The United States Securities and Exchange Commission (SEC) proposed rules for climate-related disclosures for investors, published on March 21, 2022, specifically identify disclosures relating to “high water stress.”
The proposed rules identify “sea level rise, drought … and decreased availability of fresh water” as “climate-related risks” (§ 229.1500), and require such risks to be disclosed if they are “reasonably likely to have a material impact on the registrant, including on its business or consolidated financial statements, which may manifest over the short, medium, and long term” (§ 229.1502 (emphasis added)).
This will impact registrants that are heavily reliant on water for their operations, such as those in the energy sector, materials and buildings sector, and agriculture sector. Registrants in these sectors could face—among other things—regulatory restrictions on water use, increased expenses relating to the acquisition and purchase of alternative water sources, and curtailment of operations as a result of a reduced water supply diminishing earning capacity.
The proposed rules would require a registrant to disclose:
the percentage of its total water usage that is from water withdrawn in water stressed regions;
the amount of assets (e.g., book value and as a percentage of total assets) located in such regions;
the location of these regions; and
the material impacts of physical water-stress-related risks on strategy, business model, and outlook—including the categorization of such risks as “acute or chronic,” and the identification of “properties, processes, or operations subject to” such risks.
If a registrant has set water-stress-related targets or goals, certain information about these targets and goals may also need to be provided (§ 229.1506), for example, actual or anticipated regulatory requirements, market constraints, and strategies to increase the water efficiency of operations.
A consultation period is now underway, and the SEC has posed various questions for public comment. These include whether the SEC should use the definitions of “extremely high water stressed region” and “high water stressed region” that have been provided by the World Resource Institute—“a region where more than 80 percent of the water available to agricultural, domestic, and industrial users is withdrawn annually,” and “a region where 40-80 percent of the water” so available is withdrawn, respectively—or whether other definitions should be considered?
This acknowledgement by the SEC of the importance and significance of water availability and impacts is to be welcomed. Water is too often overlooked, yet it is fundamental.
Comments must be filed the later of 30 days after the date the proposed release is published in the Federal Register or May 20, 2022.
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