California wants to find out.
If you order a company to reveal how much it pollutes, would it clean up its act? And if a business has to chalk out all the ways extreme weather and rising sea levels hurt its bottom line, will that force it to better prepare?
California certainly thinks so. The Golden State recently enacted two climate laws. One would make billion-dollar businesses in the state — the likes of Apple, Google, Walmart, and Chevron, more than 5,300 companies in total — disclose their greenhouse gas emissions publicly. The second requires companies making more than $500 million a year, applying to more than 10,000 companies, to report their climate-related financial risks.
To limit climate change, simply getting a handle on where heat-trapping gasses are coming from is a critical step. And figuring out how rising average temperatures will hurt businesses could make the cost-benefit case for investing in more action on climate change right now.
That’s why several states, the US federal government, and some other countries have been exploring forms of climate change disclosure rules, reporting their tallies to independent monitoring groups. And many companies have already started publishing their numbers.
“Already today, issuers are making climate risk disclosures, and investors are making investment decisions based on those disclosures,” Gary Gensler, the chair of the Securities and Exchange Commission, said at a Treasury Department meeting in July. “Further, investors representing tens of trillions of dollars in assets are making decisions relying on those disclosures.”
However, California’s latest laws go further than most other climate reporting requirements on the books in the US. In particular, the new greenhouse gas accounting law requires big companies to measure their scope 3 greenhouse gas emissions. These are the indirect emissions from an organization, including things like the carbon dioxide output from employees commuting to work, pollution from shipping, or the energy needed to power their products. A company’s scope 3 emissions can be more than 11 times greater than its direct emissions.
By including this category, it expands the spotlight beyond major manufacturers and fossil fuel companies to envelop businesses that don’t often face scrutiny for their impact on the climate. Tech companies, financial firms, and retailers may not have smokestacks coming out of their data centers, office towers, and stores, but it can still take a lot of greenhouse gasses to keep their supply chains moving.
“It has changed the conversation for people who are sitting on the fence who are not the Exxons or the Chevrons — people who haven’t been pressured as much — to start thinking about these issues,” said Shivaram Rajgopal, a professor of accounting and auditing at the Columbia Business School.
For companies whose raw materials, warehouses, and operations sprawl across the world, calculating these numbers can quickly turn into an expensive ordeal. Accounting for the business impact of rising average temperatures is also tricky and costly since it requires an accurate estimate of where things stand and then simulating the knock-on effects of different climate change scenarios, like higher insurance premiums due to wildfire risk. In signing statements for both bills, California Gov. Gavin Newsom expressed concern about the financial pain the new rules could inflict and directed state regulators to monitor compliance costs.
But some major corporations have backed these measures, including REI, Adobe, Microsoft, and IKEA, companies that are already voluntarily reporting their emissions and climate risks. In an August letter, these companies said California’s new rules will help spur laggards to act and “ensure economy-wide accountability and action.”
The question, then, is how big an impact this will have.
California is one state out of 50, but it is the largest one and has the biggest economy so its rules can change the game across the country and the world. However, policies are fragmented across the states. While California is pushing businesses to do more on climate change, states like Texas and Florida are penalizing companies that are cutting back on investments in fossil fuels.
The new rules in California may also be too hasty, even for California. Gov. Newsom wrote that “the implementation deadlines in this [emissions disclosure] bill are likely infeasible, and the reporting protocol specified could result in inconsistent reporting across businesses subject to the measure.” The legislature and state regulators will therefore have to go back to revise their timelines and hammer out more details.
The SEC is now proposing to harmonize emissions reporting and risk disclosure rules across the country. But it has triggered a vast right-wing campaign against this initiative, with some business groups arguing that making companies publish their climate data violates the First Amendment. “Groups like the US Chamber of Commerce, the National Association of Manufacturers, Americans for Prosperity, and the Competitive Enterprise Institute have flooded the SEC with comments that argue company free speech would be violated,” wrote Vox’s Rebecca Leber.
I recently co-lead a letter with @RepAdamSchiff and 24 members of the California Delegation urging @GaryGensler to ensure that large corporations must keep informing investors and the public about their environmental impact.
Learn more: https://t.co/qz63BHINZs
— Rep. Juan Vargas (@RepJuanVargas) October 12, 2023
The US Federal Reserve has also asked major banks to launch an experiment on how they will cope with climate change-related shocks to the economy, as well as examine what will happen to their portfolios as more businesses switch away from fossil fuels toward cleaner energy.
Meanwhile, the European Union has implemented its own climate reporting rules for big businesses. The EU’s rules go even further, requiring companies to also publish their impacts on communities, biodiversity, and human rights. And it applies to all but the tiniest of companies, so upward of 50,000 businesses could be subject to the EU’s disclosure checklist.
So, even if disclosure regulations in the US get watered down or blocked in the courts, companies that do business in multiple countries will likely face some kind of reporting requirement; it would behoove them to start tallying up their emissions and risks.
And while monitoring and disclosure is an important fist step for addressing climate change, it’s only a step. A paper published in the journal Science in August noted that disclosure rules could help policymakers craft further, more targeted regulations that lead to direct emissions reductions. Exactly how much of an impact this will have on investments and climate pollution is not clear. Environmental activists argue that these measures need further backing with regulations that ratchet down fossil fuel production and consumption overall.
The SEC is expected to publish its climate disclosure rules in the coming months. It’s not certain how strict the final rules will be, but it shows that regulators are paying attention, which in turn could change how everyone does business. And California will be an important laboratory for how these rules play out. According to Newsom, the regulations demonstrate “California’s continued leadership with bold responses to the climate crisis, turning information transparency into climate action.”