Business Groups Challenge California Climate Reporting Law on Constitutional Grounds
A coalition of business groups filed a lawsuit challenging SB 253 and SB 261, two new California laws that require companies to report greenhouse gas emissions (GHG) and climate risks. The lawsuit contends that the laws violate the First Amendment by compelling speech on a “politically controversial” topic and that the Clean Air Act preempts California’s “de facto regulations of greenhouse-gas emissions nationwide.”
The U.S. Chamber of Commerce, the American Farm Bureau Federation, California Chamber of Commerce, Central Valley Business Federation, Los Angeles County Business Federation and Western Growers Association filed the suit in federal court, asking the court to block California from implementing or enforcing the laws.
A Constitutional Challenge
SB 253 requires companies with revenues of more than $1 billion to report their greenhouse gas (GHG) emissions related to both operations and their supply chain starting in 2026. SB 261 requires companies with annual revenue of more than $500 million and that do business in California to disclose publicly their company’s climate-related financial risks and plan to address them. The report will be due on a biennial basis with the first report due on or before January 1, 2026. (See GHG Emissions Reporting Bill Signed into Law and Climate-Related Financial Risk Act Enacted.)
The plaintiffs argued the reporting requirement violates the First Amendment. The law “forces thousands of companies to engage in controversial speech that they do not wish to make, untethered to any commercial purpose or transaction,” the complaint states. “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 plaintiffs also argued that, by requiring reporting on out-of-state emissions, California is attempting to act as a national emissions regulator. “Because the new disclosure requirements of S.B. 253 and 261 operate as de facto regulations of greenhouse-gas emissions nationwide,” the complaint states, “they are precluded by the Clean Air Act and are invalid under the Dormant Commerce Clause and principles of federalism.”
The California Effect
SB 253 is the first mandatory climate emissions reporting rule in the United States.[1] Legislators in New York have introduced similar reporting requirements and other states are expected to follow.[2] There is concern that a growing number of state laws could produce a patchwork of reporting requirements for businesses that operate in multiple states. Nonetheless, large companies that operate in multiple states could adopt the California requirements nationwide. The so-called “California effect” in which the size of the California market gives its laws extraterritorial reach, would make California’s law the de factor standard.
The California laws also come as the U.S. Securities and Exchange Commission (SEC) is developing a proposed rule to require publicly traded companies to report climate and emissions information in securities filings.[3] Similarly, U.S. multinational companies could face carbon reporting rules from the European Union that include additional types of disclosures.