Mandatory disclosure of greenhouse gas emissions by business operators is coming, one way or another. California legislators continue to press for a change in law that would require disclosures for large businesses that do business in California. Meanwhile, a climate risk disclosure rule proposed by the Securities and Exchange Commission (SEC), previously reported on here, forges ahead but reportedly may be scaling back the breadth of proposed disclosure mandates. While these mandates would be “just disclosure” at this point, the California bill and past experience suggest that quantified disclosure is simply the first step toward adopting regulations to align emissions levels with overall climate-related reduction targets and mandates.
Senator Scott Wiener from San Francisco introduced SB 253 this legislative session after his similar bill, SB 260, was narrowly defeated in the 11th hour of the 2022 legislative session. It is unclear whether Governor Newsom would have signed SB 260 had it passed or if he will sign SB 253 should it pass. SB 253, the Climate Corporate Data Accountability Act (Act), would mandate that any company “with total annual revenues in excess of one billion dollars . . . that does business in California” make the prescribed disclosures. According to the Act’s author, transactional activity in the state qualifies as doing business in California, regardless of physical presence or absence.
The Act would require such 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 the lighting-generated emissions in leased building space. The breadth of the required disclosures would not be limited to emissions within California. Although one trigger requires the company to be doing business in California, all emissions in the business’s enterprise would have to be disclosed regardless of their point of origin.
It is early in the 2023–24 legislative session, but it appears the breadth and uncertainty of quantifying Scope 3 emissions is the primary concern of opponents of SB 253. The proposed legislation defines Scope 3 emissions as:
[I]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 are not limited to, emissions associated with the reporting entity’s supply chain, business travel, employee commutes, procurement, waste, and water usage, regardless of location.
The use of wording like “indirect,” “that stem from,” and “associated with” in any law opens the door to inconsistent interpretation and costly litigation, something no business interest welcomes.
The United States Environmental Protection Agency (EPA) describes Scope 3 emissions more precisely, as follows:
Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its value chain. Scope 3 emissions include all sources not within an organization’s scope 1 and 2 boundary. The scope 3 emissions for one organization are the scope 1 and 2 emissions of another organization. Scope 3 emissions, also referred to as value chain emissions, often represent the majority of an organization’s total greenhouse gas (GHG) emissions.
As provided in the EPA description, entities potentially subject to the disclosure mandate criticize the double and even triple reporting of the same emissions inherent in Scope 3. The same is to be expected if SB 253 is signed into law. As noted in the EPA’s definition, one company’s Scope 3 emissions may already be subject to disclosure as another company’s Scope 1 or Scope 2 emissions. Supporters of Scope 3 disclosure mandates contend that there will not be true quantification of emissions related to a given business enterprise without mandating Scope 3 emissions disclosures, given that many emitters will not be subject to the disclosure mandate.
Scope 3 emission disclosures are at the heart of a potential scaling back of the proposed SEC rule. The SEC circulated its proposed “Enhancement and Standardization of Climate-Related Disclosures for Investors” on March 21, 2022. The SEC received significant public commentary on the proposed rule—over 14,000 comments overall with 4,000 of those being characterized as “unique.” Much of the public commentary, both pro and con, focused on the dynamics of Scope 3 emissions highlighted above. At least two national news outlets cite unnamed sources with knowledge of the SEC’s consideration of the public comments on the proposed rule as saying the Commission is actively considering scaling back the proposed mandates related to Scope 3 emissions. It is too early in the legislative process to know whether SB 253’s author will consider doing the same.
While both SB 253 and the proposed SEC rule focus on emission disclosures, there are some notable differences. The SEC rule would apply only to publicly traded companies, although companies subject to the disclosure rule would necessarily look to their suppliers—public or not—for the data required to be reported, so many nonpublic companies will nonetheless need to track and quantify their emissions data. SB 253 would not be limited to public companies but would only be triggered by companies with annual revenues of over $1 billion that “do business” in California, a difference that may leave some substantial companies doing business in California out of SB 253 but still required to perform SEC-mandated reporting.
Another difference is that the proposed SEC rule requires broader disclosure of climate-related risks to company assets and resources. For example, companies may need to disclose risks such as physical facilities that are located in a flood plain at increased risk due to climate events or supply chain dependency on a source that is facing increasing drought conditions. SB 253’s mandates relate only to emissions, not broader categories of risk, at least for now.
As to implementation under SB 253, the bill charges the California Air Resources Board (CARB) with establishing and implementing the disclosure regime no later than January 1, 2025. Disclosure would be to a publicly accessible “emissions registry” beginning in 2026, and disclosures would have to be independently verified by the registry or a third-party auditor certified and approved by CARB.
The bill today only purports to require disclosure without additional regulatory mandates for reductions. But foreshadowing a likely future regulatory intent, SB 253 requires CARB 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.
Senator Wiener’s SB 253 was referred to the Senate Environmental Quality Committee and will have its first hearing on March 15, 2023. Public comment on the proposed SEC rule has closed, and a final rule is expected to be adopted by April 2023, although there is no required time frame.
For more information on SB 253, the proposed SEC rule or any climate-related regulatory matters, please contact David Smith.