Britain's top listed companies must disclose how climate change affects their business, using globally agreed guidance, or explain to investors why they have not, the Financial Conduct Authority (FCA) proposed on Friday.
Investors increasingly favour companies with business models likely to prove robust as climate change raises the risk of storm and flood damage and reduces the value of carbon-intensive fossil fuel assets.
"The changes we propose will help to provide the transparency the market needs to be able to assess how well companies are adjusting to the risks of climate change," FCA Chief Executive Andrew Bailey said in a statement.
"Improved disclosures will support better asset pricing and enable investors to make more informed choices about where to allocate their capital, which will ultimately support the transition to a low carbon economy," Bailey said.
The Investment Association, which represents managers of 7.7 trillion pounds ($10 trillion) in assets such as shares, said Britain's largest listed companies should start reporting on climate risks immediately.
The FCA proposes that all commercial companies with a premium listing on the London Stock Exchange make climate-related disclosures that conform to guidance laid out in 2017 by the Taskforce on Climate-related Financial Disclosures (TCFD).
The approach was ordered by the Financial Stability Board, which coordinates financial rules for the Group of 20 Economies (G20).
Sovereign-controlled companies would also have to comply, the FCA said, implying Saudi Arabia's state-owned oil company, Saudi Aramco, would also have to meet the requirements should it seek a London listing.
There are 480 premium-listed companies on the London Stock Exchange with a combined capitalisation of 2.3 trillion pounds or 60% of total market capitalisation.
The proposal is that they must make disclosures or explain why they cannot.
"This is a very significant step from the FCA," Ben Stansfield, an environment lawyer at Gowling, said. Activists and investors will take action if climate risks and environmental impacts are not properly described, he said.
The watchdog also said in a consultation paper it would consider extending the proposed rule to a wider range of listed companies.
For some of them a binding rule may not be achievable yet as they have further steps to take to make disclosures of the highest standards.
The watchdog proposed on Friday that it would also provide guidance on existing obligations that require issuers to disclose information on climate-related, social and governance (ESG) matters.
This would be for all companies with listed securities, not just those on the premium segment.
The FCA said it was also considering how best to enhance climate-related disclosures by the firms it regulates, including asset managers and life insurers, to ensure a coordinated approach.