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In 2023, there was a significant pushback against Environment, Social and Governance (ESG) investing. While there has been a pushback against the social aspects of ESG, environmental priorities—and associated sustainability and emissions requirements—are likely to remain top concerns for investors, regulators and companies.
Bi-Partisan Support for Sustainability Initiatives
Part of the focus on sustainability and emissions is due to extreme weather experienced in 2023, which conveys to observers a proximate and imminent risk in need of attention. Moreover, the focus on sustainability and climate change is one with bipartisan support, although it gets more attention and support from Democrats. Below are a few key stats from 2023 Pew Research surveys related to climate change, emissions and sustainability:
- 74% of Americans “support U.S. participation in international efforts to reduce effects of climate change.”
- 69% of Americans “favor the U.S. taking steps to become carbon neutral by 2050.”
- 67% of Americans “prioritize alternative energy, such as wind and solar.”
- 54% of Americans “view climate change as a major threat, but the partisan divide has grown.”
These data reflect widespread American support for sustainability and environmental initiatives at a time when there seem to be so few bipartisan issues on which the voting public and Congress can agree. The implication is that more progress will likely be made in regulating emissions transparency and emissions reduction.
California Leading the Way
Historically, California paved the way for cleaner automotive emissions standards. Recently, California has been seeking to use the Clean Air Act to push for decreased greenhouse gas emissions. This follows the EPA’s reinstatement of “California’s authority under the Clean Air Act to implement its own greenhouse gas (GHG) emission standards and zero emission vehicle (ZEV) sales mandate.” In October 2023, California Governor Newsom signed into law SB-253 and SB-261.
The law SB-253 requires businesses with revenues above $1 billion operating in California to disclose their Scope 1, Scope 2 and Scope 3 emissions. Various media sources reported this would apply to over 5,300 companies. This bill requires applicable companies to produce annual disclosures of Scope 1, 2 and 3 emissions. Third-party assurance would be required, with limited assurance required initially for Scopes 1 and 2 emissions. There are also additional requirements from 2027 to 2030 for reporting related to Scope 3 emissions, reasonable assurance for Scopes 1 and 2 emissions disclosures beginning in 2030, and Scope 3 emissions disclosure assurance details to be determined in the future. The full details of this bill can be found online.
A second California law, SB-261, was also passed in October 2023 related to greenhouse gases.
This bill requires applicable entities to prepare a climate-related financial risk report disclosing the entity’s climate-related financial risk and measures adopted to reduce and adapt to climate-related financial risk. The preparation of these reports must begin on or before January 1, 2026, and biennially thereafter. These reports must be made available to the public. As opposed to assurance requirements for quantitative emissions reporting, this bill does not require assurance for qualitative reports. The full details of this bill can be found online.
California emissions reporting requirements are likely to result in a major legal battle. While the outcome is uncertain, there is significant support for emissions reporting and reduction, as noted above. Additionally, as California takes the lead nationally on emissions and climate-related risk reporting, we expect the demand for battery-powered ZEVs to rise significantly in California. In fact, previous regulations were already poised to drive up ZEV demand in California.
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