California has a long history of setting precedent for environmental action, and this year proves no different. As a large economy with much to lose—increasing water supply volatility, increased wildfire severity, heat waves, flooding, sea level rise and infrastructure damage—California continues to be a regulatory pacesetter amid the increasingly polarized national debate over how to mitigate and adapt to climate change. On Jan. 30, 2023, the state legislature introduced two measures aimed at addressing climate change: one targeting large businesses for public disclosure of greenhouse gas emissions (GHG) and another pushing California’s Public Employees’ Retirement System (CalPERS) and the State Teachers’ Retirement System (CalSTRS), two of the world’s largest public investment funds, to divest from fossil fuel interests.
While both proposals push the envelope on greenhouse gas regulation, they are far from novel attempts—both policies have been tried before but failed to advance.
Carbon Footprint – GHG Emissions Disclosure
SB 253: The Climate Corporate Data Accountability Act, by state Sen. Scott Wiener (D-San Francisco), would require “reporting entities,” defined as companies with total annual revenues in excess of $1 billion and that “do business in California,[1]” to publicly disclose their Scope 1, 2 and 3 GHG emissions from the prior calendar year. As to who this applies to, even companies without a physical presence in California should evaluate their connections to California to determine whether they “do business” there to inform whether various reporting requirements would be triggered. Given California’s economy is the largest in the U.S. and expected to overcome Germany as the fourth-largest economy in the world, one may be hard-pressed to find a company that meets the $1 billion revenue threshold and is exempt from disclosure.
Moreover, as outlined below, given the nature of Scope 3 (indirect) emissions, the reporting requirements would also impact smaller companies within the supply chain of these larger companies. SB 253 would require disclosure of direct (emissions from owned or controlled sources), indirect (emissions from purchased energy) and ancillary emissions (indirect emissions from the value chain including upstream and downstream emissions), defined as Scope 1, 2 and 3, respectively.
SB 260, from the 2022 legislative session, was Sen. Wiener’s first attempt to establish a GHG reporting framework. The measure advanced through the legislature with relative ease but failed to pass the second house by one vote on the last night of the session. A large coalition of business, agricultural, manufacturing, logistics and financial interests opposed the measure, citing significant uncertainty on how to compile and report the ancillary Scope 3 emissions. To wit, the bill went further than rules proposed by the U.S. Securities and Exchange Commission (SEC) in March 2022. It is anticipated the SEC may scale back the most contentious aspect of the proposed requirements around Scope 3 emissions reporting given the pushback over the burdens it placed on smaller upstream entities including supply chain networks, and as reported by Politico this month, concerns over “the wave of lawsuits” this would bring. Furthermore, the proposed SEC rule only applies to public reporting companies, while Sen. Wiener’s bills apply to both public and private entities doing business in California.
For a bit more clarity on why these proposed rules garner so much interest and how a broad set of entities could be impacted by reporting requirements, we outline examples of how reportable emissions are defined. It should also be noted that for many companies, Scope 3 emissions represent their largest source of emissions:
- Scope 1: Emissions associated with fuel combustion in boilers, furnaces or company-owned vehicles.
- Scope 2: Emissions associated with purchased electricity, heat or cooling.
- Scope 3: Indirect GHG emissions that stem from sources that the reporting entity does not own or directly control. Examples include emissions associated with the supply chain (raw material purchases, other purchased goods and services), business travel, employee commutes, waste and end-of-life treatment of products, and water usage.
The bill grants broad authority to the California Air Resources Board to develop and implement the program and prescribes an implementation date of Jan. 1, 2025.
Fossil Fuel Divestment
SB 252: Public retirement systems: fossil fuels: divestment, introduced by state Sen. Lena Gonzalez (D-Long Beach), seeks to divest CalPERS and CalSTRS from fossil fuel companies. It would prohibit their respective boards from making or renewing investments in these companies starting in 2024 and would require them to liquidate their existing investments by July 1, 2030.
“Fossil fuel company” is defined as one of the 200 largest publicly traded fossil fuel companies, as established by carbon content in the companies’ proven oil, gas and coal reserves. Existing law already applies these provisions to “thermal coal” companies pursuant to a 2015 bill authored by then Senate President pro Tempore Kevin de León. In an effort to sidestep a common criticism levied at “divestment” bills, the legislation does not require a board to take any action unless they determine it is consistent with the board’s fiduciary responsibilities established in the California Constitution.
Senate Bill 1173 (Gonzalez, 2022) attempted to enact a similar fossil fuel divestment requirement on CalSTRS and CalPERS but was held up in the Assembly Committee on Public Employment and Retirement without a hearing. Opposition included the CalSTRS itself, who cited a blanket policy of opposition to legislation that restricts their investment authority. In a more nuanced position, they also argued that it would hinder their ability as an institutional investor to pressure the fossil fuel industry to change behavior. In their words, “climate change cannot simply be divested away.”
What to Consider
Despite previous false starts, legislators appear confident that these measures can advance this year. The accension of several new progressive legislators to the statehouse, coupled with Gov. Gavin Newsom’s push to have the state meet its ambitious climate goals ahead of schedule, may give these bills the momentum needed to cross the finish line. However, given the anticipated impacts on other businesses and key California industries such as agriculture and that occupy key roles in the supply chains of larger companies, no one is expecting a clear path.
Apart from the pending California bills, other states’ measures and SEC’s climate rule, international markets are a few steps ahead. The European Union recently finalized its Corporate Sustainability Reporting Directive that will require detailed sustainability reporting for EU companies and non-EU companies that meet certain thresholds for revenue in the EU. U.S. and other non-EU companies not listed on a European exchange that do business in the EU may also be required to report certain environmental and social information.
Regardless of the fate of these specific California bills, it is clear the world is moving in a direction of increased disclosure and scrutiny of companies’ climate impacts. The ground is shifting and companies across the supply chain, large and small, should be taking a hard look at how to best prepare.
This document is intended to provide you with general information regarding proposed climate measures in California. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.