Sunnier Outlook for California Climate Reporting
Further pushback is expected, but experts say the global climate transition makes disclosure rules inevitable.
Initial details of California’s May budget have given the industry reassurance that the state’s landmark climate disclosure laws are set to receive the necessary funding to support their slated 2026 implementation date.
Unveiled in January, the original budget proposal for 2024-25 had left out the funding required to implement the climate bills package, as Governor Gavin Newsom wrestled with the impact of a budget shortfall of almost US$38 billion.
“We’re still waiting for something more concrete and in writing [on the May budget], but it is expected there will be funding this year for the California climate package,” Kristina Wyatt, Chief Sustainability Officer at US-based climate management and accounting platform Persefoni, told ESG Investor.
This funding will be earmarked for the California Air Resources Board (CARB) – the body responsible for the finalisation and implementation of California’s Climate Accountability Package, which comprises Senator Scott Wiener’s Senate Bill (SB) 253 and Senator Henry Stern’s SB 261, both signed into law in October last year.
SB 253 will require public and private business entities operating in California with annual revenues exceeding US$1 billion to report their direct and indirect greenhouse gas (GHG) emissions, while SB 261 will require those with annual revenues exceeding US$500 million to publicly disclose their climate-related financial risks and efforts to mitigate negative impacts. Over 5,000 are expected to fall into scope.
“Understanding the climate impact of large US companies is essential for holding them accountable in the effort to solve climate change,” said Matt Fisher, Head of Policy at sustainability platform Watershed. “More companies will now be disclosing data that will be consistent and comparable, [meaning] investors can make better decisions and hold companies accountable for their response to climate change.”
Once CARB has utilised the funding to get the laws off the ground, qualifying companies will be charged a fee allowing the legislative package to self-fund thereafter.
“The acts are landmark legislation,” said Michael Littenberg, Partner and Global Head of ESG, Corporate Social Responsibility and Business and Human Rights Practice at US law firm Ropes & Gray. “Since once in effect they will be the most far-reaching climate disclosure requirements in the US.”
Last year, the state of California announced it would sue oil and gas majors for their climate deception. In 2022, the state had a GDP of US$3.5 trillion, making it the fifth largest economy in the world.
Stepping onto global stage
The impact of California’s climate reporting rules is likely to be felt beyond the state, across the country. Many have welcomed their interoperability with the likes of the EU’s Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB) framework.
“Although the scope [of the California climate bills] is quite broad – covering public and private companies – they follow the same frameworks that much of the rest of the world is following, such as the Task Force on Climate-related Financial Disclosures,” said Wyatt.
But importantly, the bills are not entirely aligned with the US Securities and Exchange Commission’s (SEC) much-anticipated climate disclosure rules, which the agency unveiled earlier this year. While companies falling under California’s remit will be expected to disclose Scope 3 emissions from 2027 onwards, the SEC has removed such requirements from its final rules – to many market participants’ dismay.
The SEC’s decision can be partially attributed to ongoing pressure from the anti-ESG movement in the US. Much of this is litigious in nature, with some Republican states having gone as far as to sue the SEC over the regime.
“The SEC has come out with its rules, and so its ambitions are now set,” said Wyatt, noting that the regulator was now unlikely to make further radical changes “unless the courts tell it to do so”. Wyatt has also previously served as a senior counsel for climate and ESG at the SEC.
However, the same cannot be said about the California laws, which aren’t out of the woods yet. The California budget itself won’t be finalised until June.
“It would be hard to overstate the pushback from parties within the state – and I believe also at the national level – against the governor’s budget proposal,” said Harry Broadman, a veteran expert on sustainability policy, former senior White House official and now Senior Economist at US think tank the RAND Corporation.
Earlier this year, a lawsuit was filed to challenge the two California bills, on the basis that they violated the First Amendment by compelling businesses to engage in subjective speech. That process is still ongoing.
“Pressure from the anti-ESG movement isn’t helpful, but I don’t see it significantly altering the direction of travel we are on,” Wyatt added. “There is a growing number of climate disclosure obligations around the world, which US-based companies are already preparing to report against. Regardless of the political noise, it’s clear that companies see that investors are demanding [climate] information.”
Elsewhere in the US
Other states are also considering following in California’s footsteps, with the likes of Illinois and New York currently looking to adopt similar disclosure rules.
“More states adopting similar laws will work as long as all laws are consistent which one another,” Wyatt said, noting that further clarification would be needed in the coming months.
For example, lawmakers will need to outline exactly which companies are subject to the new rules – including how they intend to cover the US subsidiaries of multinational firms.
“US corporate climate disclosure rules create incentives for greater transparency on the sustainability impacts arising from business operations,” said Broadman. “But it’s critical to keep in mind that disclosure reporting – like that done in the case of auditing financial performance – is a static, rear-view mirror exercise. It simply is not a substitute for dynamic assessments of operations occurring contemporaneously or already in the pipeline.”
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