Wachtell Lipton reports:
Last week, California Governor Gavin Newsom signed into law Senate Bill 219, which applies broadly to public and private companies “doing business” in California. The law will require companies that have total annual revenues of over $1 billion dollars to disclose and independently assure their scopes 1 and 2 emissions (direct and purchased emissions) beginning in 2026 and to disclose scope 3 emissions (value chain emissions) beginning in 2027. In addition, companies that have annual revenues of over $500 million dollars will be required to prepare a climate-related financial risk report in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures beginning on or before January 1, 2026.
The problems with SB 219 are numerous and severe. First, as I have observed previously:
It strikes me that there a couple of problems with requiring Scope 3 disclosures.
First, requiring companies to include Scope 3 emissions in their disclosures would be extremely costly. Companies would have to gather data from companies in their supply chain. For companies with complex multi-national supply chains would incur expenses that would dwarf the controversial conflict mineral disclosure regime. The Harvard Business Review reports that "Scope 2 emissions [were carved] out of Scope 3 because they are easily measured and allocated to specific companies." In contrast, "the difficulty of tracking emissions from multiple suppliers and customers across multitier value chains makes it virtually impossible for a company to reliably estimate its Scope 3 numbers." ...
Second, wouldn't disclosing Scope 3 emissions result in confusing double (or more) disclosure?. Suppose Apple has to include the carbon emissions of Supplier One Inc.--a company in its supply chain--in its carbon disclosures. Suppose Supplier One is publicly held, so that it must disclose its carbon emissions. Those emissions would be double counted. Meanwhile, Supplier Two Inc. is in Supplier One's supply chain. Supplier Two is also publicly held. So it's carbon emissions would be disclosed in its 10-K, but if Scope 3 emissions must be disclosed, those emissions would also be counted in Supplier One's and Apple's disclosures. A portfolio holding all three stocks would appear to be emitting way more carbon than it actually is.
Second, to the extent these disclosures are intended to provide information to investors, there is no evidence that investors really want and are willing to pay for such disclosures.
Third, by extending the disclosure requirement to privately held companies, SB 219 is inconsistent with the general scheme of financial disclosure, which focuses on public corporations. Unlike publicly traded companies, privately held corporations do not have the same need to disclose financial details to the public. Forcing them to reveal sensitive financial data can place them at a competitive disadvantage. Competitors might exploit this information, which can be detrimental to the company’s market position.
In addition, disclosure requirements can be expensive and time-consuming. Privately held corporations, especially smaller ones, may lack the resources to comply with complex regulatory demands, leading to increased operational costs without corresponding benefits. As a result, financial disclosure could discourage private investment and entrepreneurship. Investors and founders often choose the private structure to avoid public scrutiny, and disclosure requirements could drive businesses away from these structures.
Finally, there is great potential for companies being subjected to inconsistent regulations. Back to Wachtell Lipton:
With the SEC’s climate disclosure rules stayed pending litigation, California’s latest law, along with international regulatory obligations, will require many companies to provide climate-related disclosures. ... Senate Bill 219 is also a reminder that states are willing to unilaterally address climate-related concerns and that companies should be vigilant of climate-related regulatory efforts at the state and local levels, particularly if federal initiatives are stalled.
Despite the bill's instruction that the regulator attempt to minimize duplication, there is still a serious problem. Global regulators, the SEC (if its acts), and other states will all have a say. Differences could readily emerge on issues such as:
- Which companies have to provide what disclosures. One can readily imagine, for example, that SEC regulation will apply only to reporting companies (not private) and provide lessened obligations for small reporting companies.
- Whether Scope 3 emissions must be disclosed and, if so, how they are to be calculated.
- When disclosures are due.
- What assurances by an independent assessor will be required, if any.
- The amount of information required.
In shoirt, SB 219 is yet another example of why California's business climate stinks and keeps getting worse. It's unilateral action on an issue that should be decided at a national or global level, inattentive to costs, and lacks clear benefits. It's showboating.
