Insight

Mandatory Disclosure of Corporate Climate Risk and Emissions is Coming for US Companies

Find out more about the US corporate reporting landscape including what's happening with the SEC climate rule and a spotlight on California.

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Mandatory Disclosure of Corporate Climate Risk and Emissions is Coming for US Companies

By Donald Ristow, Senior Legal Counsel, Environmental Sustainability

July 11 2023

Corporate disclosure of greenhouse gas (“GHG”) emissions and climate risk appears to have reached a tipping point. In the European Union, the Corporate Sustainability Reporting Directive will soon require tens of thousands of companies to report on their climate risk and emissions (among other topics). Globally, the International Sustainability Standards Board (“ISSB”) recently issued its closely-watched Climate-related Disclosures standard. Meanwhile, the GHG Protocol Corporate Standard (“GHG Protocol”) is undergoing a critical update to its accounting requirements ahead of legislative mandates taking broad effect.

While most activity has centered around Europe, several emerging regulatory and legislative proposals in the United States would require thousands of U.S. companies to begin reporting and publicly disclosing climate information as early as next year. Many are already aware of the well-covered 2022 proposal from the U.S. Securities and Exchange Commission (“SEC”) to require businesses to disclose climate risk information as part of their registration statements and periodic filings. Close observers have also likely noticed that the proposal has been delayed several times and must overcome strong legal headwinds to become binding law. 

In the face of these challenges, an alternative has emerged from California. Senate Bill (SB) 253 and SB 261 would together require a comparable number of companies to report – independent of the SEC’s proposal. As explained below, these requirements would apply well beyond the borders of California, could start in part as early as 2024, and would not be hampered by the same legal risks. 

Recap on the SEC’s Proposed Rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors

The Enhancement and Standardization of Climate-Related Disclosures for Investors

Officially proposed in March 2022 and currently forecast to be finalized in October 2023, the SEC’s Proposed Climate-Related Disclosures Rule would require SEC-registrant businesses (approximately 7,000 in total, including both domestic and foreign private issuers) to disclose a range of climate risk information as part of their registration statements and ongoing reports filed with the SEC.

Content requirements would generally follow those outlined in the Task Force for Climate-Related Financial Disclosures (“TCFD”) Recommendations, encompassing disclosures on, among other things: 

  • Governance, including board oversight and management’s role;
  • Climate risks and impacts to the company, its strategy, and its outlook over short, medium, and long-term time horizons; 
  • Internal risk management processes and planning;
  • Emissions data consistent with the GHG Protocol, including Scope 1 and 2 emissions and Scope 3 emissions (if material or otherwise included in transition plans); and
  • Details of climate transition plans, targets and goals, if adopted.

Reported Scope 1 and 2 emissions would also require audit and attestation from third-party assurance providers starting in the second year of reporting for larger affected companies.

While this framework would result in robust and standardized disclosures of climate-related information, legal uncertainty awaits the Proposed Rule once it is finalized.

The Long Road to Implementing the SEC’s Proposed Rule

The challenges facing the SEC’s proposal stem mostly from the fact that it is a “regulation” rather than a statute. In the United States, regulations are adopted by administrative agencies under the authority of statutory laws passed by Congress. Agencies can only adopt regulations that constitute permissible interpretations of the statutory language they are empowered to implement.

Many significant U.S. efforts to tackle climate change have come in the form of regulations rather than statutes as a result of partisan gridlock in Congress. This has often meant agencies parsing through existing statutes for plausible legal authority to act. The ambitious regulatory proposals that result are then often challenged in court by opponents who argue that the regulation exceeds the agency’s statutory authority. 

Historically, courts have been deferential to agencies so long as they make reasonable interpretations of ambiguous statutory language (known as “Chevron” deference after the famous 1984 U.S. Supreme Court decision). Yet in recent years, a new legal standard has emerged called the “major questions doctrine,” where in cases deemed to pose a question of vast “economic and political significance,” the court requires a clear Congressional statement authorizing the agency to adopt the regulation. In June 2022, the U.S. Supreme Court used this doctrine to invalidate the approach of the Clean Power Plan, a landmark regulatory proposal to reduce emissions from power plants under the authority of the Clean Air Act.

There are some similarities between the Proposed Rule and the Clean Power Plan in that both relied on arguably ambiguous, long-existing statutory language as the authority to enact the regulation. As a result, there is concern that the U.S. Supreme Court, as presently constituted, will agree to hear a legal challenge and subsequently invalidate some or all of the Proposed Rule and potentially issue a “stay” order preventing the finalized regulation from going into effect while the litigation proceeds. 

California’s SB 253 and 261 Legislation

Given the uncertain future of the SEC’s Proposed Rule, California lawmakers are pushing ahead with an independent set of solutions that would cover a comparable number of companies as a matter of state law. This is possible in part due to the sheer size and influence of California’s economy, which would be the world’s fifth largest if ranked separately. 

SB 253 aims to require large U.S. companies to annually report their Scope 1, 2 and 3 emissions following the GHG Protocol, starting as early as 2026 (based on prior fiscal  year data), with totals verified by an independent third-party auditor. Details are currently being refined as to when different reporting and verification obligations would begin (e.g., reporting of Scope 3 emissions, which may commence in year two of reporting). SB 261, meanwhile, would require disclosure of a climate-related financial risk report in accordance with TCFD Recommendations starting in 2024. 

As currently drafted, both bills would apply to U.S.-formed entities meeting specified annual revenue totals ($1B – 500MM) that also “do business” in California, a threshold expected to encompass companies with approximately $600k-700k in sales into the state per year under an existing provision of California law. In total, SB 253 will apply to approximately 5,300 businesses, while SB 261 will capture approximately 10,000. Compare this with the SEC’s Proposed Rule, which is expected to apply to roughly 7,000.

Both bills are making their way through the California Legislature. Currently, they are being considered by the state Assembly after being passed by the Senate on May 30. Typically, bills are evaluated and amended throughout the summer, with many passed on or shortly before the end of the legislative session in September before going to the Governor for his signature or veto.

While momentum is building, there are many hurdles left for both bills to overcome. Last year, a very similar bill to SB 253 narrowly failed near the end of session. Given the mounting uncertainties and delays facing the SEC’s Proposed Rule, though, California lawmakers may feel more emboldened to lead decisively this time around and add to the state’s legacy as a global leader on climate change.

Disclaimer: This Insight is provided for informational purposes and is not intended to be relied upon or used as specific legal advice.

To continue your compliance journey, read more about the upcoming legislation changes affecting retail in 2023.

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Mandatory Disclosure of Corporate Climate Risk and Emissions is Coming for US Companies
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