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E-MailCydney Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum.
You might recall that, in 2023, California Governor Gavin Newsom signed into law two bills related to climate disclosure: Senate Bill 253, the Climate Corporate Data Accountability Act, and SB261, Greenhouse gases: climate-related financial risk. SB 253 mandates disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities (public or private) with total annual revenues in excess of a billion dollars that “do business in California.” SB 253 has been estimated to apply to about 5,300 companies. SB 253 requires disclosure regarding Scopes 1 and 2 GHG emissions beginning in 2026, with Scope 3 (upstream and downstream emissions in a company’s value chain) disclosure in 2027. SB 261, with a lower reporting threshold of total annual revenues in excess of $500 million, requires subject companies to prepare reports disclosing their climate-related financial risk in accordance with the TCFD framework and describing their measures adopted to reduce and adapt to that risk. SB 261 has been estimated to apply to over 10,000 companies. SB 261 requires that preparation and public posting on the company’s own website commence on or before January 1, 2026, and continue biennially thereafter. Notably, the laws exceed the requirements of the SEC’s climate disclosure regulations because, among other things, one of the laws covers Scope 3 emissions, and they both apply to both public and private companies that meet the applicable size tests. (For more information about these two laws, see this PubCo post.) Interestingly, even when Newsom signed the bills, he raised a number of questions. (See this PubCo post.) Specifically, on SB 253, Newsom said “the implementation deadlines in this bill are likely infeasible, and the reporting protocol specified could result in inconsistent reporting across businesses subject to the measure. I am directing my Administration to work with the bill’s author and the Legislature next year to address these issues. Additionally, I am concerned about the overall financial impact of this bill on businesses, so I am instructing CARB to closely monitor the cost impact as it implements this new bill and to make recommendations to streamline the program.” Similarly, on SB261, Newsom said that “the implementation deadlines fall short in providing the California Air Resources Board (CARB) with sufficient time to adequately carry out the requirements in this bill,” and made a similar comment about the overall financial impact of the bill on businesses. So it was fairly predictable that something of a do-over was in the cards. Now, as reported here and here by Politico, Newsom has proposed a delay in the compliance dates for each bill until 2028. A spokesperson for Newsom “said the proposal ‘addresses concerns’ about cost, timeline and the ‘entirely new and significant workload for the state and the entities covered by these new requirements.’”
SideBar
Complaint. Of course, earlier this year, the U.S. and California Chambers of Commerce, the American Farm Bureau Federation and others filed a complaint against the California Air Resources Board (later adding the California Attorney General) challenging these two California laws. The lawsuit seeks declaratory relief that the two laws are void because they violate the First Amendment, are precluded by federal law, and are invalid under the Constitution’s limitations on extraterritorial regulation, particularly under the dormant Commerce Clause. The litigation also seeks injunctive relief to prevent CARB from taking any action to enforce these two laws.
In the complaint, Plaintiffs maintained that they were in favor of policies that would reduce GHG emissions “as much and as quickly as reasonably possible, consistent with the pace of innovation and the feasibility of implementing large-scale technical change,” and that they supported the disclosure of material information, including climate-related information, as necessary to protect investors, but those policies “must be informed by the best science, a careful analysis of available alternatives, and attention to legal rights and requirements.” In addition, “a patchwork of inconsistent state-by-state regulatory regimes, under which multiple states attempt to regulate emissions nationally through conflicting means” didn’t help either business or consumers.
These laws, they professed, will impose massive costs on businesses, with the burden of compliance falling disproportionately on small and medium businesses. They argued that both laws apply to any company exceeding a certain revenue threshold that does any business in California and that estimating GHG emissions is “enormously burdensome”; reporting Scope 3 emissions alone, they contended, will cost many companies more than $1 million per year and, in many instances, may be inaccurate. According to the complaint, the “burden of estimating Scope 3 emissions flows up and down the supply chain. Small businesses nationwide will incur significant costs monitoring and reporting emissions to suppliers and customers swept within the law’s reach. For example, scores of family farm members of AFBF will need to report emissions to business partners that do business with entities covered by S.B. 253.” Plaintiffs also cited the reservations California’s Governor expressed at the time of his signing of these bills regarding financial impact. (See this PubCo post.)
CARB has moved to dismiss the second and third claims for lack of subject matter jurisdiction and failure to state a claim. Plaintiffs opposed that motion. Plaintiffs have moved for summary judgment on the first claim, and CARB has indicated that it may file a cross-motion. CARB opposed the motion for summary judgment and also moved separately to deny or at least defer the motion for summary judgment to allow time for CARB to take discovery.
Motion to dismiss. According to CARB’s motion to dismiss, the two laws were intended “to increase transparency and improve access to information about the greenhouse gas (GHG) emissions and climate-related financial risks of the largest companies doing business in California. Both laws reference existing climate change reporting protocols that provide metrics for determining the required information. And both laws are complementary additions to an expanding suite of climate reporting regimes. The disclosures required by these two laws are intended to help California residents, consumers, companies, and investors make decisions informed by greater understanding of the sources and volumes of GHG emissions produced by major companies doing business in California and the climate-related financial risks those companies face.”
The motion contended that Plaintiffs’ “claims arising under the Supremacy Clause and the limits on extraterritorial regulation are not justiciable,” because CARB had “not yet proposed regulations governing their enforcement, and Plaintiffs have not pled an injury-in-fact.” Accordingly, with regard to SB 253, the motion contended that, in the absence of these implementing regulations, Plaintiffs’ Supremacy Clause and extraterritoriality claims are “not ripe for adjudication.” Further, CARB took issue with the claims related to extraterritoriality and the Supremacy clause regarding provisions of both laws because, without having established the danger of a direct injury under the laws, Plaintiffs had no standing.
In addition, CARB contended that the claim under the Supremacy Clause “relies on an erroneous factual premise and…lacks a cognizable legal theory.” CARB asserted that Plaintiffs had “failed to identify any federal law that preempts these state disclosure laws.” As a result, CARB maintained, Plaintiffs had not stated a claim under the Supremacy Clause. Nor, CARB asserted, had Plaintiffs identified “any provision of the Constitution—or any specific ‘principle of federalism’—that conflicts with the challenged state statutes.”
CARB also argued that there was no violation of the dormant Commerce Clause or claim for “extraterritorial regulation” because neither of the California laws was “driven by economic protectionism” (see Nat’l Pork Producers Council v. Ross), or “imposes a cognizably significant burden on interstate commerce” under Pike v. Bruce Church, Inc. Citing Pork Producers, CARB asserted that “the ‘very core of … dormant Commerce Clause jurisprudence’ is its ‘antidiscrimination principle’—the prohibition against ‘state laws driven [] by economic protectionism.’” (See this PubCo post (SideBar).) But, CARB contended, “Plaintiffs cannot state a claim under this actual dormant Commerce Clause principle because they cannot allege any facts that, if proven, could establish that either Senate Bill 253 or 261 is ‘designed to benefit in-state economic interests by burdening out-of-state competitors.’” The laws will apply to all companies in any state that satisfy the conditions and meet the thresholds. Nor did Plaintiffs state a claim under Pike, which would require that “the application of these state statutes imposes a ‘substantial burden on interstate commerce’”; in this instance, CARB contended, there was no discriminatory purpose or interference with the flow of goods interstate. According to CARB, the “courts have consistently rejected mere compliance costs as substantial burdens on interstate commerce, even when the compliance costs are purportedly sizable.” (See this PubCo post.)
Opposition to Motion. Plaintiffs noted in their opposition that CARB did not contest the First Amendment claim, but instead raised “misplaced objections” that were largely jurisdictional. Rejecting CARB’s ripeness contention, Plaintiffs argued that their S.B. 253 claim was ripe because CARB “has no discretion whether to promulgate regulations consistent with S.B. 253.” In addition, they contended that the Supremacy Clause and extraterritoriality claims were valid: “[b]ecause the areas of nationwide environmental protection, interstate disputes, and foreign affairs are, based on the federal structure of the Constitution, committed to the supervision of the federal government exclusively, S.B. 253 and 261 are in conflict and must fall. The Clean Air Act preempts both laws because it occupies the field of interstate-air-emissions regulation and preempts alternative remedial regimes (like California’s). And Plaintiffs’ extraterritoriality claim is valid because both laws compel companies to speak on emissions that occur entirely outside California’s borders.”
Motion for summary judgment. In their motion for summary judgment, Plaintiffs contended that S.B. 253 and 261 “compel the content of companies’ speech,” and, as a result, “are ‘presumptively invalid’ and subject to strict scrutiny.” Both laws, they argued, “compel a substantial amount of speech at significant expense, without a permissible compelling governmental interest.” For example, they maintained that SB 261 requires a company to “publicly state its opinion regarding various ‘climate-related financial risk[s]’ and to post that opinion to the entity’s website.” And under SB 253, they claimed, the Scope 3 requirement means that a company must “misleadingly represent that the emissions of other entities are its own.” What’s more, the proper calculation of emissions is open to debate, they said, as well as enormously burdensome. According to Plaintiffs, “S.B. 253 and 261 forces thousands of companies, including Plaintiffs’ members, to engage in controversial speech that they do not wish to make, untethered to any commercial purpose or transaction….And they do all this for the explicit purpose of placing political and economic pressure on companies to ‘encourage’ them to conform their behavior to the policy goals of the State. This violates the First Amendment, as well as the Supremacy Clause and the Constitution’s prohibition on extraterritorial regulation by the States.”
Plaintiffs asked the court to “permanently enjoin Defendants from enforcing or implementing S.B. 253 and 261, because they unconstitutionally compel speech. The laws serve no compelling government interest, concern a controversial matter of vehement public debate that is not purely factual, and are nothing like the government-required disclosures regarding health, safety, or other matters that courts have upheld in other contexts.” Strict scrutiny was triggered, they professed, because the laws require companies “to wade into a contentious political debate,” and “infringe on companies’ freedom ‘to remain silent.’” But they fail the strict scrutiny test because, among other things, there is “no compelling government interest ‘simply’ in providing ‘information.’” Moreover, neither of the exceptions to strict scrutiny applies, they maintained: Central Hudson does not apply because the speech is compelled and is not commercial speech; Zauderer does not apply because the speech “has no nexus to commercial advertising, nor is it purely factual and uncontroversial.” (See, e.g., this PubCo post and this PubCo post.)
Opposition to motion for summary judgment. In its opposition, CARB argued, citing Zauderer, that the “Constitution gives the government greater latitude when it acts to increase, rather than restrict, the free flow of information to the marketplace.” The two Acts in question “are designed to serve this very interest: ‘Information for the public.’ …The laws increase transparency and improve access to consistent, standardized information about the greenhouse gas (GHG) emissions and climate-related financial risks of the largest companies doing business in California.” These laws do not require companies to take positions on political or controversial issues, CARB contended; “[r]ather, Senate Bill 253 simply asks companies to mathematically calculate their total GHG emissions and make that data public. And Senate Bill 261 asks companies to disclose corporate governance practices and risk management strategies—factual information increasingly requested by insurance companies and underwriters…—so as to make data available about whether and to what extent those companies are planning for climate change. These disclosures require the application of traditional financial accounting principles that are widely accepted.” What’s more, many companies already provide this information voluntarily applying the same principles and protocols. Because the compelled disclosures require only “factual and noncontroversial information about commercial operations, and do not dictate the language of the disclosures or hamper companies’ ability to present their own messages on climate change,” the lowest level of First Amendment scrutiny under Zauderer should apply. The Constitution, CARB contended, “accords the government greater latitude to regulate commercial speech,” especially “when the government action is intended to increase, rather than restrict, the free flow of accurate information to consumers.” CARB rejected plaintiffs’ contention that Zauderer is “limited to speech proposing a ‘commercial transaction’’; instead, CARB argued, SCOTUS “defines commercial speech to include ‘expression related solely to the economic interests of the speaker and its audience.’” Nor is the compelled disclosure “so ‘unjustified or unduly burdensome’ that it chills or restricts constitutionally protected commercial speech.” Finally, they contended, if the court did not apply the lowest level of intermediate level of scrutiny, these bills could nevertheless survive any level of scrutiny, including strict scrutiny.
The Governor’s proposed delaying language appears in “budget trailer bill language” released by the Department of Finance, which reportedly has a deadline of August for passage. Politico reports that the “California Air Resources Board, which is in charge of writing rules to implement [the bills], suggested removing the Scope 3 requirement as it was being negotiated last year.” But Scope 3 remains in the proposal.
One of the bills’ key sponsors told Politico that “he opposes the administration’s proposal and that it doesn’t reflect an agreement with lawmakers. ‘The language posted by the Department of Finance does not represent an agreement with the Legislature….The Legislature has *not* agreed to the Administration’s proposed delay to SB 253’s implementation. The Administration’s proposal significantly delays the implementation of a landmark climate action law that already has a 6 year phase-in.’” This same sponsor “declined to speculate on Newsom’s motivations….‘I don’t read too much into this….The governor signed both bills, and we’re very grateful he did. The administration really wants additional delays for the disclosures. And we don’t agree on that.’” Another sponsor told Politico that he “‘thought we’d gotten past all this drama….I’m just so desperate to get past that posture and really get down to work.’”
While the draft of the proposed amendments reflects a number of tweaks to the existing laws, the key changes relate to the timing of compliance. According to the Legislative Counsel’s Digest, currently, the Climate Corporate Data Accountability Act (SB 253) requires CARB to develop and adopt regs on or before January 1, 2025—only six months away. The proposed amendments would “require the state board to develop and adopt those regulations on or before January 1, 2027, rather than 2025” and delay for two years the initial compliance dates for reporting entities, along with conforming changes. In addition, the bill “would require that the regulations adopted by the state board require, among other things, a reporting entity to make the annual disclosure to either the emissions reporting organization or the state board, and that the reporting entity publicly disclose its scope 3 emissions on a schedule specified by the state board,” rather than, as is currently required, no later than 180 days after its scope 1 emissions and scope 2 emissions are publicly disclosed. The bill would also “authorize reports to be consolidated at the parent company level and would delete the requirement that the annual fee be paid upon filing the disclosure. The bill would authorize, rather than require, the state board to contract with an emissions reporting organization to develop a reporting program to receive and make certain required disclosures publicly available. The bill would make other related changes to the duties of the emissions reporting organization and the state board, as provided.”
With regard to Greenhouse gases: climate-related financial risk (SB 261), according to the Legislative Counsel’s Digest, current law requires that, on or before January 1, 2026, and biennially thereafter, a covered entity must prepare a climate-related financial risk report disclosing its “climate-related financial risk and measures adopted to reduce and adapt to climate-related financial risk.” Existing law also requires the state board to contract with a climate reporting organization to prepare a biennial public report on the climate-related financial risk disclosures and other actions. The bill proposes to delay until January 1, 2028, the date for the initial climate-related financial risk report and to make conforming changes. The bill would authorize, rather than require, the state board to contract with a climate reporting organization to carry out the various mandated actions “that the state board deems appropriate. The bill would also delete the requirement that the entity’s fee be paid upon filing its disclosure.”
