The US securities regulator on 21 March unveiled a landmark proposal requiring US-listed companies to disclose their climate-related risks and greenhouse-gas emissions, part of a push by President Joe Biden's administration to address financial risks created by global rising temperatures.
The long-awaited US Securities and Exchange Commission (SEC) draft rule should help investors better understand how climate change will affect the companies they invest in, but it is set to increase the reporting burden for corporate America.
Among its key requirements: Companies must disclose their own direct and indirect greenhouse gas emissions, known as Scope 1 and 2 emissions, respectively, as well as those generated by suppliers and partners, known as Scope 3 emissions, if material.
More broadly, they must disclose the "actual or likely material impacts" climate-related risks will have on the company's business, strategy, and outlook, which could include physical risks as well as new regulations such as a carbon tax.
The SEC's Chair, Gary Gensler, said the agency was responding to investor demand for consistent and comparable information on climate-related risks that may affect a company's financial performance.
"Companies and investors alike would benefit from the clear rules of the road," he said.
Progressives and activist investors have pushed for the SEC to require Scope 3 emissions disclosure as the best way to incentivize companies to produce less carbon dioxide and methane.
Corporations have been pushing for a narrower rule that will not boost compliance costs too sharply. The Scope 3 requirement will include carve-outs based on a company's size, and will be phased in gradually.
"This proposal will be the light in a pathway toward addressing President Biden's priority of disclosing climate risk to investors and all areas of our society," said Tracey Lewis, a policy counsel at Washington-based advocacy group Public Citizen. "There will be a lot of critics. People are going to try to tear it down, even probably from the left."
The draft proposal is posted here and will be subject to public feedback and is likely to be finalized later this year.