Equilibrium & Sustainability

California and Newsom prep for the future with new climate rules

Californians are bracing for Gov. Gavin Newsom’s (D) impending signoff on a seminal slate of rules that would require large companies to disclose both their greenhouse gas emissions and climate-related financial risk.

“Any company located in California is well aware that it’s a first mover on climate, it’s a first mover on the minimum wage,” Manuel Pastor, director of the University of Southern California’s Equity Research Institute, told The Hill.

“Companies have their eyes wide open,” added Pastor, who specializes in climate-related economics.

Chief among the legislation on the table are the Climate Corporate Data Accountability Act, or SB-253, and the Climate-Related Financial Risk bill, or SB-261.

The former would require all public and private firms that operate in California — and whose annual revenues exceed $1 billion — to disclose both direct and indirect greenhouse gas emissions.

If companies fail to adhere to the demands of SB-253, they could face fines of up to $500,000 a year, according to the bill.

SB-261, meanwhile, would require companies that generate more than $500 million in annual revenue release climate-related financial risk reports biennially, beginning in 2026. 

Failure to comply with SB-261 could result in administrative penalties of up to $50,000 in a reporting year.

A burden or a boon?

Newsom had already declared his intention to sign both of the bills in mid-September, just a day after he and state Attorney General Rob Bonta (D) launched a lawsuit against five big oil companies they accused of “lying about climate change.”

For some businesses, the bills will present a particular burden simply because they will have to figure out just how extensive their emissions are, according to Pastor.

But on the other hand, he said, the legislation is “going to be a boon for others because they will be able to advertise themselves as green.”

“That’ll have a particular appeal for some California companies,” he said.

Many firms are already disclosing environmental data and “will be well prepared for compliance with this rule,” the nonprofit CDP, formerly the Carbon Disclosure Project, said in a statement.

Lori Llewellyn, managing director of CDP North America, stressed in a blog post that the legislation “won’t be nearly as burdensome to companies as opponents may make them out to be.”

California, as one of the biggest economies in the world, is “already operating as a major policy player on the global stage that makes economic waves worldwide,” Llewellyn stated.

Many firms have experience releasing such data to international regulators, particularly to agencies in the European Union, according to Llewellyn. 

The U.S. Securities and Exchange Commission (SEC) has also proposed federal rules that would require publicly traded companies to disclose both direct and indirect emissions. But the California bill reaches further by making these demands of private firms as well.

“What the California bills and the proposed SEC rule are asking for is already underway among most public companies,” Llewellyn said.

SEC Chairman Gary Gensler told the House Oversight Committee on Wednesday that California’s legislation could help bolster his agency’s efforts to manage climate disclosures, according to Reuters.

“That may change the baseline,” Gensler reportedly said. “If those companies were reporting to California, then it would be in essence less costly because they’d already be producing that information.”

Jonathan Storper, a San Francisco-based attorney at the firm Hanson Bridgett, highlighted California’s creativity when it comes to the law, while acknowledging that this behavior isn’t without controversy.

“Every time any laws pass, we often hear certain elements say that all these businesses will leave California,” Storper, who founded his firm’s sustainable law practice, told The Hill.

“But we’re such a huge economy that it kind of begs the question about, would you leave the fifth-largest economy in the world?” he added. 

Making do or moving on

Companies that do flee following the enactment of the new rules, Pastor argued, may have already been planning to move part of their operations anyway. 

California’s lure for innovation continually attracts the likes of Silicon Valley startups, Los Angeles entertainment and electric vehicle entrepreneurs as they establish roots, he noted.

“When things get to the point of stamping them out and mass manufacturing, a lot of that moves on,” he said.

Pastor did acknowledge the possibility that SB-253’s passage could accelerate the closure of some oil production in California.

“But that’s not something that most people in the state or Newsom would be opposed to,” he said.

In fact, just prior to declaring his support for these bills, the governor and his attorney general filed a lawsuit alleging that oil companies concealed knowledge about the potentially catastrophic effects of fossil fuel dependance.

As far as the lawsuit is concerned, Pastor described a current environment of “political prodding and pushing and testing” that he believes is being driven by the oil companies.

He specifically referred to a ballot measure backed by the industry, the California Oil and Gas Well Regulations Referendum, which would repeal a law that prohibits new wells from being constructed within 3,200 feet of homes, schools and hospitals.

“The oil companies are putting on the ballot a measure asking for the ability to poison communities close up,” Pastor said. “That’s gonna be a hard sell.”

The companies, he explained, might frame the argument around how critical the industry is for California’s economy and job availability — and they likely won’t back down from the ballot measure.

But Pastor recalled the last time the oil companies tried to do something similar in 2010. At the time, they bankrolled Proposition 23, a measure that sought to overturn AB-32 — a law that required California to reduce its greenhouse gas emissions to 1990 levels by 2020.

“They got roundly defeated,” Pastor said.

Trendsetting and ‘technological optimism’

Once Newsom signs off on SB-253 and SB-261, there is the potential for other states to follow suit — particularly those that have stricter greenhouse gas emissions targets, such as Washington and New York, according to Pastor.

“We have always been a state that starts trends,” agreed Storper. “Both in the Legislature and in our California Supreme Court, those trends tend to move east.”

In terms of exactly how California is planning to implement the legislation in a practical manner — and how the state might standardize reporting on indirect emissions — Pastor said he sees officials embracing “a little bit of technological optimism.”

“That’s of course the kind of thing that the [Chamber of Commerce] and business community aren’t always optimistic about,” he said.

In August, the California Chamber of Commerce argued that the legislation would instead create “a costly reporting requirement” that conflicts with state climate goals. 

Among the other major groups that have opposed the bills are the Western States Petroleum Association, the California Hospital Association and agricultural groups.

A spring letter penned by a Chamber-led coalition warned that companies could need to pay $600,000 per disclosure. Smaller firms, it argued, might struggle to track emissions from “distant upstream and downstream supply chains” and suffer “a detrimental impact.”

As such, Storper said he is anticipating challenges in court once the bills are signed into law.

Certain states that espouse “a very different philosophy” could also try to pass legislation preventing companies that disclose their emissions from doing business there, he added.

Storper compared that possibility to decisions made in states such as Texas, where insurers can no longer consider environmental, social and governance, or ESG, factors when setting rates.

“But usually with these things it’s two steps forward and one step back,” Storper said.

‘Skating to where the puck will be’

Arnold Sowell Jr., executive director of NextGen California, credited Newsom and the Legislature in a recent statement for showcasing California’s “unrivaled leadership in shaping national climate policy and advancing climate justice.”

“These bills — SB-253 and SB-261 — will help put an end to the lack of true accountability when it comes to corporate reporting of greenhouse gas emissions and assessing climate risk,” said Sowell, whose nonprofit organization advocates for justice-centered policies.

“Finally, communities on the front lines of the climate crisis will have the tools to quantify the ongoing damage being done by the world’s worst polluters,” he added.

Regarding Newsom’s leadership, Pastor said he believes that the governor is sincere about “finally standing up to California bashing” and quashing the idea that environmental legislation will kill the state’s economy.

But the governor is also “thinking a few steps ahead” and is “positioning himself for whatever his political future might be,” Pastor added.

“He’s thinking about running in 2028,” the professor said, referring to Newsom’s presidential prospects.

Storper likewise had his eye on the future, stressing that the younger generation is very concerned with both climate change and social issues.

That generation, he explained, is increasingly “facing the whole prospect of their entire life dealing with the climate risk and disaster.”

But because people are still forming and maintaining businesses, Storper said it will be interesting to see whether the new bills lead to major changes in corporate practices.

Between now and 2028, however, the country’s demographics will continue to change as more young people become eligible to vote, Pastor stressed.

“Newsom is skating to where the puck will be, rather than where it is,” he said.

Tags Gary Gensler Gavin Newsom Rob Bonta