California state legislators passed a bill Tuesday that would leapfrog the US Securities and Exchange Commission’s efforts to require companies to disclose their greenhouse gases and climate-related financial risks.As the world’s fifth-largest economy, California’s environmental rules are quickly followed by other states, even when they exceed federal requirements. The Golden State’s proposal, known as the Climate Corporate Data Accountability Act, would force many of the world’s biggest publicly traded corporations to make their carbon emissions public, just like the SEC plan. The state legislation, however, also would apply to closely held businesses.
The bill backed in California now heads to Democratic Governor Gavin Newsom’s desk. If he signs it into law as expected, companies in the US would for the first time not only have to account for their own pollution, but also the emissions of suppliers and customers using their products. That concept, known as scope 3 reporting, was also included in the SEC plan.
“The goal is to create transparency around corporate carbon emissions,” said state Senator Scott Wiener, a Democrat from San Francisco who authored the California bill. “It’ll create a strong incentive for businesses to reduce their carbon footprint.”
There’s growing consensus that climate change is creating economic risks and threatening the stability of financial markets. Many proponents of climate disclosures say they’re necessary to better track and regulate emissions and drive environmental action. The SEC has said its plan aims to help investors make informed decisions, rather than drive climate policy.
Enactment of California's rules won't change the SEC's thinking on whether to include scope 3 in its rule, SEC Chair Gary Gensler said Tuesday during an interview. “We're continuing to look at the public comments” and agency staff will make recommendations for the final contours of the rule based on that, he said.
While many companies, including Unilever Plc and Walmart Inc., already voluntarily disclose this data, a standardized requirement would provide more transparency to aid consumers and investors when making financial choices. But opponents argue imposing disclosures would be too costly, onerous and complicated.
“This bill isn’t going to reduce emissions,” said Brady Van Engelen, a policy advocate at the California Chamber of Commerce, which represents more than 14,000 businesses. “We have a lot of companies that really are trying to do the right thing. This is going to distract them from actually dedicating resources and energy towards accomplishing their own net zero goals.”
California’s ambition to tackle carbon accounting is the latest example of the state positioning itself as a climate leader when federal efforts lag. The proposed measure is more expansive than the SEC effort because it’d affect private and public companies doing business in the state—5,300 companies that generate at least $1 billion of annual revenue.
A companion plan would require companies with $500 million or more of yearly revenue to publish climate-related risks, a proposal that would affect about 10,000 businesses. The reports would include vulnerabilities to employees, supply chains, consumer demand and shareholder value, among other risks.
The bottom line is every company that operates in California from Microsoft Corp. and Amazon.com Inc. to Wells Fargo & Co. and Tyson Foods Inc. would have to comply or face fines of up to $500,000.
In the state’s plan, companies would have to post scope 1 and 2 emissions by 2026 and scope 3 by 2027. “This data is going to be valuable,” said Wiener, the bill’s author. “Even though we’re doing this for California, this information will be accessible by anyone.”
In a Sept. 10 letter, Mary Nichols, former chair of the California Air Resources Board, expressed her support for the bills.
“Right now, there are many different standards, and it’s confusing,” she said. “Meanwhile, California is becoming an outsized player in the world’s economy, so if California sets a clear standard that is also aligned with emerging emissions reporting standards that the federal government and other countries are using, others will follow.”
California faces a self-imposed deadline of becoming carbon neutral by 2045. The US ranks as one of the largest producers of greenhouse gases, accounting for almost 14% of global emissions. Though California is only responsible for about 6% of US emissions, it’s the second-highest emitter after Texas.
On average, global supply chain emissions are nearly six times greater than those stemming from a company’s operations. For some industries, they can comprise as much as 90%. This is especially true in agriculture and finance. Banks, for example, contribute to emissions across most sectors through their financing and lending activities.
In California, the Western Growers Association is among the fiercest opponents of the state bill, along with the Western States Petroleum Association, which has already spent $2.38 million on lobbying and advocacy this year.
Others expect California’s actions to have an impact in setting a national standard. If enacted, the state’s bill would likely factor into how the SEC moves forward with its own rulemaking, said Allison Herren Lee, a former commissioner and acting chair of the SEC who is now a senior research fellow at New York University School of Law.
California “could end up being the tail wagging the dog” for corporate climate disclosures in the US, said Lee, who was one of the primary drivers behind the SEC’s climate proposal.
The SEC has been pursuing an emissions-reporting plan as part of President Joe Biden’s wider effort to meet a net zero goal by 2050. For the SEC, scope 3 reporting has been a particularly tricky topic. Business groups are preparing to fight that federal effort in court if the regulator moves ahead with it.
Gensler said in March that far fewer companies account for scope 3 emissions, mainly because calculations for the data aren’t as “well-developed.”
That’s largely because companies need information from their suppliers, distributors and customers to accurately gauge their scope 3 emissions. The SEC’s proposed rule would only apply a scope 3 reporting obligation to companies when those emissions are “material,” or in cases where companies have pledged to become carbon neutral.
Steven Rothstein, a director at the environmental nonprofit Ceres, said investors need comparable data points to assess the risks companies are taking on.
“Shareholders deserve to understand those risks and how they’re being managed,” he said. “The disclosure of scope 3 emissions from all major corporations and a company’s plan and progress towards looking deeper into the supply chain is really critical.”
Facing legal threats, some worry the SEC will succumb to corporate pressure to soften its proposal and exclude scope 3 requirements.
Almost 80 Congressional Democrats urged the SEC in August to quickly finalize its proposed rule, saying the current patchwork of voluntary reporting mechanisms is “inadequate and lacks rigor, consistency, and verifiability.” Republicans, meanwhile, have lambasted the proposal, arguing the agency is surpassing its rulemaking authority.
Opponents say scope 3 data will be expensive and require more staff and resources.
“The ability to calculate scope 3 at this point is more of an art than it is a science,” said Van Engelen of the California Chamber of Commerce. “It’s just setting us up for failure.”
He estimates the proposed reporting requirements would cost companies an additional $600,000 per year. It would be “catastrophic” for smaller businesses down the supply chain, he said.
At outdoor apparel-maker Patagonia Inc., about 95% of the company’s emissions are scope 3. The private company has had a specialized reporting team for two decades, and while it’s a strenuous task, “it’s completely possible to do this work,” said spokesperson J.J. Huggins.
“It’s painstaking,” Huggins said. “I don’t want to sugarcoat it, but if you don’t measure your emissions down your supply chain, you can’t make the changes necessary to meet aggressive goals.”
(Recasts lead to start with Tuesday’s vote in California.)
