California’s proposed Climate Corporate Accountability Act goes belly up

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.

“California Approves a Wave of Aggressive New Climate Measures” was a headline in the NYT on Thursday, and that included a “record $54 billion in climate spending, a measure to prevent the state’s last nuclear power plant from closing, sharp new restrictions on oil and gas drilling and a mandate that California stop adding carbon dioxide to the atmosphere by 2045.” But one climate bill didn’t make the cut. That was SB 260, California’s Climate Corporate Accountability Act, which, on Wednesday, failed to pass in the California legislature, notwithstanding much ink being devoted to it this past year (see, e.g., this Bloomberg article). Had the bill been signed into law, it would have mandated reporting and disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities with total annual revenues in excess of a billion dollars that “do business in California.” Those requirements for GHG emissions reporting and attestation exceeded even the SEC’s proposed climate disclosure proposal. (See this PubCo post.) And, under the existing broad definition of “doing business” in California, the bill would have captured a large number of companies, estimated to be about 5,500, including many incorporated outside of California. (Nothing new for the Golden State—see this PubCo post and this PubCo post.) According to Politico Pro, Scott Wiener, the sponsor of the legislation, said in a statement that he was “deeply disappointed in this result….If we want to avoid a full climate apocalypse, we need to understand corporate pollution—all the way down the supply chain.” He added that “he ‘won’t give up’ and that he’s ‘very likely’ to reintroduce SB 260 next year.” Time will tell.

Although the bill had sailed through one chamber of the legislature, it failed to pass the second chamber. The vote was 37 in favor, 25 opposed and 18 “no vote recorded,” which is equivalent to a “no” vote. Politico Pro reported that the “bill had survived the Assembly Appropriations Committee with amendments that watered down penalties for noncompliance from monetary fines to discretionary action by the state attorney general. Wednesday’s vote fell largely along party lines, with nearly a third of Democrats, mostly moderates, declining to vote.”

The bill would have required the State Air Resources Board  to develop and adopt regs requiring  “reporting entities” to public disclose their Scopes 1, 2 and 3 GHG emissions to a nonprofit “emissions registry,” engaged by the state to develop a program to receive these disclosures and make them publicly available on a digital platform. (And remember that Scope 3 emissions include indirect emissions that occur in a company’s value chain—upstream and downstream.) The reporting was to be based on the GHG Protocol. A “reporting entity” under the bill was a “partnership, corporation, limited liability company, or other business entity formed under the laws of this state, the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the United States with total annual revenues in excess of [a billion dollars] and that does business in California.” The legislative analysis explained that, under existing law, “doing business” in California is defined 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 exceed specified amounts.” Under the bill, reporting entities’ public disclosure was to be “independently verified by the emissions registry or a third-party auditor, approved by the state board.” The state board was to establish auditor qualifications and a process for approval of auditors. Violation by a reporting entity would have been subject to civil penalties under a civil action brought by the California Attorney General. Implementation of this bill would have been contingent upon an appropriation by the Legislature.

As described in the legislative analysis, a coalition of environmental groups had advocated in favor of the legislation, contending that

“the full picture of corporate climate emissions remains fragmented, incomplete and unverified. When we do get corporate disclosures they are often limited to a corporation’s operations and other direct emissions, but supply chain emissions are now estimated to be 11.4 times more than a company’s emissions from their direct operations on average. Without specific and comprehensive data detailing the sources and levels of corporate pollution, and whether emissions are increasing or decreasing, we will remain unable to effectively regulate, reduce, and restrict these sources of climate pollution that are threatening California and its residents. By requiring reporting of both direct emissions from these corporations, and any emissions produced from their supply chains and other indirect emissions, SB 260 creates the data infrastructure to drive down corporate carbon emissions.

Nevertheless, there was strong opposition. According to the legislative analysis, the California Chamber of Commerce and other business groups opposed the bill, arguing, among other things, that Scope 3 data was not reliable and that California should not regulate out-of-state emissions:

Because there is no objective criteria for assessing Scope 3 emissions data, two companies with similar actual Scope 3 emissions may report significantly different data depending on the company and/or methodology used…SB 260 requires ARB to ‘verify’ reporting entities’ emissions data. While this may be achievable for Scope 1 and Scope 2 data (which despite being duplicative to what ARB currently requires, are nonetheless within the reporting entities’ control), it will be nearly impossible for ARB to ‘verify’ emissions data that is, by its very nature, subjective, inaccurate, and often incomplete…California is not in the business of regulating out of state emissions, nor should it be. California should continue to implement and build upon existing programs and policies to regulate in-state emissions rather than seek to obtain emissions data throughout the international supply chain, especially seeing how it would have no authority to regulate emissions beyond the California border….

According to this article in Politico, the bill angered some of Washington’s major trade associations. Not only did it go further than the SEC’s climate disclosure proposal, they contended, it would apply to about 5,500 public and private companies. A spokesperson for the American Bankers Association was quoted in the article to say that the bill “would have national implications,” and expressed concerns about problems with Scope 3 requirements and the cost versus the benefits of the disclosures. In his view, they would not provide “investors or average consumers with useful or reliable information.” Wiener, in an interview with Politico, characterized the criticism as a “microcosm of why we have a climate crisis….You have corporations that are opposing federal action and then going to the statehouse and saying, ‘Don’t do it at the state level, do it at the federal level,’ while killing the federal action. They just don’t want anything. And that’s just not an option anymore.”

Bloomberg reported that the failure of the bill was a “blow to environmental advocates, who said the bill would have made clear how large corporations are contributing to climate change, with the hope it would encourage them to reduce emissions. Trade groups led by the California Chamber of Commerce opposed the Climate Corporate Accountability Act, arguing that Scope 3 emissions are impossible to report accurately and completely.”

Politico Pro reported that a number of major industry groups, such as the American Chemistry Council, the American Property Casualty Insurance Association, American Forest & Paper Association, the American Bankers Association and the Bank Policy Institute actively opposed the bill, contending that the standards of the bill “should be compatible with the standards proposed by the SEC and International Sustainability Standards Board,” and that California should wait until the SEC adopts its final rules. Opponents also focused on the substantial cost for business and the potential inaccuracy and unreliability of Scope 3 emissions disclosures, which depend on information provided by third parties up and down the value chain. The American Bankers Association Banking Journal wrote that the ABA “was among the groups that objected to the legislation, saying it was unworkable because of concerns relating to the availability and usefulness of such information….ABA along with the California Bankers Association opposed SB 260, highlighting problems banks would have reporting scope 3 emissions, the effect on bank customers and reliance on international reporting standards that are not yet fully developed. In preparation for assembly floor consideration, the two associations led a financial services joint trade groups letter joined by the Securities Industry and Financial Markets Association and the Bank Policy Institute. ABA and CBA also signed broader business community opposition letters led by the California Chamber of Commerce.”

As noted above, Wiener voiced his determination to give the bill another go in another legislative session next year. Whether it will face the same fate—presumably with the SEC’s climate disclosure rules already in place—remains to be seen.

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