What's Happening?
The Ninth Circuit Court of Appeals has issued a significant ruling regarding California's climate disclosure laws, SB 253 and SB 261. In the case of United States Chamber of Commerce v. Sanchez, the court allowed California's Scope 1 (direct emissions)
and Scope 2 (emissions from purchased energy) greenhouse gas reporting requirements to proceed. However, the court blocked the State's Scope 3 (other emissions connected with the supply chain and products) and climate-related financial risk reporting requirements, stating they likely violate the First Amendment. This decision reverses a district court's denial of a preliminary injunction for these specific provisions. The court distinguished between Scope 1 and 2 data, which are measurable from a company's own operations and considered commercial speech, and Scope 3 data, which requires companies to compile and estimate information about third parties' activities, making it subject to stricter scrutiny. Similarly, SB 261, which mandates reports on climate-related financial risks and mitigation measures, was blocked because it asks companies to forecast uncertain future conditions and offer opinions, moving beyond objective facts.
Why It's Important?
This ruling provides substantial relief for manufacturers and automotive suppliers operating in California, particularly concerning the collection of greenhouse gas information throughout their supply chains. Scope 3 data collection has been identified as one of the most challenging and costly aspects of greenhouse gas reporting due to the involvement of hundreds or thousands of suppliers across multiple tiers. While companies must still prepare to report Scope 1 and Scope 2 emissions, the regulatory justification for extensive Scope 3 data collection under California law has been significantly weakened. This creates a critical distinction for suppliers: while California may no longer compel certain Scope 3 data, customers or other reporting regimes might still require the same information. Companies will need to carefully assess the origin of data requests to determine compliance obligations and protect confidential information. The decision also impacts companies preparing SB 261 reports, as those efforts now need reassessment.
What's Next?
Companies potentially covered by SB 253 should continue their preparations for reporting Scope 1 and Scope 2 emissions, maintaining their emissions inventories, supporting documentation, and reporting systems. However, companies that were undertaking extensive supplier outreach or implementing new systems solely to satisfy SB 253's Scope 3 requirements should reconsider the timing and scope of those efforts. Manufacturers and automotive suppliers must differentiate between California's statutory requirements and those imposed by customers (OEMs or Tier 1), other jurisdictions, or voluntary sustainability programs. The Ninth Circuit has remanded the case to the district court to determine if the Scope 3 provisions can be severed from the rest of SB 253, and further litigation remains a possibility. Companies should closely monitor these developments to adapt their compliance strategies accordingly.
Beyond the Headlines
The Ninth Circuit's decision highlights a critical legal and constitutional debate regarding the extent to which states can compel corporations to disclose information that extends beyond their direct operations and into speculative future assessments. By distinguishing between factual reporting (Scope 1 and 2) and estimations involving third parties or future opinions (Scope 3 and SB 261), the court has drawn a line based on First Amendment protections. This ruling could influence future climate disclosure legislation in other states, potentially leading to more narrowly tailored laws that focus on direct, verifiable emissions data. It also underscores the ongoing tension between state-level efforts to address climate change and corporate free speech rights, setting a precedent for how far regulatory bodies can go in mandating complex, supply-chain-wide data collection and forward-looking risk assessments. The decision may also prompt a shift in how companies approach sustainability reporting, prioritizing customer-driven or voluntary initiatives over potentially unconstitutional state mandates.
