California’s Next Climate Frontier: Corporate Disclosure

Corporate sustainability is a mess. For consumers, investors, employees, and anyone else trying to wrap their heads around a business’ greenhouse-gas emissions, it’s hard to know where to look for information or how one company stacks up against another. The businesses that share data publicly do so on a number of different forums and in wildly different formats. Then there are still many that don’t disclose any info at all.

“It's like a climate ‘Tower of Babel,’” Steven Rothstein, a managing director at the nonprofit Ceres, which advocates for market-based climate solutions, told me.

But the tower is close to crumbling. Two landmark bills that passed the California State Senate in May and head to a vote in the Assembly this week or next could finally put systems and standards in place, with wide-reaching effects, as California is the fifth largest economy in the world.

One would require companies doing business in the state with annual revenues over $1 billion to report their greenhouse gas emissions each year. It would cover an estimated 5,300 U.S. corporations, according to Ceres.

The second bill orders businesses with revenues of more than $500 million to produce annual assessments of their exposure to climate-related risks, and what they are doing about those risks. More than 10,000 companies would have to report on whether heat waves that idle outdoor workers could hurt their profits, for example, or how vulnerable their facilities are to wildfires and floods.

Though the federal Securities and Exchange Commission is considering similar disclosure rules, the California bills go further by applying to privately-owned firms in addition to public-traded companies. About 73% of the companies that would have to report their emissions to California are private, according to Ceres.

Proponents of the policies say investors don’t currently have enough information to understand how exposed their investments are to the effects of global warming or to future climate-related policies.

“If I'm an investor, or I'm going to go work for a company and I want to think about how they're going to grow, knowing what they're doing will affect your decision making,” said Rothstein. “This is really a financial disclosure bill. It's really helping people understand more about the safety and soundness of those companies.”

These new disclosure laws would also ripple through the currently opaque practice of environmental, social, and governance, or ESG investing, making it easier to scrutinize claims made by index fund providers. As Madison Condon, a Boston University law professor summed it up to me, “How is Blackrock supposed to report on the emissions of its S&P 500 portfolio if the S&P 500 companies have not been required to report their emissions?”

But many believe these types of laws would be useful beyond Wall Street and help unlock more progress on climate change.

“Put plainly, it is difficult to imagine a successful approach to the climate challenge that does not have widespread mandatory disclosure as its foundation,” wrote the authors of a recent study on corporate emissions published in the journal Science. They argue that reliable measurement and credible data is an essential prerequisite for both market-based policies, like a carbon tax, and more straightforward regulations on carbon.

The data would also empower outside groups to hold firms accountable to their climate claims. Suddenly, it would be relatively easy to compare the carbon emitted by Uniqlo versus Gap, In-N-Out versus Taco Bell, or Amazon versus Walmart, for example. Legal scholars Michael Gerrard of Columbia University and Eric Orts of University of Pennsylvania expect advocacy groups will also rank companies by their emissions, as many do with the limited data available today, which could lead firms to try and improve their ranking.

The Science study I referenced earlier illustrates the opportunity there. The authors analyzed voluntarily reported emissions data for nearly 15,000 publicly traded companies. After normalizing the data by calculating it as a fraction of those firms’ operating profits, emissions varied widely even within each industry, with medians that were much lower than the means. They found that if all firms with emissions above their industry’s median made reductions to achieve the median, total emissions would decline by more than 70%.

A number of companies have come out in support of the California bills, like Microsoft, Ikea, and some of the biggest trade groups representing American clothing brands. There has also been intense opposition from agricultural and food businesses, airlines, cement companies, chambers of commerce, and the Western States Petroleum Association, which represents the oil and gas industry. Opponents have spent more than $7 million on lobbying efforts, according to an analysis by The Lever’s Rebecca Burns.

But it seems that even if the California bills don’t pass, it’s only a matter of time before companies face similar requirements elsewhere. The European Union is close to finalizing standards for emissions disclosure that will apply to some 50,000 companies, including many headquartered in the United States, beginning in 2024. In the U.S., the Biden administration’s “Buy Clean” initiative requires the government to procure building materials that meet certain carbon thresholds, meaning manufacturers will have to measure and report their emissions. A number of states have passed or are contemplating similar programs. There are also the upcoming SEC rules I mentioned earlier.

“When you take a step back, it is an unequivocal trend that the world is moving to more mandatory climate disclosure,” said Rothstein.

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