The long-awaited Securities and Exchange Commission draft rule should help investors better understand how climate change will affect the companies in which they invest, but it is expected to increase Corporate America's reporting burden.
Companies must disclose their own direct and indirect greenhouse gas emissions, known as Scope 1 and 2 emissions, 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" of climate-related risks on the company's business, strategy, and outlook, which could include physical risks as well as new regulations like a carbon tax.
Gary Gensler, the SEC's chair, stated that the agency was responding to investor demand for consistent and comparable information on climate-related risks that could affect a company's financial performance.
"Clear rules of the road would benefit both companies and investors," he said.
Progressives and activist investors have urged the SEC to require Scope 3 emissions disclosure as the most effective way to incentivize companies to emit less carbon dioxide and methane.
Corporations have been pushing for a narrower rule that does not significantly increase compliance costs. The Scope 3 requirement will be phased in gradually and will include carve-outs based on a company's size.
"This proposal will be the light at the end of the tunnel for addressing President Biden's priority of disclosing climate risk to investors and all sectors of our society," said Tracey Lewis, policy counsel at the Washington-based advocacy group Public Citizen. "There will be many detractors. People will try to demolish it, most likely from the left."
The draft proposal will be subject to public comment before being finalized later this year.
LEGAL DIFFICULTIES
Given the expected contentiousness of the proposal, the SEC has spent the past week fortifying it against potential legal challenges, particularly from the oil and gas lobby, according to six sources.
Corporate groups have argued that there is no agreed-upon methodology for calculating Scope 3 emissions and that providing such detailed information would be burdensome and expose companies to costly litigation if the third-party data is incorrect.
Any legal challenges will almost certainly claim that the SEC lacks the authority to require Scope 3 emissions data, as the agency's lone Republican Commissioner has stated.
Investors have called for companies to provide better climate-change data, which is currently disorganized, patchy, and difficult to compare, after more than $649 billion was poured into environmental, social, and governance-focused funds worldwide last year.
"We have some information. The issue is that it's a shambles "said Isabel Munilla, director of US Financial Regulation at the Ceres Accelerator for Sustainable Capital Markets in Washington.
According to experts, these issues demonstrate that the SEC's rule is well-founded.
"I don't think anyone looking at the evidence fairly could have the slightest doubt that investors have demanded disclosure," said John Coates, a Harvard University professor who worked on the rule's early stages while serving as the SEC's acting director of corporation finance last year.