California’s Landmark Climate Disclosure Laws Challenged by Business Groups

Major U.S. business groups sued California on Tuesday seeking to overturn the state’s new sweeping climate disclosure laws that require companies to publicly report their greenhouse gas emissions and climate-related financial risks.

The lawsuit was filed in Los Angeles federal court by the biggest U.S. business lobby, the U.S. Chamber of Commerce, along with the American Farm Bureau Federation and several California business groups. They claim the first-of-their-kind laws will impose “massive” costs on businesses and violate free speech protections in the U.S. Constitution by compelling the disclosures.

The groups also claim the laws are invalid because they act as de facto national emissions regulations. Federal regulators are exclusively empowered to regulate emissions under the U.S. Clean Air Act, and are best situated to develop regulations that apply consistently across the country, the groups said in the lawsuit.

“California’s laws usurp the role of federal regulators, opening the door for other states to take an opposite approach to disclosure, leaving businesses and their investors caught in the middle of a political scrap between states,” said Tom Quaadman, an executive director at the U.S. Chamber of Commerce, in a statement.

The California Air Resources Board, which was named as a defendant in the lawsuit, declined to comment.

Signed into law last year by Democratic Governor Gavin Newsom, the two laws aim to help the public and investors evaluate climate-related claims by major companies.

One of the challenged laws requires public and private companies that are active in the state and generate revenue of more than $1 billion annually to publish an extensive account of their carbon emissions starting in 2026. The law requires the disclosure of both the companies’ own emissions and indirect emissions by their suppliers and customers, also known as Scope 3 emissions.

The other challenged law requires companies that operate in the state with over $500 million in revenue to disclose climate-related financial risks and strategies to mitigate that risk.

The laws, which were endorsed by some major companies, like Apple AAPL.O, Ikea and Microsoft MSFT.O, are being challenged as the U.S. Securities and Exchange Commission is working to finalize its own climate disclosure rules.

A draft of the federal rules released in 2022 would require public companies to disclose their own emissions as well as Scope 3 emissions, but SEC officials have privately indicated the agency is considering backing away from requiring disclosure of those indirect emissions due to concerns that including them will make rules vulnerable to legal challenges.

For many businesses, Scope 3 emissions account for 70% of their carbon footprint, according to the consulting firm Deloitte.

(Reporting by Clark Mindock, Editing by Alexia Garamfalvi, Cynthia Osterman and Marguerita Choy)