California's New Climate Disclosure Laws Under Fire in New Lawsuit Against California Air Resources Board

A lawsuit filed January 30, 2024, is challenging two new California climate disclosure and financial reporting laws, Senate Bill (SB) 253 and SB 261, for unconstitutionally requiring disclosure by qualifying public and privately-held businesses of greenhouse gas (GHG) emissions and climate-related risks throughout their value chain. Plaintiffs, which include a number of businesses and industry associations, allege violations of the First Amendment, Supremacy Clause, and other constitutional limitations against the California Air Resources Board (CARB).

What are SB 253 and SB 261?

California enacted two landmark climate disclosure and financial reporting laws in 2023: the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261). Collectively known as the Climate Accountability Package, these new laws impose unprecedented reporting requirements on large U.S. public and privately-held companies doing business in California.

Climate Corporate Data Accountability Act (SB 253)

SB 253 applies to entities formed and domiciled anywhere in the United States, so long as they have a total annual revenue exceeding $1 billion and do any business in California. It requires CARB to develop regulations to require these entities to publicly disclose and obtain third-party assurance of three categories of GHG emissions annually, regardless of location:

1. Scope 1: direct GHG emissions that stem from sources the reporting entity owns or directly controls
2. Scope 2: indirect GHG emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity
3. Scope 3: indirect upstream and downstream GHG emissions from sources the reporting entity does not own or directly control

Climate-Related Financial Risk Act (SB 261)

SB 261 applies to entities formed and domiciled anywhere in the United States with total annual revenue exceeding $500 million that do any business in California. It requires CARB to develop regulations to require these entities to prepare and submit “climate-related financial risk” reports to CARB every other year, disclosing

1. the entity’s climate-related financial risks in accordance with Task Force on Climate-Related Financial Disclosures recommendations
2. measures the entity has adopted to reduce and adapt to climate-related financial risks

Companies are also required to post reports publicly to their websites.

What are the claims being brought?

The lawsuit alleges that SB 253 and SB 261 violate constitutional rights by compelling companies to engage in nonfactual, costly speech on climate change, a controversial political matter. It seeks to enjoin CARB from taking any action to enforce the two laws and for the court to declare that the laws have no force or effect based on the following claims:

• First Amendment. According to the lawsuit, SB 253 and SB 261 compel companies to make a public statement that is speculative, noncommercial, and politically charged in order to conform their behavior to California’s political agenda in violation of the First Amendment to the U.S. Constitution. According to Plaintiffs, SB 261 provides a vague definition of the key term “climate-related financial risk,” imposing the burden on companies of making “high-stakes, public guesses” on a politically controversial topic.
• Supremacy Clause. The lawsuit also raises the Clean Air Act and the structure of the federal Constitution as a basis for preempting California’s authority to regulate GHG emissions outside of its own borders.
• Extraterritorial Regulation/Burdens on Commerce. The lawsuit alleges that SB 253 and SB 261 impose significant burdens on interstate and foreign commerce and force conformance with California’s policy preferences with minimal corresponding benefits.

The bigger picture

SB 261 is expected to apply to more than 10,000 businesses, including those that conduct a minimal amount of business in the state. Projections cited by the lawsuit include cost burdens falling disproportionately on small and medium businesses that lack the resources to comprehensively report emissions to supply chain partners. The lawsuit is likely a preview of litigation that will be filed to challenge the U.S. Securities and Exchange Commission’s rules requiring disclosure of climate-related financial risks, once finalized. The SEC is expected to issue final rules in the next few months.

Reporting under SB 253 and SB 261 would not commence until 2026, or later depending on the status of the Governor’s budget negotiations, potential statutory amendments, and the development of implementation regulations by CARB. Sidley will continue to monitor developments related to California GHG reporting, including budget revisions, statutory amendments and pending litigation.