Over the past six months environmental, social, and governance (ESG) policy has shifted into a new era with the promulgation of new Greenhouse Gas (GHG) disclosure requirements at both the federal and state level in California. As expected, the majority of these requirements are now mired in litigation, but their arrival marks a significant shift in corporate accountability mandates.
SEC RULES
The U.S. Securities and Exchange Commission (SEC) finalized the agency’s first climate disclosure regulations in March 2024. The rules, now on hold under an administrative stay in the face of pending litigation, apply to most public companies and companies that are going public. Among other mandates, the new rules will require companies to report “climate-related risks that have materially impacted, or are reasonably likely to have a material impact on, [their] business strategy, results of operations, or financial condition.”
However in a significant step back from the draft rules released on March 21, 2022, the SEC will only require disclosure of material Scope 1 and Scope 2 GHG emissions from certain categories of filers, and will not require the disclosure of emissions indirectly produced along a company’s upstream or downstream value chain (Scope 3 emissions) – a measure that generated significant industry pushback. While acknowledging that “many investors today are using Scope 3 information in their investment decision making,” SEC Chair Gary Gensler stated that the agency omitted Scope 3 disclosure rules due to public comment.
The final rules now face multiple lawsuits from a variety of opponents. On one end, at least 10 states and various companies and industry representatives, including the U.S. Chamber of Commerce, have sued the SEC, calling the regulations an unconstitutional overreach of agency authority. At the other end of the spectrum, environmental advocacy groups have sued the SEC for weakening the rules by omitting the Scope 3 reporting requirements included in the draft version. The consolidated suits will be heard in the U.S. Court of Appeals for the Eighth Circuit based on a random lottery pick by the Judicial Panel on Multidistrict Litigation. In addition, a new petition for review was recently submitted in the Fifth Circuit by two new petitioners.
On April 4, the SEC voluntarily stayed implementation of the disclosure rules pending resolution of the consolidated litigation in the Eighth Circuit.
CALIFORNIA LEGISLATION
While the SEC backed down from the more stringent regulations initially proposed in 2022, California pressed ahead to pass the most ambitious disclosure requirements in the United States. The three pieces of legislation, which Governor Gavin Newsom signed into law on October 7, 2023, are expected to collectively impact over 10,000 companies, including public and private entities and subsidiaries of non U.S.-based companies, according to a recent PwC analysis.
- Senate Bill 253 requires covered entities with more than $1 billion in annual revenue that do business California to report direct (Scope 1 and 2) and indirect (Scope 3) emissions;
- Senate Bill 261 mandates that businesses operating in California with over $500 million in annual revenue report certain climate-related financial risks beginning on January 1, 2026; and
- Assembly Bill 1305 requires certain disclosures for companies that market, sell, and purchase voluntary carbon offsets.
This suite of legislation now faces both legal and possible budgetary obstacles. On January 30, 2024, a coalition of business and agricultural groups, including the U.S. Chamber of Commerce, sued the state, seeking to block the implementation of SB 253 and 261. The plaintiffs allege in part that the disclosure requirements violate First Amendment protections by compelling speech, as anticipated in the Allen Matkins California Corporate & Securities Law Blog.
In another possible hurdle to implementation, Governor Newsom’s proposed budget, released on January 10, 2024, paused the funding required to implement all new laws, including the new disclosure requirements, to address the state’s deficit. Supporters, including the bills’ sponsors, Senator Scott Wiener and Henry Stern, are urging Newsom to fully fund the measures when the budget is finalized in May.
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