California may have more say in climate disclosure than SEC

A bill in the state goes well beyond what the SEC has proposed


Emile Hallez

California is poised to require major companies to provide climate disclosure data, a move that will be crucial if the Securities and Exchange Commission (SEC) excludes Scope 3 emissions from a rule it would finalize this year.

If passed, a recent bill would make companies with at least $1bn in annual revenue report the full range of their emissions – and subject those figures to third-party review. That bill, which was introduced by state senators in late January, is based on legislation that failed to advance in the prior session.

The legislation is significant for several reasons. First, it goes beyond what the SEC had proposed in its climate-disclosure rule by applying to all companies of a certain size – not just publicly traded ones. Second, it would require third-party audits of the Scope 3 emissions data that companies provide. Although the SEC’s proposal includes third-party attestation for Scope 1 and 2 emissions data, it did not apply that level of scrutiny to Scope 3 figures.

Third, the bill could essentially require all big companies to report their emissions, whether they’re based in California or not, as avoiding business in that market would be nearly impossible for many.

Further, those details would become even more important if the SEC opts to exclude Scope 3 emissions requirements from the final version of its rule.

Wide application

“The California bill is broader in both who would have to report and what they would have to report with respect to emissions,” said Allan Marks, a partner at Milbank. “The SEC draft rule would not have made all registrants or issuers disclose Scope 3.”

The SEC proposal would require companies that have sustainability reports to back up their emissions claims and disclose Scope 3 figures, for example, whereas the California will would simply require all big companies to report third-party verified data for all three categories of emissions.

In a recent interview with CNBC, SEC chair Gary Gensler indicated that the agency will likely pull back on some of the requirements in the forthcoming final version of the rule. The SEC has been collecting public comments, and many publicly traded companies have stated their opposition to Scope 3 disclosure and other requirements.


The company that would be affected by Scope 3 disclosures perhaps more than any other business – Amazon – asked the regulator to dramatically water down that aspect of the rule.

Scope 3 emissions cover everything related to what a company buys or sells, making them by far the biggest greenhouse gas source for retailers. In its comment letter to the SEC, Amazon asked for Scope 3 disclosures to be limited to “categories of upstream or downstream activities over which a company has influence or indirect control, such as business travel.”

Among the thousands of comments to the SEC are many examples of companies claiming that the disclosure requirements would result in higher compliance costs and administrative burdens.

One group, Ceres, disputed that, writing in a comment to the SEC that it “has compiled recent evidence regarding increased disclosures being made by issuers of their greenhouse gas emissions data, TCFD-aligned information and climate risk disclosure generally. This evidence supports statements in the proposing release about the sizeable portion of issuers already disclosing GHG emissions, which suggests that concerns about compliance costs and implementation burdens are overstated.”

Inevitable lawsuits

It is expected that opponents of the proposed SEC rule will pursue litigation once the final rule is published. Critics of the disclosure standards have contended that the agency has overstepped its authority set by Congress in drafting a rule that has environmental aspects.

However, the SEC is charged with protecting investors and maintaining market stability, so a narrowly tailored climate-disclosure rule that addresses those issues would likely survive a legal challenge, Marks said. If a court determined that the rule serves environmental purposes, though, it could be overturned.

That’s where California’s bill comes in. The state the ability to address issues that the SEC cannot.

“The basis for their authority is quite different,” Marks said. “The California legislature legally has the authority to protect the environment.”

Even so, a potential issue for the bill is whether a forthcoming law could apply to emissions that occur outside of the state, rather that just inside-state emissions from California-based companies, he said. Further, many of the companies that have more than $1bn in annual revenues already report Scope 1 and 2 emissions in some way, he noted.

The bill, which was introduced Jan. 30, has since been referred to committee. A similar version last year died in the Senate.

However, the current version of the legislation might have a better shot at getting to California Gov. Gavin Newsom, who would almost certainly sign it, Marks noted. Whether the bill goes that far likely depends on what the SEC’s final rule looks like.

“The California legislature is very sensitive to what the SEC does,” Marks said. “If the SEC were to enact a disclosure rule much like it has proposed, I wouldn’t be surprised if California says ‘that’s enough.’”

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