Investors and industry bodies have welcomed the passage of two laws in California which mandate emissions reporting and TCFD disclosure, but have warned of the potential litigation risk and the need to go further and faster.
The state passed two laws last week that would implement wide-ranging climate disclosure rules for companies. They are yet to be formally passed into law, but governor Gavin Newsom has indicated that he will not oppose them.
The two separate laws would see around 5,400 corporates with more than $1 billion annual revenue required to report Scope 1, 2 and 3 emissions, while 10,000 corporates with annual revenue greater than $500 million would have to disclose against TCFD recommendations and measures taken to mitigate and adapt to identified climate-related financial risks.
The legislation goes further than proposed SEC rules, which require Scope 3 disclosures only if targets are in place or Scope 3 emissions are material. It also applies to non-listed companies.
The laws were welcomed by officials in other Democrat-leaning states. Illinois state treasurer Michael Frerichs told Responsible Investor that transparency was crucial for managing risk and maximising value.
“I applaud California’s leadership on climate disclosure,” he said. “As climate risk intensifies, with extreme heat, massive storms, and historic droughts, companies must adapt to protect workers, operations, and profits. The more information investors have, the better equipped we are to deliver for beneficiaries.”
This was echoed by Tobias Read, state treasurer for Oregon, who said he expected others to join California in pushing for transparency and accountability.
Noting the wave of US state which have passed laws to “weaponise” state pension funds against responsible management of climate risk, he said that markets “are most efficient when there’s a free flow of information about which companies are managing risks responsibly and which are ignoring risks”.
Pork politics
The relative importance and size of California’s economy within the US means the laws are expected to become a de facto national standard. As the state leans heavily towards the Democrats, it is also unlikely that anti-ESG campaigners will be able to overturn them via the legislative process, leaving lawsuits as the main viable challenge.
“We fully anticipate that these will be litigated in court,” said Bryan McGannon, managing director at US SIF. “But in California the courts are probably the opponents’ last option.”
Any challenge will likely come from a corporate opponent or industry association, McGannon said, noting that the California Chamber of Commerce had been a vocal opponent of the laws. “I think there will be an attempt by opponents of the bill to say that California can’t apply laws to companies based in Arkansas, for instance.”
However, a Supreme Court precedent set this year in a dispute over pig farming may give an indication of which way the case is likely to go, McGannon said. “I don’t think there’s any merit to [lawsuits on these grounds].”
The Iowa-based National Pork Producers Council brought a case against California over a 2018 law which banned the sale of pork in the state unless the pig had been born in a pen with a certain floor area. The case went to the Supreme Court, which ruled against the council in a 5-4 decision.
“Companies that choose to sell products in various states must normally comply with laws of those various states,” Justice Neil Gorsuch wrote.
One of the major benefits of the California law would be standardising and completing disclosures, according to McGannon. While many S&P 500 companies are disclosing some emissions, having a legal standard in place will close the gap, for instance by mandating Scope 3 disclosures and introducing a standardised reporting framework.
Marian Macindoe, head of ESG stewardship at $44 billion San Francisco-based manager Parnassus Investments, hailed the laws as a great example of how state legislation can help to set and test climate reporting standards. While some firms will need flexibility to implement the legislation, it is not too ambitious, she said.
However, she warned that more attention is needed on the national and supranational level, as well as corporate and investor action.
“For investors, emissions reporting is critical. For us, it has become just like clean silverware – an expectation that companies understand and disclose their GHG footprints. While many companies still lag in their disclosures, reporting Scope 1 and 2 emissions will hopefully soon be table stakes,” she continued.
Both California’s public pension giants said that, while they had not taken a position on the emissions disclosures law, they welcomed transparency on emissions generally.
A spokesperson for CalSTRS said that the fund had not adopted a position on SB253 but believes that disclosures across all three scopes will inform investors’ management of climate-related risks. They added that it will continue to encourage portfolio companies to adopt the ISSB climate disclosures standard to ensure a global baseline.
CalPERS also believes that increased transparency is “critical” to investing and in the best interest of its members, a spokesperson said. They pointed to the fund’s track record of “using its position in the marketplace to shine a spotlight on the importance of issues like disclosure, independence and climate”.
“We look forward to seeing how this plays out,” they continued.
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