In early 2021, the California Senate introduced two bills related to reporting of greenhouse gas emissions (SB 260) and climate-related financial risk (SB 449). Both bills were amended as recently as April 2021.
SB 260 would require the State Air Resources Board, on or before January 1, 2023, to develop and adopt regulations requiring U.S.-based business entities with over $1 billion in total annual revenues and that do business in California to publicly disclose their greenhouse gas emissions. The bill would require disclosure of three types of emissions on an annual basis, beginning in 2024:
- Scope 1 emissions: all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.
- Scope 2 emissions: indirect greenhouse gas emissions from electricity purchased and used by a reporting entity, regardless of location.
- Scope 3 emissions: indirect greenhouse gas emissions, other than scope 2 emissions, from activities of a reporting entity that stem from sources that the reporting entity does not own or directly control and may include, but not be limited to, emissions associated with the reporting entity’s supply chain, business travel, employee commutes, procurement, waste, and water usage, regardless of location.
Reporting entities would need to have their disclosures independently verified by a State Board-approved third-party auditor with expertise in greenhouse gas emissions accounting.
SB 449 also is disclosure focused. The bill would require business entities with annual gross revenues of at least $500 million to prepare and publicly disclose an annual report, beginning in 2022, on climate-related financial risk. “Climate-related financial risk” is broadly construed to mean “material risk of harm to immediate and long-term financial outcomes due to climate change.” The report must also include the business entity’s measures adopted to reduce and adapt to climate-related financial risk. The report’s contents will be guided by the framework and disclosures in the Final Report of Recommendations of the Task Force on Climate-Related Financial Disclosures (June 2017).
California’s proposed rules mandating environmental, social and corporate governance (ESG)-related disclosures would run contrary to Delaware’s voluntary disclosure approach. In 2018, Delaware adopted the Certification of Adoption of Transparency and Sustainability Standards Act, which allows business entities to become certified if they opt-in to adopting ESG principles and reporting and offers flexibility in selecting the standards that would guide the entity in assessing its ESG-related efforts.
In other recent ESG-related developments, on March 4, 2021, the Securities and Exchange Commission announced the creation of a Climate and ESG Task Force in the Commission’s Division of Enforcement. The Task Force will focus on identifying ESG-related misconduct, including due to “material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.” At the same time, the SEC requested public comments on climate change disclosure in the form of responses to 15 questions on a wide range of topics. Viewed together with recent public statements by SEC staff, the SEC appears set to update its guidance on climate and other ESG-related disclosure and likely to propose expanded ESG disclosure requirements.
The California pieces of legislation, if enacted, could face some future hurdles. First, compliance with a patchwork of inconsistent regulations from various states and at the federal level will be difficult for business entities—and veers from the SEC’s stated goal of producing “consistent, comparable and reliable data” on climate change for investors (quoting a March 15, 2021 speech from then-Acting Chair of the SEC Allison Herren Lee). Second, the proposed legislation could be challenged on First Amendment grounds, similar to the litigation that ultimately led the D.C. Circuit Court in 2015 to hold that portions of the SEC’s rules on conflict minerals disclosure violated the First Amendment. It is worth noting that any future SEC mandatory disclosure rules on ESG matters may meet similar outcomes. Lastly, the California bills raise issues of federal preemption, if and to the extent they conflict with existing or eventual SEC rules on ESG disclosures.
This e-Bulletin was prepared by Shannon Treviño, Clinical Professor of Law and Director of the Transactional Lawyering Institute at Loyola Marymount University’s Loyola Law School. Ms. Treviño is a member of the Corporations Committee of the Business Law Section of the California Lawyers Association.