Flag of California

California Air Resources Board Receives Legal Challenge to the State’s New Climate Disclosure Laws

Last week, the California Air Resources Board (CARB) was named as a defendant in a new U.S. District Court, Central District of California lawsuit challenging California’s two new climate disclosure and financial reporting laws introduced late in 2023 — Senate bills SB 253 and SB 261.

The case is Chamber of Com. Of the U.S. v. Calif. Air. Res. Bd., C.D. Cal., No. 2:24-cv-00801, complaint 1/30/20. The basis for plaintiffs’ lawsuit claims the two new laws unconstitutionally require disclosure by qualifying public and privately held companies of their carbon emissions and their climate-related financial risk. The six named plaintiffs to the lawsuit, who represent several businesses and industry association groups, allege the CARB’s new laws violate, at a minimum, the constitution’s First Amendment, Commerce Clause, and the Supremacy Clause.

Plaintiffs are represented by the attorneys at the Gibson, Dunn & Crutcher LLP law firm. Along with the CARB, the lawsuit also names CARB’s chair and executive officer as defendants.

“Businesses and government need to work together to address the problem,” and that requires policies that are practical, flexible, predictable, and durable. California’s corporate disclosure laws are the opposite of that and violate the First Amendment by forcing businesses to engage in subjective speech,” said Tom Quaadman, an executive vice president at the U.S. Chamber of Commerce, which filed the lawsuit.

The Environmental Law Monitor first reported on these two new first-of-their-kind pieces of legislation in November 2023. Signed into law in October, both SB 253 (otherwise known as the Climate Corporate Data Accountability Act) and SB 261 (otherwise known as the Climate-Related Financial Risk Act) require large companies doing business in California to publish a wide-array of climate emissions information. The goal of both laws is to force companies hoping to make money in the Golden State to become accountable toward what carbon footprint they make within its borders as well as towards their climate-related financial risks.

Originally introduced by California Sen. Scott Weiner, SB 253 focuses on companies (public or private), regardless of where they are domiciled in the United States, provided they make over a $1 billion in total annual revenue and do business in California. For those companies that meet these criteria, starting in 2026 they were to be required to start annually reporting to the CARB their Scope 1 and Scope 2 greenhouse gas emissions. In 2027, they would also have to start reporting their Scope 3 emissions. CARB was given authority under SB 253 to dole out administrative penalties to companies that failed to meet these disclosure requirements. The penalties could reach up to $500,000 for the most egregious violators of the reporting requirements.

Simultaneously enacted SB 261, introduced by Californian Sen. Henry Stern, mandated that affected companies both begin creating and disclosing a climate-related financial risk report to CARB every other year. SB 261 arguably affects more companies, as it applies to companies formed anywhere in the United States and that make a total annual revenue of more than $500 million and that do business in California. These climate-related financial risk reports essentially must include the company’s climate-related financial risks as determined by the Task Force on Climate-Related Financial Disclosures recommendations and the measures that company had taken to reduce and adapt to climate-related financial risks.

It is worth noting that while these two laws of their kind from any state, the U.S. Securities and Exchange Commission is considering implementing similar disclosure rules for publicly traded companies.

So, what do the plaintiffs in this lawsuit allege exactly? Specifically, their lawsuit claims that both SB 253 and SB 261 violate the named plaintiffs’ Constitutional rights by forcing them to engage in compelled speech related to climate change. The complaint seeks declaratory and injunctive relief from the federal court that would prevent CARB from taking any action, albeit through administrative penalties or otherwise, to enforce either of these two disclosure laws beginning in 2026. They’re also asking the federal court to declare that the laws are lacking in both force and effect.

The lawsuit espouses several arguments in support of their requested relief. For starters, plaintiffs allege the laws violate their First Amendment rights by compelling them to make speculative, noncommercial, controversial, and politically charged statements that they would otherwise not make. According to the lawsuit, SB 261 fails to describe its key term — “climate-related financial risk” — with enough specificity thereby forcing the affected companies to make “high-stakes, public guesses” on a politically polarizing subject.

“It forces thousands of companies to engage in controversial speech that they do not wish to make, untethered to any commercial purpose or transaction. And it does all this for the explicit purpose of placing political and economic pressure on companies to ‘encourage’ them to conform their behavior to the political wishes of the State,” the lawsuit says.

In addition to the First Amendment argument, plaintiffs in the lawsuit also allege that SB 253 and SB 261 operate as impermissible de facto regulations on nationwide greenhouse-gas emissions under the Clean Air Act and Dormant Commerce Clause. The complaint mentions farmers in Missouri and Texas who are concerned they will be saddled with burdensome and costly reporting requirements even if they do not sell directly to California companies. They would be affected, the lawsuit argues, because they are in the supply chain for companies that ultimately have to report under the new laws.

SB 261’s criteria alone potentially implicate nearly 10,000 businesses that conduct business in California. And most of the costs of this and SB 235, the lawsuit argues, will fall on the smaller and more medium-sized companies that lack the means to satisfy reporting requirements to their supply chain partners.

Shortly after the lawsuit was filed, state Sen. Scott Wiener, who as a reminder authored SB 253, called the lawsuit “straight up climate denial” and described the First Amendment argument as “bizarre and frivolous.”

We will keep track of this lawsuit as it progresses and continue to provide updates.