Businesses are facing pressure, from the public and private sector, to report their climate change risks, sparking debate over the efficacy and scope of such disclosures. Most recently, a March 2024 rule issued by the Securities and Exchange Commission would require reporting companies to disclose climate-related financial risks, but the SEC has delayed implementation in light of several legal challenges to the final rule.
A new white paper by the Energy, Environment, and Land Use Program at Vanderbilt Law School spotlights the often-overlooked role that physical climate risk – the exposure of assets and operations to climate-induced hazards – plays in private and public disclosures.
“The Boundaries of Corporate Physical Climate Risk: Definitions and Frameworks,” authored by EELU Program Director Caroline Cox and 2023-2024 EELU Fellow Chick Hallinan ’25, examines the way firms measure physical climate risk and assesses the current state of physical climate risk disclosure. It also points to existing federal laws that might serve as indicators of how regulators might approach the topic in the future.
Debates aside, climate-related physical risks will have a profound impact across the economy, from investment banking strategies to home purchases. “What is included in a physical climate risk report and what is excluded will profoundly shape the way businesses, investors, and consumers interact,” the authors write.
The paper explains how climate data is sourced, analyzed, and presented by non-profits, startups, consulting firms like Bain and McKinsey, and financial institutions like Moody’s and S&P. Each organization comes with its own set of data, measurement tools, and presentation styles, creating the potential for diverging assessments of even a single business. “The disparities between the outputs of physical climate risks assessments indicate the need for consensus around standardized physical risk reporting frameworks,” the authors note.
Public and private governance regimes have tried to mitigate this lack of correlation by imposing standards, mainly developed on a private level before being adopted and adapted in the public sphere. The paper explores private frameworks like the Task Force on Climate-Related Financial Disclosure and public ones from California, the SEC, and the EU. It concludes by identifying which aspects of physical climate risk have and have not reached a consensus and proposes a model for identifying one important area of divergence: materiality.
Physical climate risk has a growing presence in corporate disclosures in the U.S. and abroad. While gaps in standardization make “a universal definition of reportable physical risks elusive,” the authors note that “there are areas of convergence.”
“As reporting regimes mature, additional insight into what constitutes a reportable physical climate risk will emerge.”
