Tech Giants and Oil Companies Face Stringent Climate Reporting Rules in California

California is set to introduce groundbreaking regulations requiring the world’s largest public and private companies to monitor and report their greenhouse gas emissions extensively, even encompassing emissions from supply chains, business travel, employee commutes, and product usage by customers. This will compel companies like Chevron to account for vehicle emissions from their gasoline and Apple to report the materials used in iPhones, marking a substantial shift from current federal and state reporting rules, which only cover select emissions from direct operations. California Governor Gavin Newsom signed two laws on October 7, 2023. The Climate Corporate Data Accountability Act mandates US companies with annual revenues exceeding $1 billion to report both direct and indirect greenhouse gas emissions starting in 2026 and 2027. The Climate-Related Financial Risk Act will require companies with revenues over $500 million to report financial risks related to climate change and risk mitigation strategies.

While the California Chamber of Commerce opposed these regulations on the grounds of increased costs, major corporations such as Microsoft, Apple, Salesforce, and Patagonia have endorsed them. Many of these companies are already preparing for mandatory disclosure rules. Close to two-thirds of S&P 500 companies voluntarily report to CDP (Carbon Disclosure Project), a nonprofit that surveys companies on behalf of institutional investors about carbon management and emissions reduction plans. Moreover, companies often face similar reporting requirements in various regions, including the European Union, the United Kingdom, New Zealand, Singapore, and cities like Hong Kong. Some US firms have begun complying with the EU’s Sustainable Finance Disclosure Regulation, which mandates reporting on how sustainability risks influence investment decision-making.

California, as the world’s fifth-largest economy, wields significant global influence, and its new laws are poised to establish climate disclosures as standard practice. This is particularly relevant for multinational corporations with subsidiaries that were not previously required to report emissions. California’s history of serving as a testbed for future federal US policies is well-documented. While the US government is considering broader emissions reporting requirements, California’s new regulations go further than either the proposed corporate climate disclosure rules by the US Securities and Exchange Commission or President Joe Biden’s disclosure rules for federal contractors.

One contentious aspect of these new regulations is the reporting of scope 3 emissions, which are emissions originating from a company’s suppliers and the use of its products by consumers. These emissions are notoriously challenging to track accurately. California’s emissions reporting law gives the California Air Resources Board the authority to allow some leeway in scope 3 reporting, as long as it is done with a reasonable basis and disclosed in good faith. It is important to note that the regulations currently do not require companies to reduce these emissions but mandate their reporting, which can, in turn, highlight areas where companies could apply pressure to encourage emissions reductions.

The effectiveness of climate disclosure rules in reducing emissions is a subject of debate. Voluntary carbon disclosure systems like CDP, which focus on corporate sustainability outputs such as science-based emissions targets, have been found to be less effective than those focusing on actual carbon emissions. For example, companies receiving A or B grades from CDP could still increase their entity-wide carbon emissions, particularly when not facing regulatory pressure. On the contrary, a study of the UK’s 2013 disclosure mandate for UK-incorporated listed firms revealed that companies reduced their operational emissions by approximately 8% compared to a control group, with no significant changes to their profitability. Reporting emissions provides companies with crucial insights into operational and supply chain inefficiencies not previously apparent.

In conclusion, the success of a disclosure program, whether voluntary or mandatory, hinges on its design, emphasizing consistency, comparability, and accountability. Such characteristics allow companies to demonstrate the genuineness of their climate commitments and actions, preventing them from being perceived as mere greenwashing efforts.