iLast year, California became the first state to pass laws requiring companies to make disclosures about their greenhouse gas (“GHG”) emissions as well as the risks that climate change poses for their businesses and their plans for addressing those risks. These new laws now face funding and legal hurdles that are delaying their implementation.
While California’s new laws navigate these challenges, the U.S. Securities and Exchange Commission (“SEC”) adopted its own final climate disclosure rule on March 6. Formally entitled The Enhancement and Standardization of Climate-Related Disclosures for Investors (“SEC Rule”), it requires public companies to make disclosures about the climate-related risks that have materially impacted, or are reasonably likely to have a material impact on, a registrant’s business strategy, operations, or financial condition, and also to disclose their Scope 1 and Scope 2 GHG emissions. The SEC Rule is significantly scaled-back from what the SEC originally proposed in March 2022; most notably, it does not require disclosure of Scope 3 GHG emissions. It too faces legal challenges.
California’s New Laws[1]
On October 7, 2023, California Governor Gavin Newsom signed into law two sweeping climate disclosure bills, Senate Bill 253 (“SB 253”), the Climate Corporate Data Accountability Act, and Senate Bill 261 (“SB 261”), the Climate-Related Risk Act.
Under SB 253, companies that do business in California and have more than $1 billion in annual revenue will be required to disclose emissions data to the California Air Resources Board (“CARB”) each year, starting in 2026. The new law will affect more than 5,400 companies. Under the new law, CARB can levy fines of up to $500,000 per year for violations thereunder. The new reporting requirements apply to both public and private companies, unlike the SEC Rule, which applies only to certain public companies.
Under SB 261, companies with more than $500 million in annual revenue will be required to disclose on a biennial basis how climate change impacts their business, including reporting certain climate-related financial risks and their plans for addressing those risks. These disclosures also begin in 2026 and will affect roughly 10,000 companies.
Funding Hurdles
Funding is necessary for CARB to develop and implement regulations for both climate disclosure laws, as well as to review, administer, and enforce the new laws. To implement SB 253, CARB estimated that it required $9 million in the 2024-25 fiscal year and $2 million in the 2025-26 fiscal year. For SB 261, CARB estimated that it needed an aggregate of $13.7 million over the 2024-25 and 2025-26 fiscal years to identify covered entities, establish regulations, and develop a verification program.
Governor Newsom’s $291.5 billion budget proposal for the 2024-25 fiscal year did not allocate any funding for the implementation of the new laws. The sponsors of the two laws, SB 253’s Senator Scott Wiener and SB 261’s Senator Henry Stern, immediately released a statement sharply critical of this aspect of the Governor’s budget proposal.[2] With limited exceptions, the budget proposal defers all new discretionary spending decisions to the spring, pending input from the legislature, with a final spending plan expected in July of 2024.
The budget process in California can be a lengthy negotiation. The Governor proposes a budget, but then must work with the Legislature to develop the final budget. In this regard, it is important to note that Senator Wiener was appointed to chair the Senate Budget Committee earlier this year. Thus, it’s possible that funding will be provided to implement the laws, though CARB already faced an aggressive set of deadlines for developing the regulations.
Legal Challenges
Some companies, including tech giants like Apple and Salesforce, want the new rules implemented quickly. Large businesses may have an interest in implementing the legislation expeditiously for the benefit of operational certainty and because they have the resources to absorb costs that their smaller competitors cannot. Other companies view the new rules as needlessly burdensome and are committed to halting the legislation in its tracks.
In January, the U.S. Chamber of Commerce joined the American Farm Bureau Federation, California Chamber of Commerce, Central Valley Business Federation, Los Angeles County Business Federation and Western Growers Association in filing a lawsuit[3]in federal district court challenging the climate disclosure laws under the theory that they violate the First Amendment of the U.S. Constitution and are preempted by federal law.
According to the complaint, the climate disclosure requirements violate the First Amendment of the U.S. Constitution by “forc[ing] thousands of companies to engage in controversial speech that they do not wish to make, untethered to any commercial purpose or transaction…for the explicit purpose of placing political and economic pressure on companies to “encourage” them to conform their behavior to the political wishes of the State.” The plaintiffs argue that, in the event that the State seeks to compel a business to speak noncommercially on controversial political matters, such action shall be presumed by a reviewing court to be unconstitutional unless the government proves that it is narrowly tailored to serve a compelling state interest. The plaintiffs also allege that the new climate disclosure laws are not narrowly tailored to further any legitimate interest of the state, let alone a compelling one.
The lawsuit also contends that the federal Clean Air Act preempts California’s ability to regulate GHG emissions beyond its jurisdictional borders. According to the plaintiffs, the new laws seek to regulate out-of-state emissions “through a novel program of speech regulation.” The complaint further argues that, because the new disclosure requirements operate as de facto regulations of GHG emissions nationwide, they “run headlong” into the Dormant Commerce Clause and broader principles of federalism. The plaintiffs ask the court to enjoin California from implementing or enforcing the new rules, thereby making them null and void.
A more serious preemption challenge may be that the California climate disclosure laws are preempted by the SEC Rule. The issue was addressed during the March 6 SEC hearing (discussed below), and it’s been reported that SEC General Counsel Megan Barbero answered that “nothing” in the Rule “expressly preempts any state law.” However, she added that the issue could arise as a question of “implied preemption,” which “would be determined by a court in a future judicial proceeding.” The question would be whether the SEC has “occupied the field” to such an extent that it preempts state rules in the space. Those would be questions of fact largely turning on how the climate laws are being applied and enforced, and thus any such challenge is likely to await CARB’s implementation of the laws.
The SEC Rule
On March 6, 2024, the SEC adopted the final SEC Rule which will require public companies to include certain climate-related disclosures in registration statements and annual reports. The final SEC Rule requires registrants to disclose material climate-related risks, activities undertaken to mitigate or adapt to such risks, information regarding the board of directors’ oversight of climate-related risks and management of material climate-related risks, and information about climate-related targets or goals that are material to the company’s business, operations, or financial condition.
To add transparency to investors’ assessments of certain climate-related risks, the SEC Rule also requires disclosure of material Scope 1 and Scope 2 GHG emissions, the filing of an attestation report in connection thereof, and disclosure of impacts that severe weather events and other climate-related conditions have on financial statements, including costs and losses. The final SEC Rule includes a phased-in compliance period for all registrants, with compliance dates ranging from fiscal year 2025-26 to 2031-32, depending on the registrant’s filer status and the content of the disclosure. In general, the SEC Rule requires less than the California climate disclosure laws, as Senator Wiener observed[4].
Key Takeaways
- Implementation and/or enforcement of SB 253 and SB 261 is delayed for the time being due to a lack of funding, and thus the roll-out of the regulatory regime for the two laws appears likely to slip, such that the laws’ 2026 compliance deadlines may also slip.
- The lawsuit challenging SB 253 and SB 261 adds some uncertainty to the process of ensuring compliance with climate disclosure requirements, and may cause further delay.
- The delayed implementation of the new laws affords companies additional time to develop a compliance strategy. Due to the lessened scope of the SEC Rule, companies that are prepared to comply with the California laws are likely to be prepared to comply with the SEC Rule. And implementation of the SEC Rule may be delayed by legal challenges as well, thereby creating more time for companies to develop a compliance strategy.
FOOTNOTES
[1] A prior article describing these laws in more detail is here.
[3] Chamber of Commerce of the United States of America, et al. v. Cal. Air Resources Board, et al. (Cal. Central Dist., Western Div.) (Case No. 2:24-cv-00801).
