Two unprecedented climate disclosure mandate bills cleared a formidable and critical legislative hurdle on the path to becoming law in California. And while much attention to date focused on a mandate to disclose comprehensive emissions data, a companion bill requiring assessment, disclosure, and responses to climate-related business “risks” may pose an equal if not greater operational challenge. While the legislative destiny of the pending bills remains uncertain, companies both public and private view the disclosure mandates (and more) inevitable and are already preparing accordingly.
Controversial legislation in California is frequently “held on the Suspense Calendar” in the Appropriations Committee of the second house (i.e., Assembly bills are held on Suspense by the Senate Appropriations Committee and vice-versa). Bills “on Suspense” stay there and can die a quiet procedural death unless the committee chair allows a vote to remove the bill(s) from “Suspense.” If a bill(s) is voted off Suspense it goes to the floor of the second house for a final vote of the full body that can send the bill to the governor to sign or veto. Authors face a formidable task in working to have their bills removed from the Suspense Calendar, including persuading the committee chair that the policy changes the bill would make are needed, sound and worthy of consideration by the full committee, the full house and the governor. Here, the two bills originated in the Senate and were sitting on the Suspense Calendar in the Assembly until late last week when votes were taken to remove them despite yeoman efforts by those opposed to the measures to keep the bills on the Suspense Calendar.
The two Senate bills that would mandate disclosure of climate-warming emissions and organizational “risk” related to climate change largely mirror a proposed rule by the Securities and Exchange Commission (“SEC”), however the California mandates are not limited to publicly traded companies. The California obligations apply to any company doing business in California whose total revenues (not limited to California) exceed $1 billion as to emissions disclosure and $500 million as to risk disclosure. The disclosure obligations would not be limited to California but would encompass operations worldwide.
SB 253 (Weiner), “The Climate Corporate Data Accountability Act” (“Act”), would require specified companies to disclose all emissions related to the business’s operations – Scope 1, Scope 2, and Scope 3 emissions. Scope 1 emissions are the emissions generated by the business’s operations itself, e.g., emissions generated by the company’s own manufacturing processes. Scope 2 emissions are emissions generated by the energy consumed by the business in carrying out its activities, e.g., its electricity bill. Scope 3 is anything and everything else in its operations and supply chain, e.g., employee travel, component suppliers’ emissions, and use of the end product by the company’s consumers. Disclosure of Scopes 1 and 2 would commence in 2026, but Scope 3 would be deferred to 2027 under amendments by the author in order to advance the bill out of a prior committee.
SB 261 (Stern), would require disclosure of risks arising from climate-related phenomena. According to the bill, “’Climate-related financial risk’ means material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.”
The bill requires each entity subject to its disclosure mandate to prepare and post on its website a report identifying its climate-related financial risks as well as “measures adopted to reduce and adapt to climate-related risk disclosed.” The annual reporting obligation begins “on or before December 31, 2024.” The report must conform to the June 2017 “Recommendations” report by the Task Force on Climate-Related Financial Disclosures and any subsequent amendments thereto. The Recommendations report is available here.
Perhaps portending the bill’s prospects on the Assembly floor, with the latest amendments the bill garnered nine additional coauthors in the Assembly.
As to the magnitude of impact on the business community, sources estimate that the emissions-disclosure mandate could apply to nearly 5,500 business and the climate-related-risk-disclosure mandate to 10,000. But the reach is actually far beyond those estimates. As to emissions reporting, Scope 3 necessitates the disclosing entity have data underlying every operator in its supply chain as well as the end users of its products. Thus, entities not directly subject to the disclosure mandate will nonetheless need to produce compliant data for entities with whom they conduct business, lease office space, or otherwise interact that are subject to disclosure. Similar tangential dynamics will expand the reach of risk-related disclosures.
The bills today only purport to require disclosure without additional regulatory mandates for reductions. But foreshadowing a likely future regulatory intent, SB 253 requires the California Air Resources Board to contract with the University of California or another research entity to prepare a report on the disclosed emissions and requires "at a minimum" that it consider those emissions relative to "state greenhouse gas emissions reduction and climate goals." Among others, those "goals" include legislative mandates that California be carbon neutral by 2045 and that by 2030 the state's emissions be at least 40 percent below 1990 levels.
Both SB 253 and SB 261 now move to the Assembly floor. For adoption, they must be approved by the Assembly on or before September 14. Should they pass, Governor Newsom (who has yet to state whether he would sign either bill) would have until October 14 to sign or veto the measures.
The latest version of SB 253 is available here.
The latest version of SB 261 is available here.
For more information on SB 253, SB 261, the proposed SEC rule, or any climate-related regulatory matters, please contact David Smith.