Episode 42: Understanding the Latest Regulations: California SB 253 and 261, AB 1305, and SEC Climate Disclosure Rules with Tanya Nesbitt from Thompson Hine
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In this episode, Tad and Julianna sit down with Tanya Nesbitt, Partner at Thompson Hine, to discuss the evolving landscape of climate regulations and litigation; specifically California Senate Bills 253 and 261, Assembly Bill 1305, and the SEC Climate Disclosure Rules. Tanya explains the rise in climate-related lawsuits, the growing scrutiny around voluntary carbon offset disclosures, and the complexities of corporate sustainability reporting. Tune in to learn how these emerging legal challenges could impact your organization’s sustainability initiatives and reporting practices.
*This episode was recorded on 9/13/24 and one major update has occurred since then: California Governor Gavin Newsom signed the Climate Disclosure Bill into law with the 2026 start date intact. Click here to read more about it.
We've included the full transcription of the episode below for your reference.
introduce yourself and tell us about your career path.
“Sure. Thanks, Julianna. I'm happy to join you guys this morning. So, I'm currently a partner at Thompson Hine in their Atlanta and DC offices, and I'm part of their environmental and ESG practice groups. A lot of my work focuses on litigation and compliance related to most of the major federal environmental statutes like the Clean Water Act, Superfund, and hazardous waste laws. I also help clients with environmental permitting issues such as NEPA, and I advise clients about upcoming ESG regulations. So, there are many of those that fall under state law and that practice is broad because it encompasses things like recyclability legislation. We have a lot of clients, for example, that produce products that use plastic in some form, or they have products that may have batteries that are recyclable. So, it's a broad and interdisciplinary practice.”
Can you give an overview of the California Senate Bill 253 and 261?
“For those of us in this space, it's a bit challenging to stay up to date on all the twists and turns with the California climate saga. However, climate legislation SB 253 and 261, are the most extensive GHG disclosure laws that we currently have in the country. SB 253, which is the Climate Corporate Data Accountability Act, requires both private and public companies doing business in California above the threshold of $1 Billion in revenue to report both Scope 1, 2, and 3 GHG emissions. The inclusion of Scope 3 is sort of what makes the regulations particularly challenging because those compliance requirements are going to fall to smaller and medium-sized businesses through the supply chain.
So, that's why a lot of clients initially may say, "Hey, we're below that billion-dollar revenue threshold, and so are we going to have to contend with this?" and the answer is maybe, right? If they are in the supply chain of a company that meets the reporting entity definition, they're going to turn to you for a lot of information, so you're going to have to be ready to provide that.
SB 261, which is the Climate-Related Financial Risk Act, requires companies doing business in California with at least $500 Million in revenue to report on their climate-related financial risk and measures taken to reduce and adapt to such risk. This bill defines climate-related financial risk as ‘material risk of harm to immediate and long-term financial outcomes due to physical and transition risk.’ This includes things like:
Corporate operations
Your supply chain
Employee health and safety
Your financial investments
Shareholder value
Consumer demand
Economic health
Those disclosures under SB 261 must be reported in accordance with the final report of recommendations of the Task Force on Climate-Related Financial Disclosures, or TCFD. TCFD's recommendations include disclosures about climate-related governance, and strategy and risk management metrics. I think the reaction from companies is that SB 261 is going to also impact both private and public companies because of the low dollar threshold.”
who does the California legislation apply to and what are the timelines for reporting?
“This has not been a straightforward process and part of the concern and frustration from the community is that we still do not have regulation, so there is a lot of uncertainty surrounding the definition of a ‘reporting entity.’ The bill tasked the California Air and Resources Board (CARB) with creating regulations, and they have not yet completed that job. The bill defines reporting entities to include partnerships, corporations, limited liability companies, and other business entities formed under the laws of the U.S., the District of Columbia, or an act of Congress. We do know that the bill is not meant to apply to foreign-formed entities, and we think that subsidiaries of non-U.S. entities, however, would be included, if they would meet the revenue threshold and are doing business in California.
I know there was a lot of uncertainty as to whether individual revenue for the subsidiaries could be counted to meet that overall threshold number. The bill, however, does not define what it means to do business in California. But if you look at the state senate floor analysis, they give three parameters of what it would mean for an entity to do business in California. The first is that the entity is engaged in any transaction for the purpose of financial gain in California. The second is that the entity is organized or commercially domiciled in California. Then the third is, the entity is selling products in California. Do you have California sales? Do you own property in California? Or do you have payroll in California that exceeds specified amounts on an annual basis?
So to get back to Julianna's question about when we need to worry about these obligations for reporting purposes, the current text of the bill requires that Scope 1 and 2 emissions would start in 2026 and you'd be reporting for the previous fiscal year, so it'd be 2025 data. For Scope 3, you would begin in 2027. And for SB 261, it's a biannual reporting requirement and begins in 2026.”
SOme of this legislation does require third-party assurance. Can you elaborate on that?
“SB 261 doesn't have an assurance requirement, but SB 253 does. That would require a limited assurance for the Scope 1 and 2 disclosures in the first year of reporting. The reasonable assurance requirements on Scope 1 and 2 would be required starting in 2030. Assurance providers have to be independent and have significant experience in measuring, analyzing, and reporting emissions disclosures. An entity will need to submit a copy of the Assurance Report in the name of the assurance provider to the admissions reporting organization.”
We understand that there is a lot to be done in California to get this fully implemented. Do you have any insights on what's occurring there?
“When the bills initially got passed, there was a strong reaction regarding how feasible these deadlines were. I think from a legislative perspective, responding and saying, "Is this even enough time for businesses to be able to comply?” And obviously, you know you have an agency here that has a huge task in developing regulations, and the governor didn't immediately allocate funding for them to promulgate those regulations. It wasn't until this spring that CARB received $9 million to do this job. When the governor signed the bills, initially he made some commentary about needing to make them more workable and more reasonable, so in June, the Newsom administration proposed some amendments to the bill, trying to delay reporting by two-year periods and looking at ways to phase in the Scope 3 emissions requirement. There was a lot of confusion as to why SB 261, for example, sort of allowed consolidating reporting if you have a parent company that has subsidiaries that qualify. Why does a subsidiary have to issue its individual report? That consolidation was allowed in 261, but 253 for whatever reason didn't allow for the same. So, the governor sort of offered those revisions.
The original authors of the climate disclosure legislation package were not on board with them for whatever reason. I'm not sure what's behind the scenes there, but the authors later came out with their own version of revisions in a bill known as SB 219. So that bill has many of the same amendments that the governor had proposed, but I think instead of a two-year delay, they proposed giving CARB another six months, essentially, to develop regulations. They kept the idea of having CARB develop a schedule for Scope 3 emissions so that they would be phased in.
So that bill passed both sides of the legislature, essentially the House and Senate in California, and now it's in a process known as engrossment and enrolling where the legislature looks at the amendment for accuracy, and then the bill will be sent to the governor for signature. Governor Newsom has until September 30th to either sign it or veto it.
So that's currently where the amendments to the California climate disclosure package sit currently.”
*As of 10/1/24 Governor Newsom has signed SB 219. Click here to learn more.
there's an assembly bill in California, 1305, regarding voluntary carbon market disclosures. Can you explain a little bit about that bill?
“Yeah, so not the legislature's finest moment. I think this bill last year caused a lot of panic because it came out of nowhere and there's still a lot of head scratching as to what it means and what the intention of the legislature was. AB 1305 requires entities doing business in California to disclose certain information on their websites about the use or sale of voluntary carbon offsets and carbon neutrality claims. So, it would apply to entities that market or sell voluntary carbon offsets or VCO’s in California. If you use VCO’s sold in California, or you make claims while doing business in California about achieving net zero emissions or carbon neutrality.
The bill became effective in January of 2024, and it requires these disclosures to be updated on an annual basis, particularly on your website if you are making claims about carbon neutrality or net zero emissions. The bill also empowers customers essentially to seek disclosure of information from an entity as to the basis for their claims of net zero emissions or carbon neutrality.
There has been a pending amendment to AB 1305 for several months, and the goal of the amendment would be to clarify that entities making claims regarding the achievement of net zero emissions or carbon neutrality, or just generally implying that a product does not add net carbon dioxide or GHG emissions, must make a disclosure and then revise the definition of renewable energy certificate. I think there was some conversation as to what should be included in the definition of VCO or the voluntary carbon offset definition that the bill was using. The effective date proposed with the new amendment would be January 1st of 2025.
Unfortunately, for whatever reason, the legislature was not able to get to this bill before the end of the last session, which just ended in August. The thinking is that it will be put up for a vote in the next legislative session.”
I'm hearing rumors in the world that other states are looking at similar Regulations to California. Is that true?
“That's correct. New York and Illinois, for example, do have similar bills pending regarding the reporting of carbon inventory data. Part of me wonders, too, if other states are just waiting to see what happens before they would go forward with proposed legislation depending on the outcome of the courts.”
the Securities and Exchange Commission has published legislation on climate-related disclosures for investors. Can you give us an overview of this legislation?
“The SEC Climate Disclosure Rules deals with only Scope 1 and 2 emissions reporting, and that is also subject to a materiality requirement, and it's limited to larger publicly traded companies. Those companies will have to provide certain information regarding emissions, including the methodology, inputs, and assumptions used to calculate their emissions. The disclosures can be filed, though, on a delayed basis, so they can be filed in the second quarter form, for example, rather than the annual report.
It does require an attestation report covering the disclosures. Companies are also required to disclose climate-related risks that are reasonably likely to have material impact on them, including their business strategy, the results of their operations, financial conditions, their strategy and business models, etc. Then they also must consider how such risks have materially impacted or are reasonably likely to materially impact their business operations or financial conditions.
If a company has undertaken activities to mitigate or adapt to climate-related risks, they'll have to disclose that in the form of a quantitative or qualitative description of any material expenditures incurred and any material impacts on their financial estimates and assumptions that resulted from the mitigation. Some key differences between the SEC and the California Climate Disclosure Package is that the SEC rule applies to SEC registrants, whereas California legislation applies to both public and private companies. SB 261 requires a TCFD-compliant report, whereas the SEC rules are based on disclosures recommended by TCFD.”
Can you tell our audience about what is happening in regard to these legal challenges?
“First looking at the SEC litigation, which began as nine lawsuits in six judicial circuits and then under the federal rules, it was consolidated in the Eighth Circuit pursuant to a lottery. Initially, it was the states on one side saying that the SEC rule went too far, and then environmental groups saying that the rule didn't go far enough. The initial draft rule did include Scope 3 emissions and then before the final rule was promulgated, the SEC took that out. Obviously, there was a lot of opposition to the inclusion of Scope 3 and so the SEC decided not to move forward with that as part of the final rulemaking.
Generally, the legal questions before the Eighth Circuit can be distilled to three points:
The first is whether the SEC has a statutory authority to adopt climate rules.
The second is whether the SEC acted reasonably in adopting the climate rules, whether it reasonably assessed the climate rules' economic impacts, and whether it satisfied here in the Administrative Procedure Act's procedural requirements.
The third question would be whether each of the climate rules is consistent with the First Amendment. We're seeing a lot of First Amendment challenges to climate disclosure legislation, both on the federal and state level.
In June of 2024, the environmental groups actually asked for a voluntary dismissal of their petitions. They essentially said that their efforts are best spent working outside of the litigation process to defend the SEC's fundamental authority to require climate-based disclosures. So they have now moved to the SEC side to support the rule.
Also in June, we received sort of opening briefs from the remaining petitioners in the case. There are also a number of IMECI, Curie, or parties that are intervening essentially from states and non-profits. There are a lot of different industry groups that have a stake in the outcome of the litigation, and they will be filing briefs essentially.
The briefs generally argue that the rule is arbitrary and capricious, that it exceeded the SEC's statutory authority, that it violated the major questions doctrine and violates the First Amendment, and that the SEC is acting outside of its authority. The SEC recently filed its brief last month. They are relying on the arguments that for over 90 years it has promulgated disclosure rules aimed at protecting investors.
We also know that the SEC intends to issue a new effective date and a phase-in period for the rule’s implementation in the Federal Register, obviously, if the rule survives. I think the legal understanding is that regardless of what the Eighth Circuit decides, this will eventually be appealed to the Supreme Court. We're expecting litigation probably for another year or so.”
What next steps would you recommend to our audience based on all this new legislation?
“Well, I think you must stay updated on the evolving regulatory requirements related to ESG reporting. Depending on your business, there are a lot of new regulations, for example, that are related to extended producer liability. There are just so many different vehicles related to ESG reporting that I think a company should be apprised upon.
Because ESG has been so politicized, a lot of the activity is happening on the state level. Particularly if you are doing business in all 50 states, there is going to be a lot of risk and compliance and you have to stay apprised as to what is happening. To do that you need to have a team that can help you. Part of this is obtaining legal counsel, but you're also going to need consultants that can help.
The consultant who writes your ESG report is going to be very different than the person who can help you with your carbon inventory. You're going to need the right person for the job, and you're going to need a timeline to be able to assess what those needs are. You can't start this tomorrow. You have to give yourself enough leeway, particularly with the carbon inventory work.
Because of where we are, like I said, with the politicization of these issues, it's going to be very difficult to predict which way the headwinds are going, and you don't want to get caught flat-footed in that process with looming compliance work to be done. You have to also remember that ESG is driven by stakeholders, and if your stakeholders want you to consider these issues, then that should be part of your materiality assessment and it is going to lead to some action the company is going to have to take.
It is a very complex and ever-evolving space, but I think companies have to be mindful of the many things I've mentioned. Always starting with the prioritization of assessing your stakeholders is the best place to start and then from there, beginning to build out of that.”
for our audience who wants to stay up to date on things, what is the best place for them to find this information?
There are a lot of publications such as ESG Today which does a pretty good job of looking at different industry regulations. Traditional news such as Wall Street Journal and Bloomberg also cover a lot of these things, although those require subscription-based services. Another good source is Harvard and Colombia's environmental clinic which regularly does high-level analyses regarding climate disclosure litigation. So those are very good high-level analyses if you're looking to get a little more into the weeds.
I generally also set up Google Alerts. That's an easy way to track the legislation. If you are, for example, zeroing in on a particular state or a particular bill, you can get alerts as the legislatures amend them or the bill advances.
About Tanya Nesbitt
Tanya is a nationally recognized formidable litigator who has litigated highly complex environmental matters. Her successes have earned her the distinction of Lawdragon 500’s Leading U.S. Environmental Lawyer. She collaborates with all her clients to find the best business solutions, whether it involves providing detailed strategic advice and tactics, counsel on the advertising and marketing of environmental benefit claims, or fighting for her clients in litigation.
Tanya has represented small and large businesses in environmental permitting, natural resource, land management and wildlife management matters in relation to federal public lands. She previously was a trial attorney with the U.S. Department of Justice’s Natural Resources Division, where she worked with the Bureau of Land Management and Forest Service on greater sage-grouse litigation among other matters. Before that, she was an Assistant United States Attorney for the U.S. Attorney’s Office in Washington, D.C.
Tanya currently serves as co-leader of the firm’s Greenwashing Defense & Litigation practice group. Click here to learn more about Tanya.
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