Climate Goals and Mandatory Reporting Trigger Legal Risks for Companies

State and federal regulators have enacted new climate-disclosure mandates, and investors, consumers, and activists have demanded accountability for climate goals. Companies everywhere need to account for these legal risks.

While some businesses have announced voluntary goals to protect the environment (see our analysis of market opportunities here), many companies must also reckon with climate-related mandates. In the footsteps of European regulators, American jurisdictions have begun to require reporting on material-sustainability impacts. Below is an overview of these requirements and associated litigation risks.

Mandatory Climate Reporting

California recently became the first American jurisdiction to specifically mandate climate-related disclosures. Under two statutes, signed into law this month, the California Legislature imposed the following climate-disclosure obligations on companies doing business in California:

• • Emissions-Disclosure Bill: Any company doing business in California that has at least $1 billion in total annual revenue must (1) by 2026, begin annually disclosing “Scope 1” and “Scope 2” emissions and (2) by 2027, begin annually disclosing “Scope 3” emissions. Scope 1 emissions are all direct greenhouse-gas emissions that stem from sources that the company owns or directly controls. Scope 2 emissions are indirect greenhouse-gas emissions from electricity, steam, heating, or cooling that the company purchase or acquires. Scope 3 emissions are further-upstream greenhouse-gas emissions, such as those from sources that the company does not own or directly control (e.g., purchased goods and services, business travel, employee commutes, and processing or use of sold products).

The bill imposes administrative penalties up to $500,000 per reporting year for failure to comply with its disclosure requirements. Companies are not, however, subject to an administrative penalty for Scope 3-emissions misstatements that were made with a reasonable basis and disclosed in good faith.

• • Climate-Risk Reporting Bill: Any company doing business in California that has at least $500 million in total annual revenue must, by 2026, begin submitting an annual climate-related financial-risk report. The report must be made available on the company’s website and must disclose (1) any material risk of harm to the company’s immediate and long-term financial outcomes due to physical and transition risks from climate change; and (2) any countermeasures the company adopted to reduce said climate-related risk.

Failure to comply with the bill’s disclosure requirement can result in an administrative penalty up to $50,000 per reporting year. Further details of these statutes remain subject to administrative rulemaking and potential legal challenges.

While these statutes make California the first American regulator to mandate climate-related disclosures, federal regulators tread close behind. For instance:

• • Proposed SEC Disclosure Rule: The U.S. Securities and Exchange Commission (“SEC”) proposed regulations last year that would require public companies to provide detailed reporting of their climate-related risks, the actual or likely impact on the registrant’s business of such risks, and the company’s governance of these climate-related risks. All public companies would have to report their Scope 1 and Scope 2 emissions to the SEC, and many would also have to report Scope 3 emissions if they are material or if the filer has a climate target.

After proposing these requirements in March 2022, the SEC reportedly received a flood of public comments. Eighteen months later, the rule still has not been finalized. It is likely imminent and will likely face legal challenges after finalization.

• • Proposed Federal-Contractor Rule: Also last year, several federal agencies proposed a rule that would require certain federal contractors to disclose their emissions and climate-related financial risks. Any federal contractor receiving more than $7.5 million in annual contracts would have to disclose Scope 1 and Scope 2 emissions, and any federal contractor receiving more than $50 million in annual contracts would also have to disclose Scope 3 emissions.

Public comment on the proposed rule has closed, and the Biden Administration is likely to finalize the rule shortly.

Risk of Lawsuits

Environmental reporting moreover creates at least two related litigation risks for companies of all sizes. First, companies may face enforcement actions under the regulations. As demonstrated by the $50,000 and $500,000 per-year administrative penalties authorized by the California statutes, such enforcement can prove costly. Companies should remain vigilant to the changing regulatory landscape and conform their reporting practices to these new requirements.

Second, companies have already begun to face “greenwashing” claims. While there is no consensus definition of greenwashing, it broadly refers to a practice of overstating how environmentally sustainable or friendly a product, service, or activity is. Greenwashing claims have been asserted against companies for misrepresenting or exaggerating the positive environmental attributes of themselves or their products.

Federal regulators have punished greenwashing. Additionally, environmentalists, consumer watchdogs, animal-rights groups, and investors have brought greenwashing claims under state-based laws relating to misrepresentation, breach of warranty, breach of fiduciary duties, and unfair business practices. In just the past three years, for instance, companies have faced greenwashing lawsuits, including class actions, for advertising themselves or their products as “earth friendly,” “environmentally friendly,” “recyclable,” “sustainable,” “natural,” “ethical,” or “humane.”[1] And, investors have challenged companies for the impact of voluntary climate goals on profitability. Companies of all sizes should carefully analyze their public representations and incorporate counsel review as appropriate.

Attorneys at Baird Holm LLP have broad experience dealing with emerging corporate, environmental, and litigation issues. Specifically, our attorneys assist with SEC reporting requirements, corporate policies, federal rulemaking challenges, environmental compliance, and associated litigation. Please do not hesitate to contact us if you have any questions about environmental or climate-disclosure issues.

[1] See e.g. McGinity v. Procter & Gamble Co., 69 F.4th 1093 (9th Cir. 2023); People for Ethical Treatment of Animals, Inc. v. Vital Farms, Inc., No. 222MC00024EWHRJK, 2023 WL 5506028 (E.D. Va. Aug. 14, 2023); Duchimaza v. Niagara Bottling, LLC, 619 F. Supp. 3d 395 (S.D.N.Y. 2022); Earth Island Institute v. Brands, No. 2021 CA 003027 B, 2022 WL 2132634 (D.C.Super. June 07, 2022); Smith v. Keurig Green Mountain, Inc., No. 18-CV-06690-HSG, 2020 WL 5630051 (N.D. Cal. Sept. 21, 2020); Bush v. Rust-Oleum Corp., No. 20-cv-03268-LB, 2021 WL 24842 (N.D. Cal. Jan. 4, 2021).