In what could be a watershed in climate legislation in the United States, the California Senate passed the Climate Corporate Accountability Act in January 2022 to target greenhouse gases (GHG). The first-of-its-kind legislation mandates that large public and private companies conducting business in the state report their total GHG emissions footprint to a government entity. In light of the longtime influence California environmental laws have exerted on other states and federal legislation, the bill could have a significant national impact if passed into law.
For investors focused on ESG issues, the legislation could also mean something else—an endorsement of ESG investing and a potential new set of metrics to measure impact and determine investment strategy.
What the Bill Does
The bill requires that US companies with more than $1 billion in gross annual revenue who do business in California provide a complete emission inventory annually. The data would go to the California secretary of state for analysis by the California Air Resources Board, which would then produce a report for the public.
The reporting requirements are significant not just for their novelty but for their scope. They are extensive, covering not just a company’s direct greenhouse gas emissions and emissions from buying and using electricity but also GHG emissions from its supply chain.
What It Means for Companies
For most of the 5,500 to 6,000 companies potentially affected by the legislation, the bill means regularly providing a significantly more comprehensive accounting of their GHG emissions than they typically report currently. Perhaps most noteworthy is the requirement to disclose secondary emissions, including emissions resulting from business travel and those produced by suppliers, which are more complicated to measure.
Because the market of California is so large—if it were a sovereign nation, it would have the fifth-largest economy in the world—corporations may find it difficult not to comply with the new rules. This could lead to a spillover effect beyond the state’s borders, as demonstrated with California’s tailpipe emissions standards.
The pending legislation sits against a backdrop of stepped-up national moves to regulate and limit carbon emissions. This includes a push for greater corporate transparancy. For instance, the SEC is evaluating new rules mandating that companies disclose their carbon emissions, though progress has been stymied by pressure from different stakeholders. Some environmental advocates are pushing to require that corporations report emissions produced by their suppliers, while many companies want narrower reporting parameters.
New federal rules also allow California to resume its role as a trendsetter for national emissions standards. In March, the Environmental Protection Agency reinstated California’s authority to establish more stringent standards for tailpipe carbon emissions than those set by the federal government. This removed a Trump administration decision to revoke the state’s right, which had existed for more than 40 years. Thirteen other states plus the District of Columbia, comprising about 40% of US car sales, have followed California’s lead on emissions levels.
Taking its cue from recent regulations from California setting tighter limits on truck pollution, the Biden administration is developing new national standards for such vehicles.
Implications for Impact Investors
California’s move toward accountability and transparency in climate disclosure positions impact investors to gain deeper insight into corporate sustainability practices as well as often-overlooked supplier emissions. This data may offer new possibilities for making informed investment decisions, measuring impact, and supporting positive actors.