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As discussed in our earlier Client Alerts, California recently passed several laws requiring certain climate-related corporate disclosures, including, for example, regarding emissions and climate-related financial risk. As some had speculated, two of these laws are now facing a legal challenge from a coalition of business organizations.1
The two challenged laws are the Climate Corporate Data Accountability Act (California Senate Bill 253 (SB253)) and the Climate-Related Financial Risk Act (California Senate Bill 261 (SB261)). Both were signed into law on October 7, 2023 and form part of California's "Climate Accountability Package." The laws require US-based companies "doing business"2 in California to make certain public disclosures about Scope 1, 2 and 3 greenhouse gas emissions and the extent and management of climate-related financial risks. Several thousand companies are expected to be subject to these laws. See our earlier Client Alert for a more detailed discussion of these laws, which can be found here.3
The lawsuit challenging SB253 and SB261 was filed against the California Air Resources Board (and its representatives) in federal court by the U.S. Chamber of Commerce, California Chamber of Commerce, American Farm Bureau Federation, Los Angeles County Business Federation, Central Valley Business Federation, and Western Growers Association. The plaintiffs are seeking a ruling that would block and overturn SB253 and SB261.
The legal challenge alleges that SB253 and SB261:
- violate the First Amendment by unconstitutionally compelling speech and "forc[ing] thousands of companies to engage in controversial speech that they do not wish to make, untethered to any commercial purpose or transaction";
- are "precluded by the [federal] Clean Air Act" under the Supremacy Clause (i.e., where regulation of a particular matter is exclusively in the federal government's domain), given that SB253 and SB261 do not limit their scope to "intrastate" matters (i.e., disclosures relating only to "emissions produced in California or to companies' expected climate change financial risks in California") but, instead, potentially extend to emissions produced, or climate-related risks expected, anywhere in the world; and
- "are invalid under the [U.S.] Constitution's limitations on extraterritorial regulation, including the Dormant Commerce Clause" (i.e., that prohibits states from passing laws that discriminate against or excessively burden interstate commerce) on the basis that the disclosure requirements are not limited to emissions produced, or climate-related risks expected in California.
According to the plaintiffs, the laws also "impermissibly compel thousands of businesses to make costly, burdensome, and politically fraught statements" about their operations around the world in an effort to shape the behavior of those businesses.
In response to the lawsuit, the lead author of SB253 – Senator Scott Weiner – issued a statement in which he declared the lawsuit to be "baseless" and challenged the plaintiffs' argument that SB253 and SB261 would cause undue expense by stating that "[t]he costs to major corporations" to comply with the requirements of these laws was "miniscule."
While it remains to be seen how the court will rule on this lawsuit, the California legislature is understood to have been mindful of the risk of constitutional challenges in formulating these new laws.4 As such, covered companies should continue to prepare for compliance with SB253 and SB261.
While the lawsuit seeks only to challenge SB253 and SB261, it may offer insight into the basis of potential future challenges that other similar laws may face whether in California or beyond, including, for example, the Securities and Exchange Commission's proposed climate disclosure rules and Minnesota's recently recently passed law requiring climate risk disclosures from banks.
Footnotes
1 Interestingly, the lawsuit does not challenge the other climate-related law enacted at the same time as SB253 and SB261 – the Voluntary Carbon Market Disclosure Act (California Assembly Bill (AB1305)), which requires corporate public disclosures relating to certain climate-related claims and the use of voluntary carbon offsets. We provide a more detailed discussion of AB1305 in our recent Client Alert.
2 See our previous Client Alert, "Are You 'Doing Business' in California?", for a discussion of this "doing business" analysis.
3 See also our Client Alert – "Global Climate Change Disclosure Initiatives and Board Corporate Governance Considerations" – which provides a global overview of climate-related initiatives (including commentary on California).
4 See, e.g., State. Sen. Judiciary Comm., Analysis of SB253 (2023-2024 Reg. Sess.) Apr. 14, 2023 at 12-13 (considering SB253 in the context of the dormant interstate Commerce Clause), and State. Sen. Judiciary Comm., Analysis of SB261 (2023-2024 Reg. Sess.) Apr. 14, 2023 at 7-8 (considering SB261 in the context of the dormant interstate Commerce Clause).
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