Incentives for Climate Action through Regulation
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March 7, 2023
min read

Incentives for Climate Action through Regulation

Companies can stay ahead of the competition by improving their climate-related disclosures and honing their climate messaging

As the low-carbon transition accelerates, more businesses are including climate change considerations in their operations and decision-making. Part of this shift can be attributed to regulation but part is driven by the realization that climate risks can threaten financial stability . 

Governments in many jurisdictions are requiring businesses to include climate-related information in their periodic filings. Climate-related disclosures inform key stakeholders about how companies are addressing the challenges and opportunities associated with extreme weather and the low-carbon transition. These disclosure requirements often take the form of management's assessment of material climate-related risks and opportunities

 These disclosures provide insight into how organisations perceive climate change, what they are doing to address it, and what they have committed to. Organizations typically structure their disclosures using at least one framework for climate-related reporting.

 Climate disclosure requirements are emerging globally. In the last year, several jurisdictions have moved to require corporate climate-related disclosures based on the TCFD. Authorities intend to require disclosure in order to increase the number of organisations reporting climate-related information, ensure comparability across companies and sectors, and reduce gaps and other discrepancies associated with voluntary disclosure frameworks.

 In March, the US Securities and Exchange Commission (SEC) proposed climate reporting for all US-listed companies. The International Sustainability Standards Board (ISSB), established by the International Financial Reporting Standards Foundation (IFRS), issued draught sustainability and climate disclosure standards in March.

 These have the potential to become the global template for corporate sustainability and climate reporting requirements, both voluntary and mandatory.

How can regulation promote change?

Regulation changes will have an impact on how businesses approach and respond to climate-related issues. Standardised climate disclosures enforced by regulations will ensure that companies' reports contain decision-useful information and will help close current data gaps, such as those surrounding corporate emissions.

 Investors will be able to compare companies' climate-related data and gain a comprehensive understanding of how they are responding to climate-related risks and opportunities with more consistent disclosures. Once investors understand how organisations identify, assess, and manage their climate risks and opportunities, they can set specific climate action expectations for them. Furthermore, investor interest in climate-related data from companies extends beyond publicly traded companies.

 Environmental action can be encouraged by businesses. Companies will benefit from reducing climate risks and capitalising on climate opportunities as climate disclosure expands. Furthermore, there are a variety of ways for businesses to get ahead of the curve and address climate change.

 Companies can stay ahead of the competition by improving their climate-related disclosures and honing their climate messaging ahead of time. Climate change action is another way for businesses to get ahead.

 Reduced climate risks and incorporating climate risk into your business strategy, operations, and management processes have advantages. Companies can also help encourage climate action by aligning their lobbying efforts with global climate targets, such as those outlined in the 2015 Paris Climate Agreement.