California lawmakers move ahead with major climate disclosure bills

Two bills in California that would surpass forthcoming climate disclosure requirements from the SEC are moving forward, and were approved Tuesday by the state Senate.

The pieces of legislation, SB-253 and SB-261, would require companies with substantial business in California to report their annual greenhouse gas emissions and issue yearly reports on their climate-related financial risks.

The bills, which have been sent to the state assembly, are significant for two main reasons. First, they would apply to more companies and mandate a higher level of emissions disclosure than the Securities and Exchange Commission’s forthcoming rule would. Second, given the size of California’s economy, if the bills are passed, they would effectively mean mandatory emissions and climate-risk disclosure for major U.S. companies, even if the SEC’s rule is delayed, watered down or faces legal challenges.

“[L]egal challenges against these requirements are likely. As such, wide-sweeping climate disclosure requirements via securities regulations may only come into effect once such challenges — if they arise — are settled, which could take years," Jonathon Smith, associate director of ESG at Sustainable Fitch, wrote this week in an update about the bills. "The SEC is due to reveal its proposed climate disclosure rules sometime in the third quarter, already a year behind when they were originally due to be unveiled.

“However, legislative action from California — one of the world’s largest and most influential economies — could bypass these delays and serve as a meaningful catalyst in growing climate-related disclosure across the U.S.,” Smith added.

WHAT'S COVERED

Under the SEC’s proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors, most public companies would have to eventually report their Scope 1 and 2 emissions, or those they directly emit or that are associated with the energy they use. Wide-ranging Scope 3 emissions, which apply to greenhouse gases in companies’ supply chains and consumer use of the products they provide, would need to be reported by companies that deem those emissions as material to the operations.

By comparison, the California legislation covers all companies with business in the state and at least $1 billion in annual revenue — public or private — making the report Scope 1, 2 and 3 emissions. It would also require third-party reviews of the emissions they report.

Meanwhile, companies with at least $500 million in revenue would be required to issue reports on their climate-related financial risks.

The bills are new versions of legislation that were introduced last year but failed to get out of the state Senate.

MOUNTAINS OF FEEDBACK

Since proposing its rule in March 2022, the SEC has received thousands of public comments.

Republican groups have opposed it amid recent attacks on ESG that have been part of the wider culture wars in the country.

Big companies that would be heavily affected by the reporting, particularly on Scope 3, which represents the biggest source of emissions, have taken issue with at least some of the requirements.

Asset managers have offered ideas for tweaks, but many have generally supported the SEC’s proposal.

In no small part, that’s because emissions and climate risk are already being reported by numerous public companies, and asset managers often use that data to help inform their investment decisions. But because there isn’t a standard way that such data are collected and reported, comparing numbers from different companies is not straightforward.

One group, Soros Fund Management, in its recent Climate Action Progress Report noted that although its net-zero commitment covers Scope 1, 2 and 3 for its portfolio, its internal targets only include Scope 1 and 2 for public equity and credit “where the emissions data and calculation methodologies are most established.”