Scope 3 Could Be Scrapped from California Climate Bills
With the timeline now confirmed, investors are nevertheless being advised to stand ready for implementation.
Ongoing controversies and industry pushback could result in Scope 3 emissions disclosure requirements being removed from the California climate bills, a regulatory expert has warned.
If the threat is averted, the bills could offer an alternative to federal legislation, with the US Securities and Exchange Commission’s (SEC) disclosure rules still subject to legal challenges.
The package of three laws includes SB 253, which requires both public and private businesses operating in California with annual revenues greater than US$1billion to report their Scopes 1, 2, and 3 emissions as of 1 January 2026 (for 2025 data). It also comprises SB 261, which focuses on companies with revenues over US$500 million, requiring them to biannually disclose climate-related financial risks and mitigation from the same date.
Both bills have been subject to intense lobbying and pressure from market participants, who have tried to dilute or delay some of the requirements.
“The laws are very much on track, and institutional investors need to begin preparing and anticipating the new information that will be coming forward,” said John Kostyack, Adviser to Sierra Club’s Fossil-Free Finance campaign. “These could be some of the most important climate disclosure laws in the world. They have a more comprehensive requirement for emissions disclosures than the pending SEC rule.”
The third bill is AB 1305 – also known as the Voluntary Carbon Market Disclosures Act – which regulates companies involved in the marketing, selling, and purchasing of voluntary carbon offsets in California. Although this one went into effect on 1 January this year, the first disclosures it mandates won’t be required until 2025.
“We currently have a largely voluntary reporting system that has led to a patchwork of disclosures that are very difficult to harmonise,” said Kostyack. “[These bills] are a very positive development that go a long way to creating a standardised approach. It’s in everyone’s interest to ensure implementation goes well – both by being timely, and producing quality disclosures.”
Happy anniversary
On 7 October, it will be a year since California Governor Gavin Newsom signed the legislative package into law. First exposed to threats from cuts to the state budget, the three bills were then subject to a delay proposed by Newsom himself, who cited “likely infeasible” implementation deadlines.
“There was a big push from certain regulated interests to get the deadlines pushed back and cut back on the quality and comprehensiveness of the disclosures,” said Kostyack. “The good news is that the attempt to weaken these laws was unsuccessful. The changes that we saw this summer are perfectly okay.”
Going into California’s summer legislative session, the expectation was that the compliance timelines for SB 253 and SB 261 would be pushed back, explained Krista deBoer, Partner at global law firm Morrison Foerster. But, “surprisingly”, the legislature opted against, she said.
The only approved change was an extension of the deadline by which the California Air Resources Board (CARB) was due to produce the required guidance and framework for emissions disclosures – from early to mid-2025.
But with the timeline for all three bills now fixed, companies are being advised to stand ready for implementation.
“Given the California legislature declined to amend the statutes and extend compliance timelines, regulated entities should prepare for compliance according to the bills’ original timelines and obligations,” said deBoer.
Some investors have expressed support for the bills – including the California State Teachers Retirement System (CalSTRS).
“Climate change affects the California economy. Current disclosure standards related to climate-related financial risks are voluntary and, therefore, inadequate to address rapidly increasing climate risks,” CalSTRS said in a statement. “Mandatory disclosures from all major economic actors are needed to address the climate crisis and ensure a sustainable future for California.”
Supply-chain disclosures under threat
California’s climate bills may have survived the summer legislative session, but they aren’t entirely out of the woods yet, as litigation filed earlier this year could still result in changes.
“There’s a hearing on competing motions due next month, the outcome of which could have a big impact on the bills,” said deBoer. “I don’t anticipate it will completely do away with either SB 253 or SB 261, but it may limit their scope and result in a peeled-back version.”
In January, several businesses and industry associations co-filed a lawsuit challenging the bills “for unconstitutionally requiring disclosure by qualifying public and privately held businesses of greenhouse gas emissions and climate-related risks throughout their value chain”. The plaintiffs alleged violations of the First Amendment and the Supremacy Clause, and raised further constitutional limitations against the CARB.
“One of the arguments made by the plaintiffs is that the requirement to disclose Scope 3 emissions unintentionally regulates parties that shouldn’t be regulated by the bills – such as small farmers and businesses that are part of a larger business’s value chain,” deBoer explained. “One possible outcome of the litigation is that those disclosures could be found to be somehow unconstitutional or unworkable, and then the legislature may have to go back and reimagine the bills without them.”
Bigger picture
Regardless of where the bills end up following the October hearing, Kostyack maintains that they reflect a larger trend that is underway in the investment community.
“Investors want reliable backward-looking metrics to measure progress on climate – which are emissions disclosures using agreed-upon frameworks – but they’re also looking for more reliable forward-looking metrics, as featured in SB 261,” he said. “We need to get emissions reporting right, but there’s equal value to the parallel process underway of getting smarter about what investors can use to measure investments in the transition – and investments that are counterproductive to the transition.”
Pointing to the Transition Pathway Initiative’s latest ‘State of Transition’ report, which found that only 30% of the biggest corporate emitters had long-term 2050 climate targets aligned with 1.5°C, Kostyack said such metrics could “be the future”.
“They have two parallel ways of evaluating [corporate] progress: one is on emissions, and the other is on interventions that are done to advance the transition,” he added. “These interventions really are about what companies are investing, and similar questions need to be asked about asset managers, banks and insurance companies.”
Though held on standby until the outcome of the litigation becomes clear, some believe the California climate bills could serve as a blueprint for wider adoption of similar legislation across the US.
“One of the benefits of the US federal system is that if the government is moving too slowly, a state can move forward,” said Kostyack. “We have an opportunity to achieve through California what we may, or may not, be able to achieve through the SEC and the federal rulemaking process.”
Similar initiatives to the California bills already exist in the states of New York, Oregon, Illinois, and Washington.
“A handful of states are looking at California’s laws and introducing their own in their legislature,” said deBoer. “In the absence of rules at the federal level, that’s what we’re going to start seeing. But some provisions in the California bills make it so that people will be able to use the same disclosures, as opposed to dealing with a ‘patchwork of laws’.”
Some, however, believe that the emergence of state-level legislation could cause more harm than good.
“While I’m an ardent supporter of operationalising sustainability reporting, we need to be careful about championing states that are creating their own standards – which can create complicated compliance webs and an even bigger burden on reporting companies,” said Chad Spitler, CEO of sustainability and governance consulting firm Third Economy.
“The California rules and subsequent proposals in other states could take our focus away from the best outcome for our economy – a federal climate disclosure standard from the SEC.”
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