Excerpt
While the federal government shelved rules that would have required public companies to report greenhouse gas emissions, states are taking up the charge, considering their own disclosure rules that experts say could impact thousands of U.S. companies.
California is leading the way, becoming the first state to mandate greenhouse gas emissions disclosure. The law, signed by Gov. Gavin Newsom in 2023, says companies with more than $1 billion in annual revenues must start reporting greenhouse gas emissions by June 30, 2026.
The law applies to both public and private U.S. companies, and stretches to include not only firms based in California but also those that do business there. Nearly 2,600 companies will be affected by the law, according to the California Air Resources Board, which held a public webinar on the topic in August. Companies that fail to comply face penalties of up to $500,000 per reporting year. A federal appeals court paused a related law in November, which required some companies to report the impact of climate change on their financial situation, but kept in place the emissions disclosure requirement.
The California law will introduce mandates to a U.S. system that is now entirely voluntary, with no federal requirement for disclosure, no widespread standards and little accountability when data is incorrect—and that is often the case.
New Harvard Business School research found that 74% of S&P 500 firms revised emissions data at least once in their Corporate Social Responsibility (CSR) reports from 2010-2020. In a majority of cases, the total emissions reported in previous years was revised upward.
The result is that key data used by investors, policymakers and others to make climate decisions is often incorrect.
“Most companies are disclosing corporate emissions now. But they have a lot of wiggle room in how they disclose it, what they choose to leave out, what mistakes are made, and how and when those mistakes are corrected,” said Harvard Business School professor Ethan Rouen, who authored the study with HBS professor Lauren Cohen and Kunal Sachdeva, assistant professor of finance at the University of Michigan. “One thing investors, shareholders and all stakeholders should take from this is that they shouldn’t take companies at their word when they look at their data.”
California’s new disclosure law
The California law is more far-reaching than scuttled Securities and Exchange Commission rules, adopted in March of 2024 and effectively shelved a year later, because it applies to private companies as well as publicly-traded firms.
Of course, California is just one state. But it is the fourth-largest economy in the world (after the U.S., China and Germany), and experts believe the rules will have an outsized impact and provide momentum for more states to act.
“As far as moving the needle, I do think California has become a leader on this,” said Leila Yow, climate program associate at the Institute for Agriculture & Trade Policy. “It's right up there with the European Union” in the global movement to demand more sustainability statistics from corporations.
Even as the SEC balks at requiring companies to report emissions, there is growing pressure from investors to provide that information, says Steven Rothstein, chief program officer for the sustainability nonprofit Ceres.
“In the next few years, you're going to see a flood of information,” Rothstein said.
The California law, which calls for rules to be finalized in December, requires companies to report Scope 1 emissions (those produced directly by the business) and Scope 2 emissions (indirect emissions, such as those created from generating electricity to run a company's buildings) by mid next year. Reporting of Scope 3 emissions (indirect emissions from a company's supply chain) will be required in 2027.
California’s outsized economic power could nudge more companies into rigorous emissions reporting, Rouen said. “While regulation is dependent on political will — which can be fickle — one large economy can quickly change the rules for all of these big firms,” he said, noting how California’s strict vehicle emissions rules prodded the auto industry to fundamentally change how they design cars.
More states are following
Four other states — New York, New Jersey, Illinois and Colorado — are also considering their own emissions reporting requirements, but those efforts are in early stages or stalled. The details differ, but all four state proposals would allow state attorneys general to bring civil action against companies for non-compliance.
It's a start, said Sachdeva. But it's not a replacement for broader action.
“The state-level rules definitely raise the floor, and California's a big market,” said Sachdeva, assistant professor of finance at the University of Michigan. “A large state like California might set a de facto standard. But it's not necessarily a substitute for a national standard.”