Business groups’ recently filed lawsuit mounts the first legal challenge to California’s novel climate disclosure laws, creating potential uncertainty for impacted companies.

TAKEAWAYS

• On October 7, 2023, California Governor Gavin Newsom signed into law two new, first-of-their-kind climate disclosure laws—SB 253 and SB 261—which will impact thousands of companies across the United States.
• California’s new, controversial climate disclosure laws are now the subject of a legal challenge by a coalition of business organizations.
• The lawsuit and the relief it seeks introduce a level of uncertainty for covered entities as they prepare for the laws’ first reporting deadline in 2026.

On January 30, 2024, a coalition of business organizations—including the U.S. Chamber of Commerce, American Farm Bureau Federation, Los Angeles County Business Federation, Central Valley Business Federation and the Western Growers Association—sued the State of California to prevent the California Air Resources Board (CARB) from enforcing California’s recently enacted climate disclosure laws—Senate Bills 253 and 261. The lawsuit, filed in the Central District of California, mounts the first legal challenge to these new, controversial laws and argues, among other things, that the laws’ requirements unconstitutionally compel speech by business entities in violation of the First Amendment and are otherwise precluded by federal law.

SB 253 and SB 261
Signed into law on October 7, 2023, the California Climate Corporate Data Accountability Act, or SB 253, generally requires entities with over $1 billion in annual global revenue that do business in California to annually disclose to CARB and make publicly available the full range of their greenhouse gas (GHG) emissions attributable to both their own operations and their supply chains, and to obtain third-party verification and assurance. Under SB 253, companies must report their annual Scope 1 (direct, operational emissions), Scope 2 (indirect emissions from energy use) and Scope 3 (emissions up and down the company’s value chain for which it is indirectly responsible) emissions to CARB for the prior calendar year and obtain third-party verification and assurance. Annual Scope 1 and 2 emissions must be reported beginning in 2026 (for 2025 emissions), while annual Scope 3 emissions reporting begins in 2027 (for 2026 emissions). In addition, SB 253 authorizes CARB to promulgate regulations governing these forthcoming emissions reporting programs.

Failure to comply with SB 253’s requirements could result in significant financial consequences, with CARB authorized to impose administrative penalties of up to $500,000 per reporting year.

Similarly, SB 261—or the California Climate-Related Financial Risk Act—requires entities with over $500 million in annual global revenue that do business in California to undertake biennial reporting and website publication of the company’s “climate-related financial risk,” i.e., financial risks associated with climate change, and the measures adopted to reduce and adapt to those risks. Such “climate-related financial risk” can include risks to the supply chain, delivery of goods or services, consumer demand, investments, shareholder value, and financial markets or overall economic health. The first climate-related financial risk report is due by January 1, 2026, and biennially thereafter.

SB 253 and SB 261’s disclosure requirements apply to all types of business entities—from public and private corporations, to partnerships, to LLCs and beyond—so long as those entities “do business in California.” Borrowing from the California Tax Code, both climate disclosure laws adopt a broad, nearly all-encompassing definition of “doing business in California,” covering any entity that (i) engages in any transaction for the purpose of financial gain in California, (ii) is organized or commercially domiciled in California, or (iii) has California sales, property or payroll exceeding certain specified amounts by year. In fact, the two climate disclosure laws are expected to capture anywhere from 5,000 to 8,000 newly reporting companies.

The Business Coalition’s Battle in Federal Court
Given the controversial nature of the new climate disclosure laws and their anticipated impact on thousands of businesses, it comes as no surprise that stakeholders seek the jurisdiction of the federal court to better assert their claims and gain autonomy from the California state courts. In their complaint, the business organizations argue in part that California’s new climate disclosure requirements unconstitutionally compel speech in violation of the First Amendment, “untethered to any commercial purpose or transaction.” The complaint further characterizes SB 253 and 261 as a purported attempt to regulate business conduct on a national—even global—scale, beyond what California is authorized to regulate, thereby conflicting with the federal Clean Air Act and violating the Commerce Clause of the U.S. Constitution.

The plaintiffs seek both a judicial declaration that SB 253 and 261 are unconstitutional and an injunction enjoining California from enforcing the laws.

Potential Implications
Although this lawsuit comes more than a year before any of SB 253 or 261’s requirements go into effect, its potential implications introduce a layer of uncertainty for impacted companies as they strive to prepare for the laws’ forthcoming compliance deadlines. Indeed, if the plaintiffs are successful, most—if not all—of the laws’ climate disclosure requirements could be invalidated, throwing into turmoil a California climate disclosure regime some believe EPA and/or other states will use as a template for their own climate disclosure regulations. Moreover, while they have not done so yet, the plaintiffs may eventually seek temporary injunctive relief from the court to prevent the laws’ requirements from going into effect while the challenge is pending, creating even further uncertainty for potentially regulated companies.

It remains to be seen whether other parties will join the battle and intervene in the pending federal action, and/or whether additional lawsuits will be brought in California state courts on these or similar grounds. Depending on how the courts decide these challenges, SB 253 and SB 261 could survive entirely intact, or may be vacated in part or in whole and require a new round of legislation. Even so, until and unless a court injunction issues, California’s climate disclosure laws will remain in full force and effect. As such, companies would be wise to proceed and engage third-party consultants now to begin assessing their carbon footprint at all points in the value chain, identifying and analyzing potential climate related risks to the business, and evaluating potential measures for avoidance of or adaptation to these risks. With the first Scope 1 and 2 emissions disclosure reporting deadline approaching on January 1, 2026, companies will want to prepare themselves for potential tracking of their annual carbon emissions starting in January of 2025 and implementing the procedures and systems to help make that happen. Companies should also feel free to reach out to Pillsbury to help explain whether and how these new climate disclosure laws may apply to their particular businesses, both to operations within California and outside it.

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