What's Happening?
The U.S. Court of Appeals for the Ninth Circuit, in a 2-1 decision in *Chamber of Commerce v. Sanchez*, ruled on November 9 that California's requirements for disclosing Scope 3 greenhouse gas (GHG) emissions under SB 253 and climate-related financial
risks under SB 261 likely violate the First Amendment. The court allowed the Scope 1 and Scope 2 reporting requirements of SB 253 to proceed, maintaining the November 10, 2026, reporting deadline for these direct and energy-related emissions. The court found that mandatory disclosure of Scope 1 and 2 emissions constitutes commercial speech and is sufficiently tailored to California's interests in informing investors and reducing emissions. However, Scope 3 reporting was deemed likely unconstitutional because emissions from independent third parties are not sufficiently connected to a reporting company's operations to be considered commercial speech. Similarly, SB 261's requirements for predictive and subjective judgments about climate risks were found to violate the First Amendment as noncommercial speech. The case has been remanded to the U.S. District Court for the Central District of California for further proceedings.
Why It's Important?
This Ninth Circuit decision has significant implications for corporate climate disclosure regulations across the U.S., particularly for companies operating in California with over $1 billion in annual revenue. By striking down the Scope 3 and SB 261 requirements, the court has limited the extent to which states can compel companies to disclose indirect emissions and subjective climate risk assessments. This ruling could influence future climate disclosure legislation and litigation, potentially setting a precedent for how commercial versus noncommercial speech is interpreted in the context of environmental regulations. While companies must still comply with Scope 1 and 2 reporting under SB 253, the injunction against Scope 3 and SB 261 reduces the immediate compliance burden and associated costs for many businesses. The dissenting opinion, which argued for enjoining all of SB 253, highlights a broader constitutional debate over compelled corporate disclosures that could lead to further appellate review, including by the Supreme Court, shaping the future of climate transparency in the U.S.
What's Next?
Covered companies must meet the November 10, 2026, deadline for Scope 1 and Scope 2 emissions reporting under SB 253. Enforcement of SB 261 was previously enjoined, and the Ninth Circuit's decision now provides preliminary relief against both SB 261 and the Scope 3 emissions reporting requirements. Companies should closely monitor further proceedings in the U.S. District Court for the Central District of California regarding severability of the Scope 3 provisions and injunctive relief. Additionally, any potential petitions for panel rehearing or rehearing en banc are due by November 23, 2026, which could further alter the legal landscape. Companies should also anticipate and monitor subsequent guidance from the California Air Resources Board (CARB) as it adapts to this ruling and any future legal developments. The broader constitutional dispute over compelled corporate disclosures may also attract review from higher courts.
Beyond the Headlines
This ruling delves into the complex intersection of corporate speech, environmental regulation, and constitutional law. The distinction drawn by the court between commercial and noncommercial speech in the context of climate disclosures could have far-reaching effects beyond California, influencing how other states and potentially federal agencies approach mandatory environmental reporting. The decision highlights the tension between a state's interest in promoting transparency and mitigating climate change, and corporations' First Amendment rights. The debate over whether company-level emissions disclosures constitute commercial speech, even if investors find them useful, points to a fundamental legal question about the nature and scope of corporate communication. This legal challenge could ultimately redefine the boundaries of corporate accountability in addressing climate change, potentially shifting the burden or nature of disclosure requirements in the long term. The outcome of this case and subsequent legal challenges will be critical in shaping the future of climate governance and corporate responsibility in the U.S.
