency in both the regulatory space and in the court of public opinion are only set to increase.