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US regulator unveils rules for companies to disclose climate risk


The United States securities regulator on Monday 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 rising global 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 will increase the reporting burden for corporations in the US.

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.

A land-based windmill farm in Atlantic City, New Jersey, NJ, that helps power a sewage treatment plant offers a glimpse of the future.
The proposal comes amid President Joe Biden’s push to address financial costs related to the climate crisis [File: Wayne Parry/AP Photo]

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 incentivise companies to produce less carbon dioxide and methane.

Corporations have been pushing for a narrower rule that would 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 towards 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 finalised later this year.

Legal challenges

Given the expected contentiousness of the proposal, the SEC has spent the past week shoring up the draft against potential legal challenges, especially from the oil and gas lobby, six sources told the Reuters news agency.

Corporate groups 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 $649bn pouring into environmental, social and governance-focused funds worldwide last year, investors have called for companies to provide better climate-change data, which is currently disorganised, patchy and difficult to compare.

a view of a pump jack operateing in an oil field in Midland, Texas.
A UN-backed study has found that the world needs to cut coal, oil and gas in the coming decade to maintain a chance of keeping global warming from reaching dangerous levels [File: Tony Gutierrez/AP Photo]

“We do have information. The problem is that it’s a hot mess,” said Isabel Munilla, director of US Financial Regulation at the Washington-based Ceres Accelerator for Sustainable Capital Markets.

These issues show the SEC has sufficient grounding for its rule, experts said.

“I don’t think anyone considering the evidence fairly could have the tiniest doubt as to whether investors have demanded disclosure,” said John Coates, a Harvard University professor who worked on the early stages of the rule during a stint as the SEC’s acting director of corporation finance last year.



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