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E-MailRobert G. Eccles is a Visiting Professor of Management Practice at Oxford University Said Business School, and Mika Morse is the Founder and CEO of Goldfinch Strategies.
When Exxon filed its lawsuit challenging California’s new climate disclosure laws, it framed the issue as a constitutional one: the state is compelling the company to “tell a story” it disagrees with. According to Exxon, requirements to report greenhouse gas (GHG) emissions under SB 253 force it to adopt a narrative about emissions and climate risk that violates its First Amendment rights.
At first glance, this argument seems to align with the standard for judging the constitutionality of compelled speech. Under Zauderer v. Office of Disciplinary Counsel (471 U.S. 626, 1985), the government can compel disclosure of “purely factual and uncontroversial information” as long as the speech is reasonably related to a government interest. But if the information is not “factual and uncontroversial,” the government must prove that the law is narrowly tailored to achieve a compelling interest–the “strict scrutiny” standard of review.
Here, Exxon is asking the court to define GHG emissions disclosures as “controversial” not because it disagrees with carbon accounting generally, but because of the implications of the particular metric California requires. This argument ignores a basic fact about the regulatory disclosures. Companies are routinely required to report standardized metrics, even if they run counter to their preferred narrative. This is particularly true in financial markets, which rely on consistent information to function.
The timing of Exxon’s lawsuit is interesting. Just days before, Exxon helped launch Carbon Measures, an industry coalition to develop new carbon accounting standards. Exxon’s CEO called for better emissions data, saying “if you can’t measure it, you can’t manage it.” The company is now simultaneously arguing that California’s measurement requirements are unconstitutional compelled speech while advocating for different measurement requirements it prefers. The First Amendment doesn’t protect a right to be measured only by metrics of your own choosing.
Further complicating the matter is that it’s not clear what the goal is of Carbon Measures. If its objective is voluntary adoption, then it’s likely that some companies will adopt it and others won’t. It’s possible that this initiative may lead other companies to propose yet other measures to their preference if they don’t like the Carbon Measures approach. This will lead to a proliferation of different ways to report on carbon. Yet if the ultimate objective of Carbon Measures is to replace the GHG Protocol with an “E-Ledgers Approach” the irony is obvious. ExxonMobil doesn’t support compelled speech unless the speech is something it wants others to be compelled to do.
If disagreement with the potential narrative associated with a metric were enough to transform a disclosure rule into unconstitutional “compelled speech,” then virtually any financial reporting requirement could be challenged. Companies could object that GAAP depreciation schedules do not reflect “their story” about the useful life of their assets, that revenue recognition rules distort the perception of their business model, or that pension accounting assumptions unfairly color views of their long-term solvency.
History shows that companies have fought disclosure metrics that proved inconvenient to their preferred story. When FASB required companies to expense employee stock options in the mid-2000s, the business community fought back vigorously. The Board faced what the SEC’s historical society called “unprecedented opposition,” including Silicon Valley protest rallies, a Senate resolution urging FASB to abandon the effort, and legislative proposals to strip FASB of authority over the issue. Opponents argued the valuation models were subjective, hypothetical, and even misleading. Yet the standard took effect, and nearly two decades later, it remains in place—unrepealed, unchallenged, and unremarkable.
Fair-value accounting provoked a similar uproar. Banks insisted that mark-to-market rules forced them to present a distorted picture of their balance sheets and blamed the rules for sparking the 2008 financial crisis. Regulators kept the standard in place, and today fair-value reporting is regarded as essential for understanding financial exposure.
Improvements in pension accounting have also triggered intense pushback. Companies objected that requirements to recognize underfunded pension plans on the balance sheet exaggerated their liabilities and imposed a misleading narrative. Yet the standards took hold, and they made financial statements more informative for investors, not less.
Exxon’s First Amendment argument is already on shaky ground. In an earlier challenge to the same California laws brought by the U.S. Chamber of Commerce, a federal judge recently held that required GHG emissions disclosures are “purely factual and uncontroversial.” The judge pointed out that SB 253 doesn’t require companies to “agree or even comment on” climate policy debates. As he wrote, “the fact some may look favorably or unfavorably on a company based on its emissions report does not transform an otherwise non-controversial disclosure into a controversial one.” Most recently, the Ninth Circuit stayed the implementation of another California climate disclosure law (SB 261), but declined to stay SB 253.
Exxon’s position is not that GHG emissions disclosure is impossible or intrinsically unconstitutional—it is that California’s approach is the wrong approach. Carbon Measures, the initiative that Exxon launched, proposes tracking the carbon intensity of specific products, rather than using the GHG Protocol’s company-wide foot printing approach. Exxon prefers carbon intensity metrics, because they underpin their approximately $30 billion bet on developing low-carbon energy products. But some other companies may prefer a different narrative. As Exxon presumably advocates for acceptance of the Carbon Measures approach, it will be vulnerable to the same arguments it is deploying here. It is hard to see how Exxon can make the arguments in its lawsuit and credibly promote a new approach to emissions accounting and disclosure.
Disclosure regimes cannot be suspended every time a company proposes a different methodology. The GHG Protocol has been used by thousands of companies for decades. Investors have made clear that these emissions data are essential to assessing transition risk, operational resilience, capital allocation, and long-term value. California relied on that interest in defending its laws, and so far, the district court has agreed. If Exxon has a better approach, it can advocate for its adoption. It can also add context to the emissions disclosures required by SB 253. What it cannot do is claim the First Amendment bars California from requiring any approach at all until Exxon’s preferred standard wins.
