As the SEC Gears Up for Mandatory Climate Disclosure, So Does California

Akin Gump Strauss Hauer & Feld LLP

Many investors and other stakeholders have long sought universal requirements for public companies to disclose the social and climate impacts of their operations. If recent developments at the United States Securities and Exchange Commission (SEC)—such as the nomination of Gary Gensler to chair the SEC, the creation of a new Climate and Environmental, Social and Governance (ESG) Senior Policy Advisor position and yesterday’s announcement that the Commission will update its 2010 guidance on climate disclosure—are any indication, the proposal of such requirements appears imminent. Not to be outdone, a group of California legislators may beat the federal government to it by introducing what could become the first mandatory climate disclosure requirements in the U.S.

California Senate Bill 260 (SB 260), entitled the Climate Corporate Accountability Act, would direct the California Air Resources Board (CARB) to develop requirements for corporations with more than $1 billion in revenue that do business in California to disclose their scope 1, 2 and 3 greenhouse gas emissions in annual reports beginning no later than January 2024. By 2025, those corporations would have to begin publishing “science-based” emissions targets consistent with the Paris Agreement’s aspirations to limit global warming to no more than 1.5 degrees Celsius above preindustrial levels.

While many large companies already issue climate disclosures on a voluntary basis, SB 260 would no longer give them—or their more reluctant peers—a choice. Importantly, the bill’s required scope 2 and 3 emissions reporting would force companies to disclose, for the first time, the indirect emissions that result from their purchase and use of electricity as well as their supply chains, business travel, procurement efforts, water use and wastes. Covered entities also would have to engage certified third-party auditors to verify their disclosures and emissions targets, another noteworthy first that should lead to a greater degree of standardization over time in climate reporting. Given the bill’s capacious reach and the minimum contacts with California required to trigger its applicability, most large companies in virtually every sector would soon face climate disclosure requirements.

By contrast, the SEC’s current federal disclosure regulations, such as Regulation S-K, require neither emissions accounting nor target setting. Instead, companies have discretion to consider and report only on issues they deem “material” under the current principles-based approach to disclosure. Simply put, SB 260, if enacted, would revolutionize the U.S. regulatory disclosure landscape in under three years, and possibly pave the way for more robust disclosure in other ESG areas over time. These requirements might exceed those that a Gensler-led SEC will impose and could encourage other states to adopt similar systems to supplement or fill the gaps left by the federal regime.

With that said, the bill is not without other political and legal restraints, and it is not on a surefire path toward enactment. Although supported by a number of prominent environmental organizations, like the California League of Conservation Voters, the bill’s somewhat vague definition of “science-based emissions target” has the potential to govern direct and indirect greenhouse gas emissions anywhere a covered entity operates, even places beyond California’s borders. This broad ambit could conflict with the U.S. Constitution’s Commerce Clause, and may give pause to California legislators and greenhouse gas regulators. 

Opponents likely will argue that existing California laws already impose comparable requirements on a number of regulated entities. These laws—such as Assembly Bill 32, and Senate Bills 32, 350 and 100—require companies with direct, in-state greenhouse gas emissions exceeding 10 million metric tons per year to report and reduce those emissions according to CARB targets. Currently, many sectors face these requirements, including the energy, electricity generation, transportation, cement, chemical, and agriculture sectors. In addition, California has set ambitious emissions reductions goals governing the generation and sale of electricity, including a requirement that 100 percent of retail electricity sales come from renewable energy sources by 2045. Similarly, 40 percent of truck engine sales in the state by 2045 must consist of zero-emission models, and other regulations impose (or soon will impose) some form of reporting and reduction requirements on companies doing business in California. Thus, to some extent, SB 260 may be duplicative, overly burdensome, and of marginal benefit when considered against the backdrop of California’s current regulatory environment. For these reasons, the measure could face resistance from moderate members of the Democratic caucus.

The bill will face its first test as early as next month in the State Senate’s Environmental Quality and Judiciary Committees. If it clears both committees and the State Senate, it then must pass the State Assembly, after which point it likely would receive the Governor’s approval as early as this fall. It also remains to be seen whether the SEC’s eventual federal disclosure requirements supersede, or merely set the floor for, these potential California-specific requirements.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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