On Feb. 9 the comment period for the final draft regulations for California’s new climate disclosure laws ended. The first deadlines for compliance are coming up later this year, giving investors what they have long sought: standardized, comparable data on companies’ exposure to financially material climate risks.
Pending any changes to the California Air Resources Board’s regulations, the Climate Corporate Data Accountability Act will take effect at the end of February. Most companies doing business in California will need to report on their Scope 1 and Scope 2 emissions by August 10.
Enforcement of the second law, the Climate-related Financial Risk Act, is currently under a court-ordered pause as the Ninth Circuit Court considers arguments for an injunction sought by the U.S. Chamber of Commerce, which argues that reporting on climate risk would violate companies’ First Amendment rights by compelling speech.
Nevertheless, many companies are well on their way to assessing and measuring both emissions and risk. Systems evaluation and transparency can win over investors and uncover value to operations. Studies have shown that emissions levels are a proxy indicator of some risks, such as transition risk and certain physical risks. That’s why the vast majority of large, publicly traded companies already produce such reports.
“Companies that report can often get better access to capital,” said Julia Millot, who leads carbon accounting and target setting at consultancy Carbon Direct. “It is a derisking mechanism.”
“We think consistent sustainability disclosure is critical information for investors,” said Edward Mason, head of public markets engagement at asset manager Generation Investment Management. While “it would be preferable to have regulation done at the national level,” he said, “it is very welcome to us that California is taking action to mandate disclosure.”
Visibility = success
The new regulations direct companies to use the International Sustainable Standards Board’s (ISSB) IFRS-S2, which requires them to disclose risks and opportunities that could affect their cash flow and access to capital, as their reporting framework. Companies operating in Europe also use the ISSB standard to comply with the European Union’s disclosure regulation, which took effect in 2024.
As physical risks from extreme weather disasters increase within a global economy dependent on complex supply chains, companies that understand what’s going on across their value chains will succeed. “The companies that can articulate this are the ones that will retain investors’ confidence,” said Mason.
More than half of the comments received by the California Air Resources Board supported the rules, according to a Ceres analysis, and only 9 percent expressed outright opposition. Opponents include the Western States Petroleum Association and some oil and gas drillers, along with the American Farm Bureau Federation, the Western Growers Association and the California Chamber of Commerce, which joined the lawsuit filed by the U.S. Chamber. Farm groups have said collecting data on Scope 3 emissions would be too complicated and costly.
Institutional investors overwhelmingly support climate disclosure rules. When the U.S. Securities and Exchange Commission (SEC) held proceedings to consider a rule mandating that public companies disclose climate risk and emissions, 310 institutional investors commented in favor, according to an analysis by the nonprofit Ceres.
“More investors wrote to the SEC on this issue — climate disclosure – than anything else since the SEC was established in 1933, and over 95 percent of investors supported it,” said Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets. Nearly all of the commenters favored requiring disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD).
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