United States: California Emissions Disclosure Suit Foreshadows SEC's Obstacles

Greenberg Glusker's Sedina Banks and Samantha Pannier examine a lawsuit on California's emissions reporting rules and its implications for businesses and the SEC.

A federal lawsuit filed Jan. 30 by the US and California Chambers of Commerce and four business groups—the American Farm Bureau Federation, Los Angeles County Business Federation, Central Valley Business Federation, and Western Growers Association—seeks to block California's recently enacted landmark corporate climate change disclosure laws on constitutional grounds.

The current lawsuit may be an indication of the types of challenges the Securities and Exchange Commission could face once its climate change disclosure rules are adopted. It may also motivate the SEC to further delay adoption of its rules, which have been in the works for almost two years but have received industry pushback including from the plaintiff, the US Chamber of Commerce.

Climate Accountability Package

Signed into law by Gov. Gavin Newsom (D) in October 2023, Senate Bill 253 (the Climate Corporate Data Accountability Act) and Senate Bill 261 (the Climate-Related Financial Risk Act) are the most sweeping climate change disclosure laws passed in the US to date.

Collectively referred to as the Climate Accountability Package, the laws work in tandem to require large publicly traded companies and privately held corporations doing business in California, regardless of their corporate domicile, to publicly disclose their greenhouse gas emissions and their financial risk related to climate change.

Senate Bill 253

The Climate Corporate Data Accountability Act requires companies doing any business in California and generating more than $1 billion in annual revenues to publicly disclose Scope 1 and 2 greenhouse gas emissions annually beginning in 2026 and Scope 3 emissions in 2027.

Scope 1 emissions are direct greenhouse gas emissions that stem from sources the company owns or directly controls, regardless of location, including fuel combustion activities. Scope 2 emissions are indirect greenhouse gas emissions from the company's consumed electricity, steam, heat, or cooling purchased or acquired by a company, regardless of location.

Finally, Scope 3 emissions are indirect upstream and downstream greenhouse gas emissions, other than Scope 2 emissions, from sources that the company doesn't own or directly control, and may include purchased goods and services, business travel, employee commutes, and processing and use of sold products.

The law tasks the California Air Resources Board, the designated regulating and administering agency, with developing and adopting regulations to implement the law by next January. The law also authorizes CARB to impose administrative penalties of up to $500,000 per reporting year for violations.

Senate Bill 261

The Climate-Related Financial Risk Act requires companies doing any business in California and generating more than $500 million in annual revenues to publicly disclose climate-related financial risks and measures adopted to reduce and adapt to these risks every other year starting in 2026.

These laws surpass the scope of the highly anticipated SEC's proposed climate change disclosure rules by requiring disclosures from privately held companies.

Many privately held companies may lack the organizational infrastructure to collect and report climate-related data and unlike publicly traded companies are unaccustomed to producing and submitting regular public disclosures.

Even small and mid-sized companies that don't meet the revenue thresholds for disclosure, may be tasked with providing their greenhouse gas emissions data if they're in the supply chain of larger companies subject to the disclosure requirements. Plaintiffs call-out Scope 3 emission reporting as being especially burdensome because the "burden of estimating Scope 3 emissions flows up and down the supply chain."

Lawsuit Grounds

The lawsuit raises three constitutional grounds for blocking the laws: the First Amendment, Dormant Commerce Clause, and the Supremacy Clause based on preemption by the Clean Air Act. The suit claims that the laws "impermissibly compel thousands of businesses to make costly, burdensome, and politically fraught statements about 'their operations, not just in California, but around the world.'"

Plaintiffs argue that both laws "unconstitutionally compel speech in violation of the First Amendment and seek to regulate an area that is outside California's jurisdiction and subject to exclusive federal control by virtue of the Clean Air Act and federalism principles embodied in our federal Constitution."

This isn't the first time industry groups have challenged a California law on First Amendment grounds.

Late last year in National Association of Wheat Growers v. Bonta, industry advocates convinced the Ninth Circuit that California Proposition 65 cancer warnings shouldn't be required for products containing the herbicide glyphosate because the state's listing didn't meet the requirements of intermediate scrutiny applied to compelled commercial speech, particularly when the scientific community wasn't in consensus regarding the herbicide's cancer-causing risk.

Here, plaintiffs seek a strict scrutiny standard of review on their First Amendment claim, arguing that the speech the laws compel is "noncommercial, not purely factual, and concerns a controversial political matter."

Looking Ahead

If plaintiffs prevail, businesses across the nation may get a longed-for reprieve. Even Gov. Newsom in the Senate Bill 253 signing statement recognized the burden the laws may create for businesses, acknowledging that the "implementation deadlines in the bill are likely infeasible, and the reporting protocol specified could result in inconsistent reporting across businesses subject to the measure."

Although the case is in its infancy, it will be closely watched by over 10,000 businesses subject to California's disclosure laws and other states that may have plans to adopt similar climate change disclosure laws.

The case is Chamber of Commerce of the United States of America v. California Air Resources Board, C.D. Cal., Docket No. 2:24-cv-00801, complaint filed 1/30/24.

Originally published by Bloomberg Law.

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