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Climate Change and Securities Litigation, Higher Rates for Directors & Officers Liability Insurance

For those in the industry, navigating the reporting systems connected to climate change related risks can be daunting.  A more streamlined approach to this task would certainly have a warm welcome amongst the community.  This wish may come true soon enough with a U.S. Securities and Exchange Commission proposal that would require companies to disclose climate-related risks.  This required disclosure has the potential to cause a better process to emerge that could very well become standardized.

Within the proposal issued earlier this month, the SEC asks companies to gather data and report on four channels.  These are:

  1. The registrant’s governance of climate-related risks and relevant risk management processes.
  2. How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term.
  3. How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook;
  4. The impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

Chair Gary Gensler said in an interview, “I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.”  

Now this statement may sound prolific to investors for making better investment decisions but as the Commissioner of the SEC Hester Pierce states, “Contrary to the hopes of the eager anticipators, the proposal will not bring consistency, comparability, and reliability to company climate disclosures.  The proposal, however, will undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures.  We cannot make such fundamental changes to our disclosure regime without harming investors, the economy, and this agency.  For that reason, I cannot support the proposal.”

Who knows exactly what will occur as a result of this new proposal that is said to make its way into the stream of things come this October.  Europe and other countries have, and have already been, implementing new climate reporting measures and it’s been said, this new proposal seems to be in line with the same style of regulatory standards now being seen globally.

With this new proposal there will certainly be more transparency and standardization in climate change risk reporting across the board but, it is also said to have some mud on the other side of that coin as well.  Compliance costs and policyholder costs are poised to rise and there will certainly be companies and individuals that are not ready, or willing, to carry the weight of those added costs.  A shift is in view and with that it is said there will be more securities litigation causing a rise in directors and officers premiums.  The SEC has laid down a new road map for this, now we’ll have to see where it leads us.