The US securities regulator will ask companies to disclose their direct greenhouse gas emissions and have them verified by a third party, under long-awaited climate change risk rules proposed by the agency.
A plank of the Biden administration’s pledge to limit global warming, the Securities and Exchange Commission proposal would require companies to publish their direct emissions, as well as emissions derived from their electricity needs, defined as scope 1 and scope 2 respectively, in their annual SEC filings.
It would also require companies to make an annual disclosure of their plans to reduce emissions, and their targets.
The most controversial aspect of climate risk disclosures are the emissions that arise from the company value chain, or so-called scope 3.
Under the SEC proposal, these would need to be disclosed only if they were deemed “material” or part of companies’ climate targets. These scope 3 disclosures would not be subject to third-party verification and would be protected from legal liabilities.
“Today’s proposal would help [companies] more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do,” said Gary Gensler, SEC chair. “I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance.”
If the SEC votes in favour of the proposal, it will move to a public comment phase before being implemented. It will also apply to foreign entities registered with the SEC.
Notably, the proposed rules include phase-in periods for companies preparing to comply. Assuming adoption of the rules by the end of the year, the SEC said large companies would need to disclose scope 1 and 2 emissions in 2024, and scope 3 emissions in 2025 at the earliest.
The rules would be the first set of mandatory disclosures issued by the SEC on climate risk. It also sets up a potential battle between companies and their investors, who have complained about the lack of consistency, standards and transparency over environmental damage.
The proposal is likely to face opposition from Republicans, some of whom have threatened to challenge the final SEC climate rules in court.
It would require companies that have issued emissions targets and climate plans to outline how they intend to reach those targets, and a timeframe. Disclosures about companies’ internal carbon prices and how they are set would also be necessary.
In an effort to combat greenwashing, businesses that are setting out a transition plan away from carbon emissions would be required to share the programme’s details, metrics and targets.
The guidance is the latest in a flurry of proposals presented by the SEC under Gensler, who has sought to beef up disclosure spanning climate risk and private equity and hedge funds, as well as cyber security, with the aim of increasing transparency for investors.
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Source: Financial Times