California's Voluntary Carbon Market Disclosures Statute

In early October 2023, California Governor Newsom signed Assembly Bill 1305 into law. The new statute, titled “Voluntary Carbon Market Disclosures,” applies to entities that operate within California and that market or sell carbon offsets, purchase or use carbon offsets, or make certain claims regarding, for example, progress toward carbon reduction goals.¹ Such entities must disclose certain information on their websites, including information regarding how carbon reduction claims were determined to be accurate or actually accomplished.

Under the statute, an entity that makes a claim (i) regarding its achievement of net zero emissions, (ii) that the entity, a related or affiliated entity, or a product is “carbon neutral” or (iii) implying that the entity, a related or affiliated entity, or a product does not add net carbon dioxide or greenhouse gases (“GHG”) to the climate or has made significant reductions to its carbon dioxide or GHG emissions (each, a “Covered Claim”) is required to disclose on the entity’s website specified information documenting how, if at all, each Covered Claim was determined to be accurate or actually accomplished. A person that violates the statute’s disclosure requirements could be subject to a civil penalty for each violation of up to $2,500 per day for each day that the required information is unavailable or is inaccurate on the person’s website. The maximum penalty under the statute is $500,000.

Funds and advisers that make claims regarding the achievement of net zero emissions, or similar claims regarding significant reductions to carbon dioxide or GHG emissions, may wish to consider whether such claims would render them a reporting entity under the statute. A few considerations:

• What is an “entity” for purposes of the statute? Unfortunately, the statute does not clarify what types of entities fall within its purview and refers to both entities and business entities. The California Corporations Code defines a “business entity” as a corporation, limited liability company or limited partnership.² Notably, the definition of a business entity does not expressly include a trust, and many investment companies are organized as series of a Massachusetts or Delaware trust. Arguably, because the term entity may be broader than the phrase business entity, the statute could capture investment companies organized as business trusts. Additionally, adviser entities are often organized as limited liability companies, and it would seem more likely that claims made about a fund could be attributed to that fund’s adviser, who likely would be a business entity under the statute.
• What does it mean to “operate” or “make claims” within California? Only entities that operate within California and make Covered Claims are subject to the disclosure requirements under the statute. For example, would offering investment advisory services to California investors constitute “operating” under the terms of the statute and thereby pick up investment advisers? Would the sale of fund shares in California constitute “operating” and thereby pick up funds or their advisers? The statute does not define what it means to “operate” or “make claims” within California. The California Corporations Code generally uses the term “operate” to refer to the performance of a function.³ The State of California Franchise Tax Board defines “doing business in California” as engaging in any transaction for the purpose of financial gain within California, being organized or commercially domiciled in California, or having California sales, property or payroll in excess of certain thresholds.⁴ While “doing business” is not necessarily synonymous with “operating,” absent further guidance as to the interpretation of these terms, it seems prudent to assume that the statute could apply to any fund that sells shares to a California investor, and potentially to any investment adviser to such a fund.
• What types of communications constitute the making of a Covered Claim? The statute does not indicate or specify what types of communications constitute the making of a Covered Claim. We would expect that, in most cases, the name, marketing materials or offering documents, including prospectuses, fact sheets and other disclosures (together, “Disclosures”) of a fund, even if they describe an ESG investment process that seeks investments in issuers with low or no GHG emissions, will not constitute claims (i) regarding the fund’s achievement of net zero emissions, (ii) that the fund, a related or affiliated entity of the fund or a product is “carbon neutral” or (iii) implying that the fund, a related or affiliated entity of the fund, or a product does not add net carbon dioxide or GHG emissions to the climate or has made significant reductions in its carbon dioxide or GHG emissions. An investment adviser, on the other hand, may be more likely to make one or more of these claims, including claims of significant reductions in carbon dioxide or GHG emissions, particularly if the adviser is making disclosures of the type contemplated by the Task Force on Climate-Related Financial Disclosures (“TCFD”).
• If an entity falls within the purview of the statute and makes Covered Claims, what kinds of information must be disclosed on its website? The statute would require disclosure of all information documenting how, if at all, a Covered Claim was determined to be accurate and how interim progress toward that goal is being measured. This information may include, but not be limited to, disclosure of independent third-party verification of all of the entity’s GHG emissions, identification of the entity’s science-based targets for its emissions reduction pathway and disclosure of the relevant sector methodology and third-party verification used for the entity’s science-based targets and emissions reduction pathway. The statute does not provide a definition of what is contemplated by “all information,” but presumably this would be limited to relevant information and construed in light of the statute’s apparent goal of providing California residents to whom Covered Claims are made with the information necessary to reasonably evaluate those claims.

The effective date of the statute was January 1, 2024, but even this came under close scrutiny. In the wake of the statute’s adoption, Assemblymember Jesse Gabriel, the sponsor of Assembly Bill 1305, stated in a letter to the Chief Clerk of the Assembly that the compliance date was intended to be January 1, 2025. In the letter, Assemblymember Gabriel acknowledges that the bill does not specify a compliance date by which the required disclosures must be posted to a company’s website and states that it was his intent that the first required disclosures be posted by January 1, 2025, to provide reporting entities with sufficient time to align their business practices with the stated objectives of the bill before they become subject to potential civil fines. While California courts may reference such letters to determine legislative intent, it remains unclear whether the disclosure requirements are effective before January 1, 2025, and, under the statute, must be updated at least annually thereafter.

Further, the statute does not provide for administration by a particular California regulator. And while there is no private right of action under the statute, civil actions alleging violations of the statute may be brought in the name of the people of the State of California by the Attorney General or any district attorney, county counsel or city attorney. Given the charged environment on all things ESG-related, it is at least possible that any such civil actions could potentially be used for political purposes.

In light of the January 1, 2024 effective date, the nebulous disclosure compliance date and uncertainty regarding what entities might be subject to the statute’s requirements, funds and their advisers may wish to consider the potential applicability of the statute and whether existing Disclosures may address possible website disclosure requirements under the statute.

For additional information covering California’s ground-breaking climate disclosure bills, see earlier Ropes & Gray posts:

The California climate disclosure bill almost no one is talking about – net zero and voluntary carbon offsets disclosures soon to be required?

California’s ground-breaking climate disclosure bills have been signed. But what will they really require and what should companies be doing now?

The California Voluntary Carbon Market Disclosures Act – first disclosures not required until 2025?

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