Challenges Emerge For California’s Climate Disclosure Laws

Challenges Emerge For California’s Climate Disclosure Laws

Less than four months after California Governor Gavin Newsom signed portions of the state’s Climate Accountability Package into law, the legislation is already facing major roadblocks. The newly signed laws will require subject firms to report their Scope 1, 2 and 3 emissions starting in 2026 for financial year 2025 (SB 253) and prepare reports detailing their climate-related financial risks by January 1, 2026 (SB 261). But if they are to fully come into effect, these bills will need to weather two major challenges:

• Governor Newsom has paused funding for these laws.
  On January 9, 2024, Governor Newsom released a budget proposal that paused funding to all the state’s newly signed laws – including SB 253 and 261 – until May 2024 due to an estimated budget shortfall of almost $38 billion. According to a statement released by the Senators sponsoring SB 253 and 261, the California Air Resources Board (CARB) needs approximately $9 million – or “approximately three ten-thousands of one percent” of the state’s total budget – to implement the legislation.
  
  
• Major business groups have filed a lawsuit opposing the legislation.
  A group of business organizations, led by the US Chamber of Commerce and the American Farm Bureau Federation, filed a lawsuit in a federal court in Los Angeles on January 30, 2024. The lawsuit alleges that California’s climate legislation violates the First Amendment of the US Constitution by requiring firms to “engage in controversial speech”. The lawsuit also argues that since SB 253 requires organizations to disclose out-of-state emissions, it is precluded by the USEPA’s Clean Air Act and is invalid.
  
  

This lawsuit isn’t very surprising; even before the bills were signed into law, numerous business-friendly organizations argued that California lacks authority to regulate out-of-state emissions. The pause in funding, however, took many by surprise, especially given the Governor’s stance on climate-related issues, the relatively small amount of funding required, and the fact that the laws will be revenue neutral, meaning that the state will recuperate funds spent on implementation through fees paid by firms. Neither the lawsuit nor the pause in funding mean that CARB won’t implement these laws, but both do signal that there may be delays with either implementation or enforcement.

Given these roadblocks – along with political uncertainty associated with the upcoming 2024 election – many organizations will likely delay investment into both software and services while they wait for more clarity. However, taking this sort of ‘wait and see’ approach can be risky, especially since – as the laws currently stand – subject firms will need to report on their emissions for the period starting in January 2025. While we wait for some of this uncertainty to shake out, firms should work to establish appropriate governance structures and data collection processes, which can help them prepare for not just disclosure laws in the US, but also for value chain requirements of the EU’s CSRD and increasing sustainability-related requests from suppliers.

For more information on the California legislation, see Verdantix Strategic Focus: Unpacking Sustainability And Climate Disclosure Laws In The US.