United States: Change Is In The Air: Everything You Need To Know About California's Sweeping New Climate Disclosure Laws

On October 7, 2023, California Governor Gavin Newsom signed into law two sweeping climate disclosure bills, Senate Bill 253 ("SB 253"), the Climate Corporate Data Accountability Act, and Senate Bill 261 ("SB 261"), the Climate-Related Risk Act. Taken together, SB 253 and SB 261 overlap the U.S. Securities and Exchange Commission's proposed climate disclosure rule (the "SEC Proposed Rule"), and expand upon it in several significant ways. The SEC Proposed Rule addresses both greenhouse gas ("GHG") emissions and climate risk, while the California measures separate the two, with SB 253 addressing GHG emissions, and SB 261 addressing climate risk.

Other important differences include the following:

1. The California laws apply only to companies doing business in California, although all it takes is selling one product in or into California to qualify as "doing business" there and California is the world's fifth largest economy by GDP. (Notably, SB 253 includes the Legislature's finding that "California "is on track to be the fourth largest economy in the world [passing Germany], and is a highly desirable market for the globe's most profitable companies.")
   
   
2. Unlike the SEC Proposed Rule, which applies only to certain public companies, the California laws apply to private as well as public US companies. The only limitation is annual worldwide revenue, regardless of how much revenue comes from business in California: SB 261 applies to any company with total revenues greater than $500,000, and SB 253 applies to any with total revenues greater than $1 billion. It's estimated that the former will apply to over 10,000 companies and the latter to over 5,400 companies.
   
   
3. SB 253 requires disclosure of Scope 3 GHG emissions by all covered entities, whereas the current draft of the SEC Proposed Rule requires such disclosures only if "material" or if the covered company has publicly set targets that include Scope 3 emissions.
   
   
4. The California laws are state laws, not a federal rule. The SEC Rule could be subject to challenge in federal courts under the Major Questions Doctrine recently developed by the US Supreme Court or the federal Administrative Procedure Act. Many have suggested that this may be part of the reason that the SEC is delaying issuing the rule. At a forum hosted by the U.S. Chamber of Commerce on October 26, 2023, SEC Chair Gary Gensler indicated that the SEC Proposed Rule is not likely to be released until 2024, and he cautioned the Chamber against challenging it in court. The California disclosure laws, on the other hand, are immune to such challenges. California state law has no analogue to the Major Questions Doctrine. The California laws may be subject to challenge in federal court under the Preemption Doctrine or the Commerce Clause, but the federal courts grant the states quite a bit of leeway with their own laws. For example, in its decision last May applying the Dormant Commerce Clause doctrine, National Pork Producers Council v. Ross, No. 21-468, the US Supreme Court upheld California's Proposition 21, which prohibits selling pork in California if the pigs were housed in systems that comply with certain specific standards for freedom of movement, even if the pigs were housed out-of-state. An analogous challenge to California's new climate disclosure laws could meet a similar fate.

What do the California climate disclosure laws require?

SB 253 — GHG Emissions

SB 253 requires affected corporations to publicly report their total annual GHG emissions, beginning with Scopes 1 and 2 in 2026, and phasing in Scope 3 emissions in 2027. This is hugely important, as EPA estimates that Scope 3 emissions often account for more than 90% of an organization's total GHG emissions. Scope 3 emissions also are notoriously difficult to quantify. One company's Scope 1 emissions are another's Scope 3, and methodologies for calculating Scope 3 emissions vary from one industrial sector to another. The problem becomes even more challenging when a company's value chain (upstream or downstream) extends outside the United States.

SB 253's definitions of Scopes 1, 2 and 3 GHG Emissions

(SB 253 expressly references and draws upon the Greenhouse Gas Protocol)

• Scope 1: "all direct [GHG] that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities."
  
  
• Scope 2: "indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location."
  
  
• Scope 3: "indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products."

Critically, the law delegates to the California Air Resources Board ("CARB") responsibility for developing implementing regulations – not, as one might expect, to an agency such as the Department of Financial Protection and Innovation, which regulates the offer and sale of securities, franchises and off-exchange commodities in California. Since the adoption of Assembly Bill 32 ("AB 32") in 2006, CARB has become the lead agency for climate programs, including the Cap-and-Trade Program and the Low Carbon Fuel Standard. CARB certainly has the expertise to develop these regulations and likely will do so with an eye toward integrating the effort with its other climate programs. As with the model first established by AB 32, SB 253 sets out a series of milestones for CARB to meet – and which reporting entities (i.e., covered companies) will be obligated to meet:

Potential Schedule Slippage: SB 253 provides that CARB can extend the first reporting requirements for Scopes 1 and 2 such that they start at some point after 2026. However, it's not clear that if CARB does extend those deadlines, that it also would push-out the start date for Scope 3 emissions. The provisions re Scope 3 reporting does not contain parallel language allowing CARB to set a later start date, providing instead that Scope 3 reporting must begin in 2027 and no later than when Scopes 1 and 2 emissions are reported. A conflict thus could arise if CARB delays the start date for Scopes 1 and 2 emissions reporting.

To view the full article, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.