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California Poised To Enact Climate Disclosure Laws. What That Means for Investors.

Bills covering thousands of companies would reduce systemic risk, investors say.

The California State Assembly passed two sweeping bills addressing climate change this week—one that requires big companies that do business in California to disclose their greenhouse gas emissions, and a second that would require companies to report every year on their climate-related financial risk. Both address investor concerns about dealing with the risks to the global financial system that are posed by climate change.

The Climate Corporate Data Accountability Act, or SB 253, would require both public and private companies with revenues of at least $1 billion to disclose their so-called scope 1 and scope 2 emissions, which are those from sources that the company controls or from the electricity it consumes, by 2026. Beginning in 2027, the companies would need to report on so-called scope 3 emissions, which are from sources in its value chain that the company doesn’t control. These emissions cause global warming. SB 253 has already been approved by the California State Senate and must be signed by Gov. Gavin Newsom to become law.

The Climate-Related Financial Risk Act, or SB 261, would require companies with revenue of more than $500 million to report on climate-related risks. Amendments to SB 261 must also be approved by the senate before being signed by the governor. Senate approval “should not be a problem as they already passed a version of the bill,” says Helen Booth-Tobin, director, policy communications at Ceres, the climate advocacy organization.

Laws Affect Thousands of Public Companies and Private Ones, Too

Ceres estimates that SB 253 would apply to more than 5,300 companies and SB 261 would cover more than 10,000 companies.

“Ideally, this will set a precedent across the nation for investors everywhere,” says Kristin Hull, CEO of Nia Impact Capital. These are big requirements from a state that leads in initial public offerings and is the largest economy in the United States. “This climate disclosure brings more transparency to investors and absolutely reduces systemic risk.”

Emitters Will Need To Pay Premium to Investors

Julie Gorte, senior vice president for sustainable investing at Impax Asset Management, says, “What the investment community is working at doing is pricing climate risk. We need real assurance by 2030 … If [a company has] higher emissions, they’re at greater risk and I’m going to need a premium” to own such companies.

California’s actions come after the hottest summer on record, and after the U.S. experienced a record number of billion-dollar weather and climate disasters in the first eight months of 2023, according to the National Oceanic and Atmospheric Administration.

“We need to know more about physical risk and what companies are doing to understand, manage, and adapt,” Gorte says. “We have to be able to price those risks.”

Until now, companies have reported scope 1 and scope 2 emissions voluntarily. Scope 3 emissions, which account for the majority of emissions, are extremely difficult for companies to assess and report. California already has some caps on emissions. Last year, the state passed a law mandating net-zero carbon pollution by 2045.

In a statement, Danielle Fugere, president of As You Sow, an investor advocacy organization, said, “Clear and standardized reporting of greenhouse gas emissions is the bedrock of sound investor decision-making on climate risk. The California Legislature’s passage of SB 253 follows stringent regulatory disclosure requirements being developed in the EU and the U.K.”

California Climate Laws Will Be ‘Test Case’ for SEC

Meanwhile, sometime soon, the SEC is expected to release its finalized set of climate disclosure rules. (It released its proposed rules in 2022 and invited comment.) These include disclosures about scope 1, 2, and 3 emissions, as well as climate-related risks and their impacts on business and the company’s outlook. Fugere urged the SEC to “stand firm on those requirements [to] help ensure consistency in reporting standards, benefitting companies in the long run and assisting shareholders and other stakeholders in understanding the full extent of company emissions and climate risk. The passage of SB 253 is yet another signal that full-Scope 1-3 emissions reporting is the new norm, not the exception.”

The California law will almost certainly be challenged in court. If so, it may shed light for the SEC on which parts of its proposed rules will be disputed. “This is a good test case for the SEC,” says Gorte.

Plenty of companies, and investors with them, are finding opportunities in reducing emissions. The target date for achieving global net-zero emissions is 2050, as envisioned by the Paris Agreement. That is 27 years from now. “I don’t think anybody would have forecast 27 years ago that in 2023, onshore wind and solar generation would be more cost competitive” than oil, gas, and coal, says Gorte. “In renewables, the whole arc of technology is ahead of us.”

Correction: (Sept. 15, 2023): In a previous version of this article, the National Oceanic and Atmospheric Administration was misnamed.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Leslie P. Norton

Editorial Director
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Leslie Norton is editorial director for sustainability at Morningstar.

Norton joined Morningstar in 2021 after a long career at Barron's Magazine and, where she managed the magazine's well-known Q&A feature and launched its sustainable investing coverage. Before that, she was Barron's Asia editor and mutual funds editor. While at Barron's, she won a SABEW "Best in Business" award for a series of stories investigating fraudulent Chinese equities, which protected the savings of investors and pensioners by warning about deceptive stocks before they crashed.

She holds a bachelor's degree from Yale College, where she majored in English, and a master's degree in journalism from Columbia University.

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