California’s New Emissions Laws: Implications for Companies
California’s Climate Disclosure Rules Raise Legal Challenges for Companies
California’s recently enacted emissions laws are set to increase the disclosure requirements for companies operating in the state. These laws could potentially force companies to reveal more about their carbon footprint to the U.S. Securities and Exchange Commission (SEC), thus raising the risk of legal challenges to their climate claims. Regulatory lawyers caution that this new legislation may expose companies to increased scrutiny from both the SEC and shareholders.
The Conflict between California’s Rules and the SEC’s Drafted Regulations
California Governor Gavin Newsom signed rules into law this month, mandating companies with annual revenues exceeding $1 billion to publish comprehensive accounts of their carbon emissions starting in 2026. Meanwhile, the SEC has drafted its own rules that grant companies discretion over disclosing emissions they deem immaterial or not relevant to their emission reduction targets. The overlap between these two sets of regulations could lead companies to include emission information in SEC filings that they would otherwise have withheld, solely due to California’s rules.
The Potential Impact on Companies and the Increased Liability Risk
Experts highlight that increased disclosure typically comes with heightened liability risk and compliance efforts. With the introduction of California’s emissions laws, companies may face greater scrutiny from the SEC and shareholders. Regulatory lawyer Abbey Raish from Kirkland & Ellis emphasizes the potential consequences of increased disclosure, particularly the need for companies to address compliance efforts and the associated liability risk.
The Broader Impact of California’s Climate Legislation
California has a history of enacting climate-related legislation that has had far-reaching effects. For example, the state’s efforts to reduce vehicle emissions led car manufacturers to adopt stricter emissions standards nationwide. Similarly, the new emissions laws could have a significant impact on how companies report their emissions, potentially influencing the SEC’s regulations and disclosures on a broader scale.
The Challenge of Scope 3 Emissions
One of the key aspects of California’s new rules is the requirement for companies to disclose Scope 3 emissions, which are generated by their customers and suppliers. In contrast, the SEC’s rules only mandate the disclosure of Scope 3 emissions that companies consider material. Legal experts suggest that if the Scope 3 emissions disclosed under California’s rules are substantial compared to a company’s direct emissions (Scope 1 and 2), it may be challenging for them to exclude these emissions from their SEC filings.
The Stricter Reporting Threshold and Liability Considerations
California’s rules impose a stricter reporting threshold by requiring companies to adhere to the Greenhouse Gas Protocol, an internationally recognized standard for emissions accounting. In contrast, the SEC’s contemplated rules do not mandate the use of this methodology. While California’s rules provide a legal “safe harbor” for companies reporting on hard-to-calculate Scope 3 emissions until 2030, the protection offered by the SEC’s safe harbor provisions is limited. Companies can be held liable if they are found to be acting in bad faith, and they are not shielded from claims under various state laws.
The Impact on Company Directors and Shareholders
Company directors can be held accountable for inaccurate statements to investors, and the SEC can impose fines or refer serious cases to criminal authorities. Shareholders may also take legal action against corporate executives if they believe they have been deceived by information in SEC filings or other public statements. The potential consequences of non-compliance with these regulations highlight the significance of the SEC’s role as a powerful regulator in this context.
Conclusion
California’s new emissions laws have far-reaching implications for companies, particularly in relation to their disclosure requirements and potential legal challenges. The overlap between California’s rules and the SEC’s draft regulations introduces complexities that companies must navigate. As these regulations evolve, companies will face increased scrutiny, compliance efforts, and potential liability risks. The impact of these developments extends beyond California and has the potential to shape climate disclosures at a national level.
