As California goes ESG, will the nation follow?

The “green central planners” are at it again. On their march to handcuffing the free marketplace with ESG mandates and stringent reporting requirements, they seek to hold corporations for their contributions to the climate. California estimates that more than 70 percent of greenhouse gases, or GHGs, are attributable to just 100 companies. Yet these sweeping regulations will affect thousands of firms.

On the heels of Europe’s sweeping reporting requirements passed in July, California has enacted two new laws that will impact public and private companies doing business in that state: The Climate Corporate Data Accountability Act, which affects businesses with annual revenues of $1 billion or more, and the Climate-Related Financial Risk Act, which impacts businesses earning in excess of $500 million yearly. It is estimated that this will impact more than 10,000 businesses.

CCDAA will require businesses to report their GHG emissions under the EPA’s Scope 1,2, and 3 goals. Phased-in reporting commences in 2025:

Scope 1 emissions are direct GHG emissions from sources controlled or owned by an organization (e.g., emissions associated with fuel combustion in boilers, furnaces, vehicles). 

Scope 2 emissions are indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling.

Scope 3 emissions result from activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its value chain. Scope 3 emissions, which often represent the majority of an organization’s GHG emissions, include supply chains, business travel, employee computing, procurement, waste, and water consumption. 

CRFRA will require entities to disclose their climate-related financial risks and measures taken to mitigate these reported financial risks. These risks are divided into two major categories:

Transition risks. Transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change. Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risks to organizations.

Physical risks resulting from climate change can entail acute risks (event-driven, as from extreme weather) or chronic risks (from longer-term shifts in climate patterns, such as higher temperatures or rising sea levels). They may have financial implications for organizations, such as direct damage to assets and indirect impacts from supply chain disruption. 

The SEC is weighing both the European and the California rules. However, the SEC’s rules will apply only to public companies. They do not utilize the GHG protocol in reporting emissions. They will only require Scope 3 reporting when materials are used in reduction targets/goals. In fact, the SEC may not include Scope 3 emissions in its plan at this time. 

There is debate whether the SEC has the authority to enact such rules and how the U.S. Supreme Court might interpret these. California’s implementation of their regulations is within its authority. Undoubtedly other Democratic-controlled states will do likewise. 

Companies doing business in those states will be challenged with implementing and complying with these ESG laws. Coordinating data collection, establishing reporting systems and practices, and documenting key metrics will further burden most firms and tax their resources, whether outsourced or conducted internally. Furthermore, certification and assurance will be required along with public reporting. Falling short of imposed goals or levels may expose organizations to reputational damage and civil penalties. 

The losers will be shareholders as the scales are weighted toward stakeholders who give preference to non-ROI aspects of a company’s core business — providing products and services to its customers in return for a profit. 

California, the boa constrictor of capitalism, once again strikes. When will businesses stand up and fight? Perhaps it’s easier to flee.