Clearing the Air: CA’s New Climate Laws Face Chamber of Commerce Challenge

04.05.2024

Recently enacted legislation, Senate Bill 253 (Wiener) (“SB 253”) and Senate Bill 261 (Stern) (“SB 261”), bring a new level of transparency for corporate climate accountability.  Proponents of the legislation believe that such transparency will empower the public to make informed decisions and pressure companies to reduce their environmental impact.  However, these measures face opposition from the US and CA Chambers of Commerce and several business groups, prompting a federal lawsuit challenging their legality and practicality. 

 Senate Bill 253: The Climate Corporate data Accountability Act

SB 253, also known as the Climate Corporate Data Accountability Act, mandates public disclosure of greenhouse gas emissions by corporations, operating in California, with over $1 billion in annual revenue This affects approximately 5,400 companies. 

Beginning in 2026, the companies that meet these threshold requirements must publicly disclose their Scope 1 and Scope 2 greenhouse gas emissions annually to a digital reporting platform.  Starting in 2027, Scope 3 emissions must be reported annually as well.    

• Scope 1 emissions encompass all direct greenhouse gas emissions that stem from sources under the direct ownership or control of the reporting company, irrespective of their location.
• Scope 2 emissions represent the indirect greenhouse gas emissions resulting from the consumption of electricity, steam, hating, or cooling purchased or acquired by a reporting company, irrespective of their location.
• Scope 3 emissions are the indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources not owned or directly controlled by the reporting company. This may encompass emissions from upstream suppliers or downstream customers as well.  

Scope 3 emissions reporting poses significant challenges due to the complexity of measurement and potential costs, which could be up to $1 million annually per company.  The challengers to these bills claim that the complexity of estimating and reporting emissions pose significant challenges, particularly for smaller and mid-sized businesses with limited resources. 

Non-compliance may result in penalties of up to $500,000 per reporting year, overseen by the California Air Resources Board (“CARB”). 

 Senate Bill 261: The Climate-Related Financial Risk Act  

Under SB 261, the Climate-Related Financial Risk Act, businesses exceeding a revenue threshold of more than $500 million must disclose their climate-related financial risks and mitigation measures biennially, starting in 2026.  Opponents argue that privately-held companies may lack the infrastructure for such reporting, as they are not accustomed to publicly disclosing such information. 

Companies that fail to adhere to the requirements face potential penalties of $50,000 per reporting year, enforced by CARB. 

The Chamber of Commerce’s Legal Challenge

The legal challenge, brought forth by the Chamber of Commerce and other entities (collectively “Plaintiffs”), underscores concerns regarding the perceived burdens imposed by SB 253 and SB 261, particularly on small and medium-sized companies lacking the resources to comply with rigorous reporting requirements.  The costs associated with estimating emissions and ensuring compliance could lead to financial strain, and even force some businesses to cease operations or consolidate with larger entities.

In their lawsuit, the Plaintiffs contest the imposition of these new laws.  Plaintiffs argue that SB 253 and SB 261 compel companies to engage in subjective speech regarding climate change, an infringement of the First Amendment.  Additionally, they contend that the legislation extends beyond California’s borders, imposing reporting obligations on companies with minimal operations in the state, which disproportionality affects out-of-state businesses and those in their value chains. 

Governor Gavin Newsom, while acknowledging the importance of addressing climate change, has expressed reservations about the implementation and financial impact of these two bills. 

While SB 253 and SB 261 represent California’s ambitious efforts to combat climate change and promote transparency, they raise significant constitutional concerns.  The balance between environmental accountability and the burden on businesses remains a contentious issue, highlighting the complexities of policymaking in an era of climate crisis.

Special thanks to Farrah Ghaffarirafi, our FCPPG law clerk, for her extensive work on this alert.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

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