Recently, the State of California enacted Assembly Bill 1305: the Voluntary Carbon Market Disclosures Act (AB 1305), which requires companies, under certain circumstances, to make website disclosures of certain information about their greenhouse gas (GHG) emissions and emissions-reduction programs.
AB 1305 has the potential to apply to a large number of U.S. companies, including those not incorporated or headquartered in California, regardless of whether companies are public or private. Importantly, AB 1305 has a compliance date of January 1, 2024, making it important for companies to assess the statute's applicability and, if necessary, develop the necessary disclosures quickly.
This blog post focuses on the provisions of Section 44475.2 of AB 1305. Separate from Section 44475.2, other provisions of AB 1305 provide for website disclosure obligations for public and private business entities operating in California that market, sell, purchase or otherwise use voluntary carbon offsets (however, these website disclosure obligations are not summarized in this blog post). In addition to AB 1305, California recently enacted other climate-related legislation (Senate Bill 253: Climate Corporate Data Accountability Act (SB 253) and Senate Bill 261: Greenhouse Gases: Climate-Related Financial Risk (SB 261)) summarized in our earlier blog post: California Legislature Passes Significant Climate Disclosure Bills With Potential Broad Scope. This other California legislation is not effective for a significant period of time and, as such, is less time-sensitive than AB 1305.
Overview of Section 44475.2 of AB 1305
Section 44475.2 of AB 1305 requires business entities (whether public or private and regardless of company size) to provide specified disclosures on their website in the event that any such entity (1) "operate[s]" within California and (2) makes any of the following claims within California:
- Regarding the achievement of net zero emissions.
- That the entity, its affiliates or a product is carbon neutral, or that implies that such entities or products do not add net GHG emissions.
- That such entities or products have made "significant reductions" to their GHG emissions.
Companies subject to Section 44475.2 will be required to provide website disclosure covering the following:
- All information documenting how, if at all, a "carbon neutral," "net zero" or similar claim was determined to be accurate or accurately accomplished.
- How interim progress toward such goals is being measured.
- Whether the data and claims listed have been subject to third-party verification.
Cited examples of disclosure responsive to (1) and (2) immediately above include:
- Disclosure of independent third-party verification of all of the entity's GHG emissions.
- Identification of the entity's science-based targets for its emissions reduction pathway.
- Disclosure of the relevant sector methodology and third-party verification used for the entity's science-based targets and emissions reduction pathway.
The text of Section 44475.2 is ambiguous but can be read to imply that the scope of relevant claims includes both statements regarding historical achievement and forward-looking goals (i.e., emissions-reduction or net zero targets). As a result, the broad scope of Section 44475.2 seemingly captures not only companies that make claims regarding the current net-zero performance of their business or products but also the much more expansive group of companies that have set future climate goals or targets with respect to GHG emissions. In addition, relevant claims may include statements that a business or product has achieved a "significant" reduction in emissions, potentially capturing many sustainability-related business or product marketing statements.
There is no minimum revenue or similar threshold for being subject to this statute. Additionally, AB 1305 does not define what constitutes a "significant" reduction in emissions, nor does it define what it means to "operate" in California, make claims in the state, or what qualifies as a "claim." However, we believe it is safe to assume that website disclosure provided by a company would be deemed to constitute making a claim within California. Taking these factors into account, the scope of Section 44475.2 may cover various statements (whether made at a company or product level) relating to the reduction of climate emissions included on company websites by any company that may be viewed as conducting business in California.
Disclosures required by AB 1305 will need to be updated not less than annually.
AB 1305 will be enforced by means of civil actions brought by the California Attorney General or by a district attorney, county counsel, or city attorney in a court of competent jurisdiction within California. Thus, the statute has a potentially broad-based and unpredictable enforcement mechanism.
Violators of AB 1305 will be subject to a civil penalty of not more than $2,500 per day for each day that information is not available or is inaccurate on the company's website, for each violation, not to exceed a total amount of $500,000.
This statute does not, by its terms, contemplate any implementing regulations, such that the statute will be effective by its terms on January 1, 2024. It is unclear if enforcement will begin immediately in January 2024; however, California does have a track record of prosecutors and other attorneys vested with enforcement authority acting pursuant to such authority in various circumstances. Moreover, while AB 1305 may be subject to judicial challenge, the outcome of any such judicial challenge is unclear, and we believe that companies should prepare for this legislation, assuming that it will come into effect on January 1, 2024.
Next Steps for Companies Regarding Section 44475.2 of AB 1305
As a general matter, we believe that companies that may be within the reach of Section 44475.2 of AB 1305 may benefit from taking the following steps:
- Confirm that the company may be deemed to be operating within California.
- If so, conduct an inventory of climate-related claims and goals. This will include, to the extent applicable, reviewing statements made on a company's website or in its environment, social and governance (ESG) report or any similar document for potential trigger points under Section 44475.2.
- Prepare responsive disclosures for inclusion on the company's website. When preparing the required disclosure, companies may be able to draw from (and, to some degree, cross-reference) any previously published ESG report on their website.
- Post any responsive disclosures on the company's website by January 1, 2024. In order to demonstrate a company's awareness of the requirements of AB 1305, including Section 44475.2, we generally believe that it is advisable to make reference to AB 1305 when providing this disclosure.
- If companies are considering making new claims regarding GHG emissions (including as part of any new ESG report), be mindful of associated obligations under AB 1305 to tailor the new claims appropriately and identify substantiating information for any required disclosures.
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.