California Climate Disclosure Rule Spurs Supply Chain Overhaul

Patagonia is a fan of California’s plan to ramp up corporate climate disclosures. In fact, it thinks it’s long overdue.

The Ventura-based outdoor clothing company, as a private business, has been tracking data on its direct and indirect greenhouse gas emissions impact for years, using the information to calculate the carbon footprint of products as it designs them.

“It will be advantageous to have a standard that we’re all required to follow and be held accountable to,” said J.J. Huggins, a spokesperson for Patagonia who helped the business lobby for the new rule.

The law, which California Gov. Gavin Newsom (D) signed Oct. 7, will go beyond California’s borders by requiring public and private companies with annual revenues over $1 billion that do business in the state to disclose their direct and indirect greenhouse gas emissions. Companies are getting ready by talking to auditors, lawyers and contractors in their supply chains to set their annual reporting in motion.

For some businesses starting from scratch—unlike Patagonia—there’s a long road ahead in both seeking pertinent data and determining how they can use those disclosures to showcase or make changes to their business.

“They’re asking what do I need to report and where, organizationally who is going to own it, and how do we actually drive change from the metrics once we know them,” said Julia Salant, head of sustainability innovation and carbon solutions at EcoVadis, a supply chain sustainability business.

A Definitive Timeline

Many companies that will be covered by the rule are already voluntarily reporting greenhouse gas emissions data in some shape or form, particularly for their direct emissions, said Alfredo Silva, a San Francisco-based Morrison & Foerster partner. Those businesses have likely collected the information because of contractual obligations or in anticipation of the SEC’s climate disclosure rule and the European Union’s Corporate Sustainability Reporting Directive.

More than 5,300 companies would be covered by the new California rule, according to Ceres, an environmental group that has backed the disclosure law. Those who will be hit the hardest are small companies that just exceed the $1 billion threshold under the California law, Silva said.

“It’s a relatively small universe, or perhaps smaller than you might think,” he said.

The California rule is kick-starting some companies that haven’t done so yet to get their hands on the more elusive Scope 3 data, which refers to scouring their supply chains for emissions information back to where raw materials are sourced and which factories they go to.

“They knew they would need to do something eventually, and they now have a definitive timeline that’s probably faster than they anticipated,” said Jim Wetekamp, CEO of risk management software company Riskonnect.

Scope 3 data won’t be required under the California law until 2027, while the mandate to report emissions under Scopes 1 and 2—from operations and outputs from energy use—starts in 2026. When signing the bill, however, Newsom said that the deadlines are likely infeasible and that his administration will work to address the issue.

But some businesses will want to get a head start on the California law by voluntarily reporting ahead of the requirements. It’s an opportunity “to manage risk and control the narrative,” said EcoVadis’s Salant.

Beyond California’s mandate, corporate reporting under the EU’s sustainability directive will be due in 2025, while it’s not yet clear when reporting might be required under the SEC rule. The SEC is looking to release climate disclosure rules—which, unlike the California law, would not cover private companies—as soon as October, according to its latest rulemaking agenda.

Detractors and Backers

Dozens of business groups contend California’s pending rule is both inefficient and cumbersome. They’ve argued that state officials should have waited to see what the SEC will do before taking action.

Business organizations from the California Chamber of Commerce to the Alliance for Automotive Innovation and the California Bankers Association called on Newsom to veto the legislation. California farm groups specific to produce like apples, blueberries, dates and walnuts also backed a veto.

The organizations maintained the law could make small and medium-sized businesses unfairly appear to be excessive polluters in their Scope 3 emissions because they “play an integral role in the supply chain.”

“How does business prepare for a law so broad and undefined that the only likely result is inaccurate, inconsistent and ultimately, unhelpful, reporting?,” the Western States Petroleum Association, which includes members like Chevron, Exxon and Shell, said in an email. “This is why businesses in every sector of the California economy opposed the reporting bill. It’s a costly reporting law that will do nothing to reduce emissions.”

Patagonia wasn’t alone in supporting California’s initiative, as Microsoft Corp., Sierra Nevada Brewing Co. and Everlane all joined a letter in support to lawmakers.

“Transparent disclosure is a critical tool to signal the prioritization of greenhouse gas emissions as a long-term business risk and issue, and not just an externality that goes unaccounted for,” Katina Boutis, director of sustainability at Everlane, said in an email.

Using Climate Data

While there’s been pressure from investors and regulators for emissions disclosures, there’s also been a focus on how the general public will respond. More businesses providing their emissions data will help imbue trust in the climate information that businesses are making public, said Patagonia’s Huggins.

“I think customers will see that companies are playing by a standard set of rules and that they’re being audited,” Huggins said. “And they’ll be able to see whether companies are being truthful or if they’re greenwashing, and then they can vote with their dollars.”

There’s data to show that consumers want just that. In a 2022 survey from nonprofit Just Capital, 94% of 1,115 respondents said it’s important for companies to be transparent about their environmental impact. The survey said that 74% of Republicans and 97% of Democrats polled supported federal requirements for corporate disclosure of climate data.

One of the unknowns is if and how companies will seize on what they learn from collecting emissions data.

Some will change their operations to lower future emissions, which would require them to consider switching their suppliers or modify the materials the business uses, for example, Wetekamp said.

The California rule is also an opportunity for companies to plan their narrative and framework around sustainability in anticipation of future climate-related rules, Morrison & Foerster’s Silva said.

That way, Silva said, companies can avoid “iterating and switching gears every time a new law comes into play.”