California Climate Bills to Boost Efforts in NY, Other States

California’s first-in-the-nation measures requiring companies to disclose financial risks related to climate and report greenhouse gas emissions could embolden other states to take similar action in an effort to address climate change.

The two bills approved by California lawmakers—which Gov. Gavin Newsom (D) has said he’ll sign—come as states have differed in their approaches to regulating the use of environmental, social, and governance factors by businesses. Red states have enacted laws this year barring ESG considerations in pension and other government decisions while blue states have focused largely on transparency and reporting measures.

The California bills have a broad reach and the potential to affect a wide variety of companies, regardless of where they’re located, said Stephanie Hurst, a partner in the corporate and securities practice at Mayer Brown LLP. The ESG actions could also influence legislation in other states, which have previously followed California on environmental issues, she said.

“States are starting to look to California in this space as a model,” Hurst said.

New York could be an early test case with bills in the state Senate and Assembly modeled on the California emissions reporting requirements. The legislation is primed for success following the West Coast action, said state Sen. Brad Hoylman-Sigal (D), the Senate bill sponsor.

“I don’t think New Yorkers like to be outclassed by anyone, especially on issues as important as the climate crisis,” he said.

‘Complicated’ Disclosures

The California measures are expected to apply to thousands of public and private companies. They go further than disclosure requirements under consideration by the US Securities and Exchange Commission.

The emissions reporting bill (S.B. 253) would require companies doing business in California with more than $1 billion in revenue to report direct emissions from operations and indirect emissions from energy use starting in 2026. Reporting on emissions from a company’s supply chain and other sources outside its direct control would start in 2027.

“That’s where it gets to be very, very complicated,” said Morris DeFeo, partner and chair of the corporate department at Herrick, Feinstein LLP.

The risk disclosure bill (S.B. 261) would apply to companies doing business in California with more than $500 million in revenue. They would report climate-related financial risks every two years starting on or before Jan. 1, 2026.

The bills, which aim to increase the information available to investors and the public, will already have a national impact, said Steven M. Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets. Ceres is a nonprofit focused on business sustainability that backed the California bills.

California ranks among the world’s largest economies, and companies throughout the country would fall under the legislation. Ceres isn’t prioritizing the passage of similar bills elsewhere, Rothstein said, noting states can take other actions to address climate change.

“Additional states could lead to a patchwork and inconsistencies,” he said. “So we do not think, at this point, additional state legislation on climate disclosure is important.”

There are also still unknowns about the California measures. The California Air Resources Board would be responsible for adopting regulations, and Newsom has indicated there could be future legislative changes.

“Before we see other people jumping into the fray on new statutes, let the laboratory percolate a little more in California,” said Andy Jack, partner at Covington & Burling LLP.

State Action

Passing a similar emissions reporting measure in New York, though, would add to the penalties and enforcement power against companies that don’t comply, Hoylman-Sigal said. A successful law could also cover big companies that aren’t operating in California, he said. The New York bills have yet to receive the consideration of a full chamber in a two-year legislative session.

Hoylman-Sigal went to law school with one of the California bill authors, state Sen. Scott Wiener (D), and said the two have previously collaborated on shared legislative priorities.

Some of “the more activist states” will likely follow California’s approach, DeFeo said, but it’s unlikely “that every state or even a majority of states will follow suit.”

“Some states will take the point of view that they don’t want to go down that road because they want to differentiate themselves from the regulatory burden imposed by states like California,” DeFeo said. “I also think that there are going to be some states that would say we don’t want to necessarily incur the costs at the public level of having to monitor compliance with all this.”

Elsewhere, Democratic-led states considered narrower approaches to climate risk and transparency this year. In Colorado, the Public Employees’ Retirement Association will have to report annually on financial risks related to climate change under a new law.

Illinois enacted a law requiring investment managers working with public pension funds and agencies to disclose how they integrate sustainability factors such as greenhouse gas emissions in their decisions. A new Minnesota law requires banks and credit unions with more than $1 billion in assets to submit a climate risk disclosure survey each year.

A bill introduced this year in New York would require climate-related financial risk reporting by certain financial institutions.

Outside of the US, companies are navigating additional climate reporting requirements, including in the European Union. Companies can’t take an “ostrich in the sand” approach to carbon accounting, Jack said.

“Ostrich behavior is no longer going to work,” he said.