Judges heard arguments on the constitutionality of California’s climate disclosure legislative package last Friday (9 January) and will decide whether to pause the implementation of both laws in the coming months.
SB 253 and SB 261 were signed into law by State Senator Gavin Newsom in 2023. The former requires disclosures on GHG emissions, while the latter obliges companies to report on climate-related financial risks (see box out).
Climate Corporate Data Accountability Act (SB 253)
- Scope: Companies operating in California with over $1bn in revenue
- Requirements: Annual disclosures of GHG emissions prepared in line with the GHG Protocol standards
- Timeline: First Scope 1 and 2 disclosures required by 10 August 2026, with mandatory assurance phased in from 2026 and Scope 3 disclosures required from 2027
Climate-Related Financial Risk Act (SB 261)
- Scope: Companies operating in California with over $500m in revenue
- Requirements: Biennial disclosures of climate-related financial risks prepared in line with the TCFD framework
- Timeline: First disclosures originally required by 1 January 2026 [reporting temporarily made voluntary under court order]
In January 2024, a coalition of five business associations led by the US Chamber of Commerce challenged the constitutionality of both laws in the courts, arguing that they violate federal pre-emption under the Supremacy Clause, the Clean Air Act by regulating outside of California’s jurisdiction and the First Amendment by compelling speech.
US District Court judge Otis Wright rejected the first two arguments and said the court would need more time to evaluate and rule on the First Amendment challenge.
With the litigation process ongoing, the business associations requested a preliminary injunction to delay the implementation of SB 253 and SB 261until this decision is made. Originally rejected by the US District Court, plaintiffs appealed this ruling in the US Court of Appeals for the Ninth Circuit.
The Court of Appeals issued an order temporarily pausing requirements for companies to report under SB 261. As such, the original deadline to submit climate risk reports by 1 January this year was removed, with disclosures made voluntary until the final ruling on the preliminary injunction.
In total, 51 companies submitted reports to CARB by the end of last year, whereas 3,100 would have been obliged to do so if the requirements had remained effective.
No such pause was introduced on SB 253. If the Appeals Court rules against the injunction, the California Air Resources Board has indicated that in-scope companies will be required to submit their first GHG emissions disclosures by 10 August this year.
The Ninth Circuit will determine whether to maintain the pause on SB 261 and whether to make emissions disclosures voluntary until a final judgement on the First Amendment challenge is made. Judges Mark Bennett and Jacqueline Nguyen heard oral arguments in San Francisco last week
Central to these discussions is the question of whether climate-related disclosures constitute commercial speech.
Eugene Scalia, partner at Gibson, Dunn & Crutcher, represented the US Chamber of Commerce in the hearing. He argued that the requirements compel speech beyond commercial information as the disclosures are not tethered to specific transactions.
“These are not advertisements, the compelled speech does not concern products and the companies forced to make the speech certainly have no economic motivation to do so,” he said. “There is no doubt that [this is an] extension far beyond what has been recognised in any prior case as commercial speech.”
Scalia cited the “complete lack of tailoring” in the laws, highlighting that they mandate reporting under the GHG Protocol and the TCFD framework respectively, both of which he said have “no consideration for First Amendment rights”.
He also argued that Scope 2 and Scope 3 disclosures are “controversial” as they require companies to report emissions associated with their energy providers and supply chains, which he labelled a “false attribution”.
“With respect to SB 261, a lot of opinions, judgments and predictions about the climate and regulators need to be made,” Scalia added.
Caitlan Mcloon, deputy attorney general at the California Department of Justice, offered the defence for the constitutionality of the laws. She argued that climate disclosures constitute commercial speech as they pertain to the transactions of investment decisions.
Asked to provide the specific transaction that Scope 3 disclosures would be tethered to, she said it is “the evaluation of the overall risk that the company faces, specifically transition risk”.
Mcloon noted that 85% North American investors analyse corporate GHG emissions and that over 86% of the largest companies operating in California voluntarily provide climate-related disclosures, but this information is “not standardised, and is often selective, fragmented and unverified”.
She stressed that the laws do not aim to regulate emissions reductions, only climate-related information.
“This is about transparency to the market of decision-necessary data about companies that allows investors and others to evaluate risk,” Mcloon said. “It’s also about correcting inconsistent or incomplete data that companies are using to mislead through omission the marketplace.”
Asked whether the climate-related risk disclosures required under SB 261 would require companies to express policy vires on the impact of climate change, she emphasised that a risk assessment “is a commercial metric, not a political one”.
“There’s no tie, even implicit, between how a company has assessed the impact of climate on their overall financial success and what their political or policy view is,” Mcloon added.
Based on the oral arguments and written submissions, the Ninth Circuit will consider whether the plaintiffs’ First Amendment challenge will be successful, and the potential harm caused by not granting the injunction. The court is expected to finalise its verdict in the next six months.