The U.S. securities regulator on March 21 unveiled a landmark proposal requiring U.S.-listed companies to report their contributions to greenhouse gas emissions as well as how climate change might affect their businesses. This effort is part of a global push by President Joe Biden's administration to address financial risks created by global rising temperatures.

The long-awaited U.S. 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, Reuters reported.

According to SEC's new 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, companies 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 will be subject to public feedback and is likely to be finalized later this year.

“The SEC's vote is significant," Thomas Gorman, partner at Dorsey & Whitney, and one of the country’s preeminent experts on SEC enforcement and regulations, said in a statement.

"It centers on the disclosure of environmental issues based on a huge set of proposals churned out by the staff and which only provide for a 30 day window for comments.  While the issues are generally not new, they are significant.  While some U.S. based issuers make disclosures about environmental issues and ESG, many more do not,” says Gorman.

He continued, “Yet it is investment funds, investors and select firms that are leading the charge for new and much more far reaching disclosure obligations. On the other side are many who argue that the question of what each firm should disclose about its environmental foot print and adoption or non-adoption of ESG should be left to the individual companies—the same debate the Commissioners just had over cybersecurity." 

Corporate groups, however, have argued there is no agreed methodology for calculating Scope 3 emissions and that providing so much detail would be burdensome and would expose companies to costly litigation if the third-party data ends up being wrong.

Any legal challenges will likely argue that the SEC lacks the authority to require Scope 3 emissions data, something the agency's lone Republican Commissioner has said.

With more than $649 billion pouring in to environmental, social and governance-focused funds worldwide last year, investors have called for companies to provide better climate-change data which is currently disorganized, patchy and difficult to compare.

"We do have information. The problem is that it's a hot mess," said Isabel Munilla, director of U.S. Financial Regulation at Washington-based Ceres Accelerator for Sustainable Capital Markets.

According to experts, these issues show the SEC has sufficient grounding for its rule.

“While environmental disclosure obligations will be adopted by the agency, led by Chair Gensler and Commissioner Lee, the real question is how far will the requirements go?," Gorman said.

"The answer is in probability not as far as some foreign regulators such as the Hong Kong securities commission and the Monetary Authority of Singapore who are leaders in this area have gone.  There will surely be a beginning, however, which in probability will be followed by lawsuits."

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