ESG on the Rise

Companies are facing increased federal, state, and public scrutiny regarding environmental, social, and governance (ESG) issues. Amidst this momentum, it is important for companies operating in all sectors to address ESG compliance proactively and plan accordingly. We foresee an uptick in environmental litigation and enforcement actions, including CERCLA/RCRA and citizen suits, as lawmakers and agencies have focused their agenda on environmental justice and as community-based environmental advocacy is activated. The following article briefly lays out several of the key regulatory and legislative proposals coming down the pipeline to help companies begin to prepare.

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Corporate Disclosure Rules

New climate-related disclosure rules are looming at the federal level from the U.S. Securities and Exchange Commission (SEC), with a set of even more stringent requirements affecting both private and public entities, pending before the California Legislature.

SEC’s Enhancement and Standardization of Climate-Related Disclosures for Investors

In March 2022, the SEC proposed rule changes that would require public companies to disclose climate-related risks, including data on greenhouse gas emissions, in their registration statements and periodic reports. The rules are expected to be finalized in April 2023. Under the proposed rules, companies would be required to disclose data pertaining to direct greenhouse gas 20 emissions (Scope 1), indirect emissions (Scope 2), and, most controversially, emissions from upstream and downstream activities indirectly generated by a company along its value chain (Scope 3). As expected, the proposal has been the subject of heated debate during public comments among C-suite executives, politicians, and other interested parties, and they will likely be challenged in court once finalized.

California Corporate Disclosure Bills

In California, legislators have introduced a trio of bills the authors call the Climate Accountability package. The authors have described the legislation as a complement to the pending SEC rules.

Two of the proposed pieces of legislation focus on corporate disclosures, targeting large corporations doing business in California, both public and private: SB 253 (Wiener), the California Climate Corporate Data Accountability Act and SB 261 (Stern). SB 253, an updated version of a similar bill (Senate Bill 260) that narrowly failed in 2022, would require the California Air Resources Board by January 1, 2025 to enact regulations mandating that companies with more than $1 billion in revenue doing business in California publicly disclose Scope 1, 2, and 3 emissions data by 2026 and annually thereafter. SB 261 would mandate that companies with more than $500 million in revenue prepare and submit climate-related financial risk reports by December 31, 2024, and annually thereafter.

The third bill, SB 252 (Gonzalez), would prohibit the state’s public pension funds from investing in fossil fuel companies and require them to liquidate current fossil fuel holdings by July 1, 2030.

Environmental Justice

Environmental justice has become an important policy consideration at the federal and state level, guiding regulations and proposed legislation. The U.S. Environmental Protection Agency (EPA) defines environmental justice as “the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income, with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies.” As one of numerous actions the agency has taken to address the issue, EPA proposed on January 19, 2023, to add environmental justice as one of three new National Enforcement and Compliance Initiatives for FY 2024-2027, along with climate change and PFAS contamination.

Among the numerous environmental justice initiatives in California, state legislators and municipalities have targeted oil and gas operations, as well as industrial facilities, operating in overburdened communities through an environmental justice lens; as with the City and County of Los Angeles’ recent votes to ban new oil and gas extraction and deem existing wells and drill sites as legally nonconforming uses to address longstanding injustices.

Allen Matkins will continue to monitor these trends so companies can minimize the risk of litigation and ensure compliance with new ESG regulations.