Key Takeaways:

• Governments and stakeholders are moving quickly to clean up the voluntary carbon market and protect consumers from exaggerated or false claims of sustainability by companies.
• The California Legislature has passed two new climate disclosure bills that will require companies doing business in the State of California to make substantial annual disclosures regarding carbon emissions and climate risk.
• In order to comply with the new wave of “greenwashing” legislation, companies will need to develop comprehensive environmental claims management frameworks that emphasize both transparency and reliance on verified data.

As businesses across the globe strive to fulfill carbon-neutral and net-zero promises over the coming decades, the voluntary carbon market has emerged as a necessary resource to help businesses bridge the gap to sustainability. However, the absence of standardized protocols and rigorous verification procedures in this nascent market has led to claims of “greenwashing,” whereby businesses exploit the market’s lack of standards to make exaggerated or false claims regarding their carbon credit and offset portfolios. As a result, regulators and industry stakeholders have begun to focus their efforts on enhanced transparency and more robust reporting standards. Over the last month, these efforts have accelerated through the following:

SBTi Overhaul

The Science Based Targets Initiative (SBTi) was established by the United Nations Global Impact, World Wild Fund for Nature, and other climate organizations, to provide independent third-party validation for corporate emission reduction plans. In addition to providing third-party validation for fees, the SBTi also sets science-based standards for validation. This month, the SBTI announced the incorporation of a new entity in the UK to house its standard-setting operations. The stated aim of this change is to address conflict-of-interest concerns by assuring the fee-charging element of the organization, validating corporate targets, will be managed by a separate and distinct entity from the standard-setting non-profit entity. SBTi also announced that its standard-setting processes will be amended, and the group will publish standard-setting procedures following the appointment of an independent body to approve its standards.

California Passes Climate Disclosure Bills

On October 7, 2023, Governor Newsom signed into law two new climate disclosure bills, SB 253, the Climate Corporate Data Accountability Act (CCDAA), and SB 261, the Climate-Related Financial Risk Act (CRFRA), which together will require many entities doing business in the state to calculate and disclose their carbon emissions and climate impact.

SB 253: CCDAA

The CCDAA will require entities with annual revenues exceeding $1 Billion doing business in California to make an annual disclosure of Scopes 1, 2 and 3 greenhouse gas (GHG) emissions for the prior fiscal year in conformity with the Greenhouse Gas Protocol standards and guidance. Under this law, companies will have mandatory requirements to estimate and report Scope 3 emissions for the first time. Scope 3 emissions include emissions from the company’s “full value chain,” including emissions from entities that a reporting company does not own or directly control (e.g., customers who buy or use company products).

SB 261: CRFRA

The CRFRA will require entities with annual revenues exceeding $500 Million doing business in California to publish on their own website a biannual climate-related financial risk report that discloses (i) the entity’s "climate-related financial risk" and (ii) measures adopted to mitigate and adapt to that climate-related financial risk.

"Climate-related financial risk," as defined in the bill, includes all material risk of harm to immediate and long-term financial outcomes due to physical and transitional risks, such as risks to operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.

Overlap with SEC

The requirements of the CCDAA and CRFRA closely track those proposed by the Securities Exchange Commission (SEC) with some notable exceptions, including:

• The SEC’s proposed rule only applies to publicly traded companies whereas the CCDAA will apply to both public and private companies; and
• The SEC’s proposed rule would only require a disclosure of Scope 3 emissions when “material” or if the registrant has set a GHG emissions target that includes Scope 3 emissions.

The final SEC rule is not expected to be published until later this month, at the earliest.

EU Takes Another Step Towards Formalizing Green Claims Directive

On September 19^th, the European Council and Parliament reached a provisional agreement on the EU “Green Claims Directive” designed to eliminate misleading or erroneous environmental messaging across EU markets and address greenwashing concerns by consumers. The proposed Green Claims Directive, originally published by the European Commission in March, sets forth detailed rules governing the manner in which companies make environmental claims to consumers about products, services, or the company itself that imply a positive effect on the environment. Oft-cited examples of such claims include representations that a company is “carbon neutral” or “net zero,” or that products are made with “recycled plastic.” The proposed Directive sets forth numerous minimum requirements for substantiation and verification of environmental claims, including verification by independent, certified third-parties.

To comply with the proposed Directive, companies will need to develop comprehensive environmental claims management frameworks that emphasize both transparency and reliance on verified data. In many cases, subject companies will need to build out processes to gather and analyze environmental data across the entire value chain for products and services in order to satisfy requirements for substantiation.

Once the proposed directive is formally endorsed and adopted by the Council and Parliament, member states will be obliged to enact legislation enforcing its terms within 18 months. As such, companies could be subject to the requirements of the Green Claims Directive as early as 2026.

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