For months, banks and other U.S. companies have been waiting for
But now the state of California appears poised to act first, which could complicate the reporting requirements for many banks — assuming the Golden State's legislation survives likely legal challenges.
Earlier this month, lawmakers in Sacramento passed two bills that would require larger companies that operate in California to report expansive measurements of their emissions, as well as to account for the financial risks of climate change.
Banking industry groups are taking issue with the inclusion of so-called Scope 3 emissions in the California legislation. Those are greenhouse gas emissions that result from the value chains of companies' products and services. In the case of banks, Scope 3 emissions may result from their financing activities.
Financial industry trade groups have also been arguing that the California requirements could conflict with the forthcoming SEC rules, as well as upcoming international standards.
"We strongly recommend that any California requirements align with, or be compatible with, federal standards or other international standards incorporated by U.S. authorities," the industry groups wrote in a recent letter to Democratic state Sen. Scott Wiener, who sponsored one of the bills.
The letter was signed by the American Bankers Association, the Bank Policy Institute, the California Bankers Association and the California Credit Union League, among other financial industry groups.
The California Bankers Association
Senate Bill 253, sponsored by Wiener, directs regulators to adopt rules by 2025 for companies that generate more than $1 billion in annual revenue and operate in California. Those companies would have to report various emissions measurements, including those associated with their financing activities.
The affected firms would also have to report Scope 1 emissions, which involve pollutants sourced directly from a company's operations, and Scope 2 emissions, which result from the generation of purchased energy.
The other piece of legislation, Senate Bill 261, was sponsored by Democratic state Sen. Henry Stern. It would require companies that do business in California — and have more than $500 million in annual revenue — to report on their climate-related financial risks and transition plans.
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The bills were written in a way that would not penalize companies headquartered in the nation's most populous state. Instead, they would apply broadly to large firms that do business in California.
Still, the bills could face court challenges based on a legal doctrine that bars states from placing undue burdens on interstate commerce, said Loyti Cheng, an attorney at the law firm Davis Polk & Wardwell.
The legislation's opponents may also argue that mandating climate disclosures violates the First Amendment's protection from compelled speech, Cheng said.
Thomas Gorman, a partner at Dorsey & Whitney, said that how courts respond to the likely legal challenges will have important implications. "These will be important decisions for regulating the environment," he said.
The California bills could also have an impact on the forthcoming SEC regulations, according to Joseph Grundfest, a former SEC commissioner. He said that climate disclosures mandated by other regulators are a "blessing for the SEC and not a problem."
"The commission can take advantage from these developments by refashioning its rule proposal, so that it doesn't itself require any company to measure Scope 1, Scope 2 or Scope 3 emissions," said Grundfest, who is a law and business professor at Stanford University.
"Instead, it can simply require efficient, low-cost aggregation and disclosure in one place of all of these other metrics, and thereby avoid a legal war over whether it has authority to demand emissions measurement by any company," he said.
The SEC issued draft rules in March 2022, but it has delayed releasing a final rule after receiving a high volume of public feedback.
Danielle Fugere, president and chief counsel of the environmental advocacy group As You Sow, argued that California's enactment of Senate Bill 253 will "shore up" the SEC's draft proposal.
"There's been a lot of discussion around whether Scope 3 requirements will be removed from the SEC's proposal," Fugere said, adding that she is hopeful that the California measure "will help the SEC stand firm."
