Issues at the Intersection of ESG and Corporate Responsibility: California’s Recent Corporate Climate Accountability

These first-in-the-nation laws provide tangible ways for investors and consumers to assess the carbon footprints of companies, and the mitigation measures they are taking, and provide more assurance of accuracy in what companies are disclosing in their statements. While these laws are not created to change conduct necessarily, they do require greater transparency. As many consumers indicate the importance of purchasing products and services that are environmentally friendly, the possibility of greenwashing and misrepresentations or omissions in company statements and messaging has increased. These laws provide a mechanism to combat that conduct, giving investors and consumers information that had previously not always been available. Two important notes—first, these bills are broader than the proposed disclosure rules of the U.S. Securities and Exchange Commission (SEC), and second, these California bills have the potential to reveal the climate-related activities of a corporation’s supply chain. As such, corporations, attorneys advising those corporations, investors, and others have been watching these laws closely.

These two California bills have not sailed through to enactment without challenges. They were opposed throughout the legislative session by many in the industry, particularly regarding the obligation to disclose Scope 3 emissions because of the difficulty for companies to obtain and calculate this information as it extends beyond what they have direct control over. Since the laws passed, a lawsuit has been filed by the Chamber of Commerce of the United States, the California Chamber of Commerce, and others alleging that their requirements constitute violations of the First Amendment, the Supremacy Clause, and the Constitutional Limitations on Extraterritorial Regulation. This lawsuit is pending.

In addition to this legal challenge, budget woes in California have put the timelines for implementation into jeopardy. Funding for these new laws was in flux when California’s dismal budget deficit was announced earlier this year. While some cuts were made to the initial budget for this process, they were not as significant as some feared (or hoped for, depending on one’s views).

Ultimately, adjustments were made to the timeline for the implementation of these laws in this year’s legislative session with SB 219 (Senator Wiener and Senator Stern). SB 219 extends the deadline that the California Air Resources Board (CARB) has to complete the rulemaking process, while leaving intact the timeline for the corporate disclosures. Governor Newsom signed SB 219 into law at the end of September.

The next step will be for CARB to begin the rulemaking process for issuing regulations on these reporting requirements, which is set to begin shortly. An opportunity for public comment will be provided as CARB creates the timeline for this process. It seems likely that CARB will also make the determination of whether Scope 3 emissions should be included, which has been one of the most contested hot-button issues of this debate.

We will wait and see how the CARB process unfolds and the provisions roll out over the next few years in California. Only time will tell how this process goes and whether other states will choose to replicate or reject this strategy for corporate climate disclosures and holding large companies accountable.