What's Happening?
The Ninth Circuit Court of Appeals has issued a ruling that partially reverses a lower court's denial of a preliminary injunction against California's landmark climate disclosure statutes: the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related
Financial Risk Act (SB 261). The court held that SB 253's requirements for reporting Scope 1 and Scope 2 greenhouse gas (GHG) emissions can be enforced. However, it paused the enforcement of Scope 3 emissions reporting under SB 253, finding it likely unconstitutional under the First Amendment. Similarly, the Ninth Circuit continued its preliminary injunction on SB 261 reporting, also citing probable First Amendment violations. The court determined that Scope 1 and 2 emissions data constitute commercial speech, as they are factual and relate to a company's operations and capital transactions. In contrast, Scope 3 emissions, which originate from suppliers and customers, were deemed noncommercial speech and not sufficiently tied to a company's own operations. The court also found SB 261's requirement for climate-related financial risk reports to compel ideological speech, as it necessitates companies to make 'predictive and normative judgments' on a 'politically fraught subject.' The case will now return to the district court to determine if the Scope 3 requirement can be separated from the rest of SB 253.
Why It's Important?
This ruling significantly impacts approximately 1,971 companies with over $1 billion in annual revenue and 2,675 companies with over $500 million in annual revenue doing business in California. The decision creates a bifurcated regulatory landscape for climate disclosures, allowing the enforcement of direct emissions reporting (Scope 1 and 2) while halting the more complex and far-reaching Scope 3 reporting. This could alleviate some compliance burdens for businesses, particularly those struggling to gather comprehensive data from their entire value chain. However, it also introduces uncertainty regarding the future of climate-related financial risk reporting and the full scope of emissions disclosures. The court's distinction between commercial and noncommercial speech in the context of environmental regulations sets a precedent that could influence future legislative efforts and legal challenges concerning corporate disclosures. Companies will need to continue their Scope 1 and 2 reporting efforts while monitoring the ongoing legal proceedings for Scope 3 and SB 261, potentially adjusting their data collection and reporting strategies accordingly.
What's Next?
The case will now proceed to the district court, which will decide whether the Scope 3 reporting requirement can be severed from the rest of SB 253. Companies are advised to continue complying with Scope 1 and 2 emissions reporting, as there is no injunction against these requirements. The California Air Resources Board (CARB) is also engaged in current rulemaking, and companies should monitor reporting deadlines for 2027 and fee assessments. While Scope 3 reporting is paused, companies are encouraged to preserve existing workstreams, as other international regulations (such as the EU Corporate Sustainability Reporting Directive and International Sustainability Standards Board rules) may still require value-chain data. For SB 261, reports are considered voluntary for now, but any voluntary reporting remains subject to standard securities and consumer-protection liability. Companies must also ensure consistency in their disclosures across various platforms, including SEC filings and sustainability reports, to manage greenwashing risks, despite the court's rejection of the state's greenwashing rationale.
Beyond the Headlines
The Ninth Circuit's ruling delves into the complex interplay between environmental regulation, corporate speech, and constitutional rights. By classifying Scope 3 emissions reporting and SB 261's financial risk disclosures as noncommercial or ideological speech, the court has raised fundamental questions about the extent to which states can compel companies to disclose information that extends beyond their direct operations or expresses a particular viewpoint on climate change. This decision could have broader implications for future attempts by states to mandate corporate disclosures on a range of social and environmental issues, potentially limiting the scope of such regulations if they are deemed to infringe upon First Amendment protections. The dissent's concern about the investor-information rationale justifying disclosures on sensitive topics like immigration status or political affiliation highlights the potential for this ruling to shape the boundaries of corporate transparency and governmental oversight in the U.S. business landscape.
