New California climate disclosure laws challenged in court

As expected, a lawsuit was filed yesterday challenging California’s new laws requiring greenhouse gas emissions and climate risk disclosures. 

The Climate Corporate Data Accountability Act (Senate Bill 253) requires annual public disclosure of Scope 1, 2 and 3 greenhouse gas emissions by U.S.-organized entities doing business in California with total annual revenues exceeding $1 billion. The Climate‐Related Financial Risk Act (Senate Bill 261) requires biennial disclosure of climate-related financial risks in accordance with the recommended framework and disclosures published by the Task Force on Climate-related Financial Disclosures or an equivalent requirement, as well as the measures adopted to reduce and adapt to the disclosed climate-related financial risks. These Acts are discussed in more detail in our earlier post here.

The challenge to the Acts is being brought by the U.S. Chamber of Commerce, along with the American Farm Bureau Federation, California Chamber of Commerce, Central Valley Business Federation, Los Angeles County Business Federation and Western Growers Association. The suit was filed in federal District Court in California.

The lawsuit contends that these Acts violate the First Amendment to the U.S. Constitution by compelling businesses to engage in subjective speech. According to the complaint, “The plan [for compelling speech to combat climate change] violates the First Amendment. It forces thousands of companies to engage in controversial speech that they do not wish to make, untethered to any commercial purpose or transaction. And it does all this for the explicit purpose of placing political and economic pressure on companies to “encourage” them to conform their behavior to the political wishes of the State.”

The lawsuit also contends that the federal Clean Air Act preempts California’s ability to regulate emissions in other states. According to the plaintiffs, the Acts do so by mandating reporting on out-of-state emissions. The complaint indicates that “Because the new disclosure requirements of S.B. 253 and 261 operate as de facto regulations of greenhouse-gas emissions nationwide, they are precluded by the Clean Air Act and are invalid under the Dormant Commerce Clause and principles of federalism.”

The plaintiffs are asking the court to declare SB 253 and 261 null, void and with no force or effect and that California be enjoined from implementing or enforcing the Acts.

Three quick takeaways

• The lawsuit injects additional uncertainty into climate disclosure compliance. However, it doesn’t change the near-term compliance strategy for companies given a relatively long time period until initial disclosures are required, which in any event California’s Governor Newsom is seeking to push out further. 
• The lawsuit foreshadows some of the challenges that will be brought against the SEC’s climate disclosure rules when those are ultimately adopted. The only certainty about those long-expected rules is that they will be challenged in court.
• The lawsuit is not challenging the Voluntary Carbon Market Disclosures Act (Assembly Bill 1305), which is the third piece of climate disclosure legislation adopted by California. Among other things, the VCMDA requires website disclosures by companies making net zero claims at the enterprise or product level. The requirements of the VCMDA are discussed in detail in our earlier posts here and here.

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