As companies, and their lawyers, dive into analyzing what the new U.S. Securities and Exchange Commission’s climate disclosure rule means for them, they should be sure to take a good look at the requirements around water risks.
In a notable step forward, the SEC integrated water-related financial risks into the first-ever federal rule that requires all U.S. public companies to disclose material climate risks. This is historic for the U.S. and, while not perfect in scope, it is part of the strong global momentum – both regulatory and voluntary – behind increased transparency around water risk.
For decades, investors have been ratcheting up their calls for more robust water disclosures and actions from companies as water risk has grown.
Worsening droughts, floods and heatwaves driven by extreme weather are making water more scarce, more polluted and more unpredictable. That is impacting companies and financial markets by disrupting production and shipping, undermining productivity and damaging and idling assets ranging from factories to farms.
These threats are why investors working with Ceres launched the
Valuing Water Finance Initiative , opens new tabto engage companies with a large water footprint to value and act on water as a financial risk and drive the necessary change to better protect water systems – an initiative that has grown significantly over the past two years to represent 100 investors managing $17.6 trillion in assets.
The new SEC rule will give investors some of the sorely needed consistent, comparable and transparent information they have been seeking, and that is crucial to ensuring long-term portfolio value and beneficiary returns.
The rule requires companies to disclose material physical risks they are exposed to including acute risks – shorter term weather events, such as hurricanes, floods, tornadoes and wildfires – and chronic risks from drought, rising sea levels and other longer term weather patterns. Related risks could include decreases in arability of farmland, habitability of land and availability of fresh water, according to the rule.
In a departure from the SEC’s original proposal, disclosure of these material physical impacts in the final rule is only required for companies’ direct operations, not the supply chain or entirety of the value chain, due to concerns over undue burdens to companies. Yet the rule calls for disclosure of applicable material impacts on “suppliers, purchasers, or counterparties to material contracts, to the extent known or reasonably available”. Companies may define what is “reasonably available” differently. This gives companies a potential off-ramp.
The new rule also does not require the disclosure of certain metrics, such as the percentage of assets located in water-stressed areas, which was contemplated in the 2022 draft rule. Nor does it address water quality as a factor in the definition of water-stressed regions, which we had recommended the SEC include, given the material nature of the reliance on freshwater by many sectors. We hope that companies still realize the importance of their business planning in understanding the full suite of material financial risks.
For two decades, Ceres has led advocacy efforts and mobilized investor and business support for corporate sustainability risk disclosures, including those related to water risk and opportunities. In fact, the first report released by Ceres’ newly formed water team in 2010 was around water disclosures.
Because climate and water risk are financial risks, it’s vital for companies to fully understand the water risks they face, including in their supply chain, and it’s important for their investors to know. After all, for most companies, their largest water footprint is in their supply chain. A variety of supply chain assets are exposed to risks, including
concentrated animal feeding operations , opens new tab(CAFOs) within flood-risk zones and
semiconductor manufacturers, opens new tab in drought-prone areas.
The good news is that more companies are voluntarily reporting these water disclosures year after year.
In 2022, CDP reported, opens new tab that over 3,900 companies had submitted voluntary water disclosures, marking an 85% increase in water reporting over a prior five-year period. Ceres’
benchmarking of companies on their water management , opens new tabpractices since 2015 has also shown an improvement in water-related disclosures through a variety of mechanisms such as CDP surveys and sustainability reports.
And on the regulatory front, the
Corporate Sustainability Reporting Directive (CSRD) , opens new tabadopted by the EU in 2021 is helping drive necessary change. The rule is comprehensive in scope including companies’ direct operations and supply chains, impact materiality and financial materiality. It lays out specific requirements for reporting on water resources (water consumption and pollution, recycling and the identification of high-risk sites and basins), and linkages to pollution, biodiversity loss and community water access.
This will help raise the bar with U.S. companies on water-related disclosures, and help them better understand their water risks, since large U.S. companies listed on an EU-regulated market will be required to report under CSRD starting in 2025. Some other U.S. companies operating in the European Union will be required to comply in subsequent years.
The new SEC rule is an important step towards achieving the water-secure future we all seek, though we and investors wanted the SEC to go further. As water risk continues to escalate around the globe, investors and companies need full transparency to be able to manage these threats, adapt and innovate to be the resilient, competitive markets and companies that succeed in a changing climate.
At the end of the day, we need to see bold action on addressing these water risks. Robust disclosures and benchmarking will help investors understand if actions are in fact sufficient to mitigate financial risk and ensure a sustainable water future.
Fuente: Reuters