![\"\"](\"https:\/\/blogs.law.columbia.edu\/climatechange\/files\/2023\/08\/sacramento-CA-state-capitol-300x166-1.jpeg\")
<\/a>The Securities and Exchange Commission regulations on climate disclosure, first proposed in March 2022 and likely to be issued in final form in October 2023,<\/span>[1]<\/span><\/a>\u00a0have drawn considerable controversy and face an uncertain fate in the inevitable litigation.<\/span>[2]<\/span><\/a>\u00a0Much less attention has gone to two bills that are moving toward adoption in California. They would require that firms doing business in the state (with some exceptions) make climate disclosures similar to those under the expected SEC regulation and in some important ways would go further.<\/span>[3]<\/span><\/a><\/p>\nCalifornia has long led the nation in adoption of environmental rules, including the first motor vehicle emission standards in 1966, energy efficiency standards for appliances in the 1970s, the Global Warming Solutions Act of 2006, and many others.<\/span>[4]<\/span><\/a> The new corporate climate disclosure bills may well continue that tradition. If adopted, this legislation would have a global impact, as California is the fifth largest economy in the world, and companies around the world sell into California. The law would mesh with corporate climate disclosure regulations elsewhere, particularly in Europe, and would therefore represent a significant step toward assuring the accuracy, trustworthiness, and transparency of corporate climate performance reporting.<\/span> One bill would mandate that firms assess and disclose on an annual basis the financially related climate risks they face and how they are managing these risks. A second bill would require annual reporting of the greenhouse gas (GHG) emissions caused by a covered firm\u2019s operations.<\/span><\/p>\n Several leading companies including IKEA Supply, Microsoft, and Salesforce support the reform, and a number of smaller firms do as well.<\/span>[5]<\/span><\/a>\u00a0For the reasons discussed below, more firms \u2013 and their legal and other advisers\u2013 should follow them. Academic readers of this blog should too!<\/span><\/p>\n Perhaps we all can agree to the following proposition: It is now obvious that we must address the climate emergency as an existential priority. Record-setting global average high temperatures, deadly heatwaves and flooding, and choking smoke in many places this summer reinforce this urgency.<\/span>[6]<\/span><\/a>\u00a0Scientists are alarmed that this year the temperature of the surface of the oceans has reached levels that are much higher,<\/span>[7]<\/span><\/a>\u00a0and the extent of Antarctic sea ice is much lower,<\/span>[8]<\/span><\/a>than ever previously recorded. It\u2019s long past time to stop relegating the climate problem to a narrowly conceived field of \u201cenvironmental law.\u201d Corporate and securities law \u2013 as well as companies and their leaders acting through lobbying and politics \u2013 also have major roles to play.<\/span>[9]<\/span><\/a><\/p>\n The proposed legislation in California is both legally solid and helpful for making climate progress. Although not a silver bullet, it is likely to have positive consequences of decreasing GHGs, advancing work to prepare for the worsening physical impacts of climate change, and encouraging climate friendly innovations.<\/span>[10]<\/span><\/a><\/p>\n The SEC and possibly California are not the only authorities that are expanding their securities and corporate disclosure requirements to encompass more information about climate change. On April 21, 2021, the European Commission adopted the Corporate Sustainability Reporting Directive, which substantially expands the climate information that must be reported by covered companies. It went into effect in January 2023 and will be phased in over the next five years. It is expected that approximately 49,000 firms \u2013 including most large multinational corporations \u2013 will be subject to these rules.<\/span>[11]<\/span><\/a>\u00a0Additionally, on June 30, 2023 the International Sustainability Standards Board, which was established in November 2021 at the UN Climate Change Conference in Glasgow, issued the first iteration of its standards for climate-related disclosures.<\/span>[12]<\/span><\/a><\/p>\n Here are some details about the proposed California legislation.<\/span><\/p>\n California\u2019s financial climate risk disclosure bill, known as the Climate-Related Financial Risk Act (SB 261), passed the State Senate on May 30 with a vote of 27-8 and is now before the state Assembly.<\/span>[13]<\/span><\/a>\u00a0It would require covered businesses with annual gross revenues of more than $500 million to prepare and make public a \u201cclimate-related financial risk report disclosing the entity\u2019s climate-related financial risk and measures adopted to reduce and adapt to climate-related financial risk.\u201d<\/span>[14]<\/span><\/a>\u00a0The bill specifies that the standards developed by the Task Force on Climate-related Financial Disclosures must be used.<\/span>[15]<\/span><\/a>\u00a0Company reports would also have to be verified by qualified third-party auditors.<\/span><\/p>\n SB 261 would embrace a considerably larger universe than the proposed SEC rules because it would cover\u00a0<\/span>all<\/span>\u00a0large companies, not just the public reporting ones under the SEC\u2019s jurisdiction.<\/span>[16]<\/span><\/a>\u00a0Most U.S.-based firms (including subsidiaries) with at least $500 million in annual revenues would likely qualify as \u201cdoing business\u201d in California.<\/span>[17]<\/span><\/a>(Insurance companies, which are covered by other separate legislation in California, are excluded.) According to a report from the California Senate, of the over 10,000 companies that do business in California and exceed the $500 million revenue threshold, only 20 percent are publicly traded.<\/span>[18]<\/span><\/a>\u00a0SB 261 also provides that if a new federal law or regulation requires companies to prepare an annual report \u201cdisclosing information materially similar\u201d to the information required by SB 261, that report may be used instead. This deferential provision should be sufficient to stem any potential federal preemption challenge.<\/span><\/p>\n The GHG emissions disclosure bill, known formally as the Climate Corporate Data Accountability Act (SB 253), also passed the state Senate on May 30 and has moved to the Assembly. The vote on it was 24-9. It would require standardized reporting of GHG emissions (primarily carbon dioxide and methane) by firms doing business in California with total annual revenues more than $1 billion.<\/span>[19]<\/span><\/a><\/p>\n The SEC proposal provides in considerable detail that companies must back up any claims they make publicly about their future emission reduction plans. One target of this is the \u201cgreenwashing\u201d that underlies many companies\u2019 net zero pledges.<\/span>[20]<\/span><\/a>\u00a0SB 261 requires disclosure of companies\u2019 \u201cmeasures adopted to reduce and adapt to climate-related financial risk.\u201d It directs the California Air Resources Board (CARB) to contract with a nonprofit climate reporting organization that has \u201cexperience with climate-related financial risk disclosure by entities operating in California.\u201d One of this contractor\u2019s tasks will be to keep abreast of proposals to update the definition of \u201cclimate-related financial risk.\u201d It is likely that CARB\u2019s regulations implementing SB 261 and SB 253 would include more detailed requirements on documenting the bases for emission reduction pledges.<\/span><\/p>\n Both bills allow CARB to seek penalties from companies that fail to make the required reports. The maximum yearly penalty under each bill is $500,000. Given the cost of preparing the required reports, it is possible that some firms \u2013 especially those that are not worried about the adverse publicity or consumer or investor backlash \u2013 will opt to pay the penalty instead, though doing so may open them to reputation damage from nonprofit environmental groups, consumers, and pro-climate companies.<\/span><\/p>\n SB 253 would direct CARB to develop standards for GHG emissions reporting by January 1, 2025, with covered entities then required to begin annual reports following these standards in 2026 (for scope 1 and scope 2 GHG emissions) and in 2027 (for scope 3 emissions).<\/span>[21]<\/span><\/a><\/p>\n Scope 1 emissions are those that come directly from a company\u2019s operations, such as its factories, heating plants, and vehicle fleets. Scope 2 emissions are those attributable to producing the energy (principally electricity) that the company buys. Scope 3 emissions are those from its supply chain, both upstream and downstream.<\/span>[22]<\/span><\/a><\/p>\n Perhaps the greatest controversy over the SEC proposal was its inclusion of Scope 3 emissions, and it is still uncertain whether the final rule will include them.<\/span>[23]<\/span><\/a>\u00a0The draft rule required them only if they are determined to be \u201cmaterial,\u201d which has led to a considerable amount of confusion.<\/span>[24]<\/span><\/a><\/p>\n SB 253 does not require materiality. It defines Scope 3 emissions as \u201cindirect 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.\u201d CARB will presumably adopt regulations with a more detailed definition and what is and is not included.<\/span><\/p>\n Most Scope 3 emissions are someone else\u2019s Scope 1 or 2 emissions, so there have also been complaints about double counting, but the purpose of accounting for Scope 3 emissions is not to come up with an overall national emissions inventory; other programs do that. The principal purpose is to identify the emissions that are attributable directly or indirectly to a company so that the company can be aware of its own impact and can be held accountable by others \u2013 and then act to lower its carbon footprint.<\/span><\/p>\n Federal and state rules already require reporting of most Scope 1 emissions, including the pollution from power plants that are others\u2019 Scope 2 emissions. The Environmental Protection Agency (EPA) has adopted a Greenhouse Gas Reporting Rule<\/span>[25]<\/span><\/a>\u00a0requiring facilities that emit more than 25,000 metric tons of carbon dioxide equivalent to report their direct GHG emissions.<\/span>[26]<\/span><\/a>\u00a0About 8,000 facilities are required to report.<\/span>[27]<\/span><\/a>\u00a0This rule also requires fuel suppliers to report the emissions attributable to the fuel they sell.<\/span>[28]<\/span><\/a>\u00a0It does not cover emissions from the agriculture and land use sectors or other small sources of emissions. EPA estimates that roughly 85 to 90 percent of total U.S. GHG emissions are reported this way.<\/span>[29]<\/span><\/a><\/p>\n California has its own Mandatory Reporting of Greenhouse Gas Emissions regulation for electricity generators, industrial facilities, fuel supplies, and electricity importers.<\/span>[30]<\/span><\/a>\u00a0Many large companies disclose some of their Scope 3 emissions under a variety of voluntary programs, but as declared in the legislative findings in SB 253, this system \u201clacks the full transparency and consistency needed by residents and financial markets to fully understand these climate risks.\u201d<\/span>[31]<\/span><\/a><\/p>\n In addition, the new European Corporate Sustainability Reporting Directive and the International Sustainability Standards Board climate disclosure standards both require disclosure of Scope 3 emissions in accordance with the Greenhouse Gas Protocol.<\/span>[32]<\/span><\/a><\/p>\n In summary, the new California legislation, if adopted, would press forward a general global trend toward requiring Scope 3 emissions disclosures, even if the SEC balks at taking this step.<\/span><\/p>\n Taken together, the two California bills constitute a significant effort to address the climate challenge through informational regulation.<\/span>[33]<\/span><\/a>\u00a0We admit that promises about the efficacy and efficiency of informational regulation can be overblown.<\/span>[34]<\/span><\/a>\u00a0And again, informational regulation of climate emissions and their risks will surely not deliver a silver bullet. However, if pacifist readers will forgive the analogy, the climate emergency is sufficiently difficult and complex \u2013 a \u201csuper wicked problem\u201d \u2013 that it requires sustained buckshot from many legal and other social directions to solve.<\/span>[35]<\/span><\/a>\u00a0The proposed new California corporate climate disclosure laws would add significantly increased firepower that can be expected to lead to progress in what has been aptly called \u201cthe new climate war.\u201d<\/span>[36]<\/span><\/a><\/p>\n As informational regulation, the California legislation would follow in the footsteps of similar kinds of law that have been successful. The federal securities laws are the leading example of successful informational regulation designed to deter fraud and enhance the reliability and efficiency (and perhaps sometimes the fairness) of the capital markets.<\/span>[37]<\/span><\/a>The National Environmental Policy Act and its state equivalents have greatly advanced environmental protection (though there is controversy because they slow down good as well as bad projects).<\/span>[38]<\/span><\/a>\u00a0At much smaller scale, the Toxic Release Inventory (TRI), required by the Emergency Planning and Community Right-to-Know Act of 1986,<\/span>[39]<\/span><\/a>represents a modest success of informational regulation in environmental law.<\/span>[40]<\/span>\u00a0<\/span><\/a>Although the future consequences and outcomes of informational regulation are not easily foreseen or calculated, it is likely that the reform will translate into greater transparency, accountability, and commitment to climate progress by covered business firms.<\/span><\/p>\n In addition, the climate financial risk bill in particular carries characteristics of \u201creflexive\u201d or \u201cmanagement-based\u201d regulation.<\/span>[41]<\/span><\/a>\u00a0The main idea is to encourage ongoing internally reflective processes in the deliberations of top management (including CEOs, their executive teams, and corporate boards) about how their firms are dealing with large social and environmental problems which they might otherwise ignore as irrelevant negative externalities. On a more granular scale, as occurred with the TRI, the process of preparing the climate disclosure reports may make management aware of previously unappreciated emissions sources that they can readily and inexpensively address. Another effect of the TRI that would surely be replicated here is that advocacy groups would use the publicly reported data to rate companies by their environmental performance, leading firms to strive to improve their rankings or relative benchmark performances.<\/span><\/p>\n The Western States Petroleum Association is vigorously fighting the bills,<\/span>[42]<\/span><\/a>\u00a0and the California Chamber of Commerce has led a group of trade and business associations in opposing them.<\/span>[43]<\/span><\/a>\u00a0The chamber’s submissions to the California legislature argued that, while the bills require only large businesses to report their emissions, the small and medium-sized businesses that are part of the large firms\u2019 supply chains would be burdened with providing data.<\/span>[44]<\/span><\/a>\u00a0It should be noted that SB 253 in fact proposes to reduce this burden by allowing \u201cthe use of industry average data, proxy data, and other generic data in its scope 3 emissions calculations.\u201d<\/span>[45]<\/span><\/a><\/p>\n The chamber has also argued that California has \u201cno authority to regulate emissions beyond the California border.\u201d<\/span>[46]<\/span><\/a>The U.S. Supreme Court weakened this kind of argument considerably on May 11, 2023, in its decision in\u00a0<\/span>National Pork Producers Council v. Ross,\u00a0<\/span><\/i>which upheld a California law that banned the in-state sale of pork from pigs that are \u201cconfined in a cruel manner.\u201d<\/span>[47]<\/span><\/a>\u00a0Since the great bulk of pork sold in California comes from pigs bred elsewhere, the law was attacked as amounting to extraterritorial regulation and as violating the dormant Commerce Clause. The majority opinion, written by Justice Gorsuch, upheld California\u2019s law, ruling that a state law may have extraterritorial effects so long as it does not discriminate between in-state and out-of-state producers. Neither SB 261 nor SB 253 is discriminatory in this way.<\/span>[48]<\/span><\/a><\/p>\n The chamber said that SB 261 \u201cis premature given the amount of activity happening at the federal and international levels,\u201d and that while SB 261 refers to the recommendations of the Task Force on Climate-related Financial Disclosures, these recommendations were designed to be a voluntary framework, while SB 261 would be mandatory.<\/span>[49]<\/span><\/a>\u00a0However, the details of the state standards would be set by CARB, SB 261 recognizes and honors federal preemption authority, and to cheer climate progress at the international level as an objection to state legislation is, at a minimum, disingenuous.<\/span><\/p>\n Some have argued that the proposed SEC rule is vulnerable to attack in court under the \u201cmajor questions doctrine,\u201d which the Supreme Court recently declared and then used to invalidate EPA\u2019s (already defunct) Clean Power Plan<\/span>[50]<\/span><\/a>and President Biden\u2019s student loan forgiveness program.<\/span>[51]<\/span><\/a>\u00a0That doctrine only applies to federal regulations, however, not to state statutes, so it does not pose a danger to the two California bills. Moreover, the Supreme Court recently signaled again that states are free to enact environmental laws that may be beyond federal powers.<\/span>[52]<\/span><\/a><\/p>\n All things considered, we believe that California\u2019s proposed climate disclosure legislation should be adopted. It is significantly flexible so that changes over time can be made based on experience and new knowledge gained through an intentional dynamic learning and feedback process. A long-term objective would be that, consistent with other environmental legislation in which California has taken a lead, the federal government may eventually take over and establish a comprehensive corporate climate disclosure regulation of its own. In turn, these regimes would gradually lead to coincidences and, to borrow a European legal term, \u201charmonization\u201d with corporate climate disclosure regulations adopted in European and other nations.<\/span><\/p>\n In addition, it is time for many large and powerful businesses that signal climate virtue \u2013 such as through environmental marketing and participation in environmental, social, and governance (ESG) strategies and reporting initiatives \u2013 to take a serious legal and political stand on California\u2019s climate disclosure initiative that aligns with their aspirational talk.<\/span>[53]<\/span><\/a>\u00a0We see no good reason for businesses to oppose the California bills, which have been carefully designed to provide a level playing field for climate information disclosure. Instead, they should strongly support passage of these bills.<\/span><\/p>\n If a business that says that it is pro-climate then turns around and either opposes or remains neutral on the California legislation, observers should draw the obvious conclusion. This is no time for a business to hide behind an ESG-inspired pose to oppose needed climate legislation.<\/span><\/p>\n [1]<\/span><\/a>\u00a0Andrew Ramonas, \u201cSEC Eyes October for Climate Disclosure Regulations Release\u201d,\u00a0<\/span>Bloomberg Law<\/span><\/i>, June 13, 2023,\u00a0<\/span>https:\/\/news.bloomberglaw.com\/esg\/sec-eyes-october-for-climate-disclosure-regulations-release<\/span><\/a>.<\/span><\/p>\n [2]<\/span><\/a>\u00a0See, e.g., Jacqueline M. Vallette and Kathryne M. Gray, Mayer Brown LLP, \u201cSEC\u2019s Climate Risk Disclosure Proposal Likely to Face Legal Challenges,\u201d Harvard Law School Forum on Corporate Governance, May 10, 2022,\u00a0<\/span>https:\/\/corpgov.law.harvard.edu\/2022\/05\/10\/secs-climate-risk-disclosure-proposal-likely-to-face-legal-challenges\/<\/span><\/a>.<\/span><\/p>\n [3]<\/span><\/a>\u00a0Andrew Oxford, \u201cCalifornia Emissions Reporting Bill Would Go Further Than SEC,\u201d\u00a0<\/span>Bloomberg Law<\/span><\/i>, July 13, 2023,\u00a0<\/span>https:\/\/news.bloomberglaw.com\/ip-law\/california-emissions-reporting-bill-would-go-further-than-sec<\/span><\/a>; Alejandro Lazo, \u201cCorporations and climate change: California may force large businesses to disclose climate impacts,\u201d\u00a0<\/span>Cal Matters<\/span><\/i>, June 27, 2023,\u00a0<\/span>https:\/\/calmatters.org\/environment\/climate-change\/2023\/06\/california-legislation-corporate-climate-change\/<\/span><\/a>.<\/span><\/p>\n
\n<\/p>\nPending Bills<\/b><\/h3>\n
Scope 3 Emissions<\/b><\/h3>\n
Informational Regulation<\/b><\/h3>\n
Political Opposition<\/b><\/h3>\n
Conclusions<\/b><\/h3>\n
ENDNOTES<\/strong><\/h3>\n