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Public Radio's Environmental News Magazine (follow us on Google News)

California Leads with Climate Disclosure Bills

Air Date: Week of

California has a population of about 40 million people making the state’s economy one of the largest in the United States, with a $3.7 trillion gross state product (GSP) as of 2022. It is the largest sub-national economy in the world. (Photo: Eric Demarcq, Flickr, CC BY-NC-ND 2.0)

California is poised to enact two laws that would require companies to disclose how climate change affects their business, and how their operations impact the climate. Dave Jones directs the Climate Risk Initiative at Berkeley Law and joins Host Jenni Doering to explain how this transparency can help investors, consumers, and regulators make better decisions related to climate change and business.



Transcript

O’NEILL: It’s Living on Earth, I’m Aynsley O’Neill.

DOERING: And I’m Jenni Doering. California has long been a leader on climate and environment issues. And that’s what earned Governor Gavin Newsom the only speaking invitation for a US government leader at the recent UN Climate Ambition Summit hosted in New York.

NEWSOM: We led with the first fully-functioning cap-and-trade program in the United States. We continue to lead as it relates to efforts to completely transition to 100% zero-emission vehicles – the first state in America to establish a firm goal. And we also have established the most comprehensive plan to implement – we call it ‘the great implementation’ – our ambitious goals and advance our low-carbon, green-growth future.

DOERING: Now the Golden State is poised to enact two laws that would require companies to disclose how climate change affects their business, and how their operations impact the climate. The bills are on Governor Newsom’s desk as of this broadcast and joining us from Sacramento to discuss is Dave Jones, a former California Insurance Commissioner and the Director of the Climate Risk Initiative at Berkeley Law. Dave, welcome to Living on Earth!

JONES: Great to be with you.

DOERING: So let's start with the climate risk disclosure law, California Senate Bill 261, which I understand you were involved in drafting, what does this bill require companies to do?

JONES: This bill, for the first time requires companies and financial institutions to disclose their financially related climate driven risks. So this is a requirement, once it's signed by the governor, for the first time and sets a national standard. Companies and financial institutions will have to use the Task Force on Climate Related Disclosure Framework, which was adopted by the GE 20 some years ago. And basically, in addition to reporting emissions, they have to identify and disclose climate driven risks that they face, both in their operations and in their financial operations as well.


A pumpjack in the oil field in Bakersfield, California. The state of California is suing the oil companies BP, ExxonMobil, Chevron, Shell and ConocoPhillips and their trade group, the American Petroleum Institute, over what the state says is a long-standing pattern of deceiving the public over the risks associated with fossil fuels. (Photo: Babette Plana, Flickr, CC BY-NC 2.0)

DOERING: And what are those risks look like for companies and financial institutions?

JONES: So it differs by company. If you are, for example, a bank that's making loans into areas impacted by climate change, maybe you're lending to homeowners in areas that are facing wildfire risk, or flooding, or sea level rise, you would need to disclose the fact that you're lending to homeowners that are facing those risks. And that those consequences of climate change, which include more wildfires, more floods, more sea level rise, could impact the homeowners that you're lending to and potentially have consequences for their ability to repay their loans, and thus have consequences for your financial balance sheet. If you're a utility that's operating on a coast, maybe a coast that is impacted by more frequent and severe storms, you would need to disclose the fact that those consequences of climate change could impact your operations as a utility. So it varies based on the nature of your business. but the objective is the same. It's to get companies to think about and report and make public the risks that they face from the impacts of climate change.

DOERING: So why is it important for companies to be disclosing the financial risks of climate change?

JONES: Investors and shareholders and owners of companies as well as consumers of goods, and policymakers and regulators need to understand the risks that are facing financial institutions and companies from climate change, particularly with regard to the financial sector. The Federal Reserve and the Department of Treasury have already identified climate change as a potential systemic risk to our financial system. And it's important that companies and financial institutions evaluate what that risk is, and then disclose it. A part of the TCFD (Task Force on Climate Related Finance Disclosure) framework that companies will have to use to disclose their financial risks under Senate Bill 261 is to identify what governance mechanisms are putting in place to address climate change, what their strategy is to address the risks from climate change, what they're doing vis-à-vis risk management, and then they're supposed to set targets to try to address the risks as well. So institutional investors like pension funds, for example, the pension funds for firefighters, or police officers, or teachers, they are investing literally trillions of dollars in companies across the economy. It's critically important that institutional investors like pension funds, and others understand what are the climate change driven risks that the companies that they're investing in face? And what are those companies doing about that, so that they know that those investments will be protected, and will provide a reasonable return.


During the Climate Ambition Summit, Governor Gavin Newsom said that he would sign bills SB 253 and SB 261, the greenhouse gas emissions bill and the financial climate risk disclosure bill. These bills are intended to require major corporations to be more transparent about greenhouse gas emissions and the financial risks stemming from global warming. (Photo: Gage Skidmore, Flickr CC BY-SA 2.0)

DOERING: So that was the climate risk disclosure law. And this other bill, Senate Bill 253 requires companies to disclose their supply chain emissions. Can you walk us through that law, please?

JONES: So Senate Bill 253 By Senator Scott Wiener establishes for the first time a requirement that companies that make over a billion dollars a year in revenue, disclose what's called their scope one, scope two, and scope three greenhouse gas emissions. Scope one emissions are emissions from the direct operations of the company, let's say it's a company that manufactures cars and so the emissions associated with the manufacturing the cars have to be reported. Scope two basically covers the inputs to manufacturing associated with energy. So the electricity costs, heating costs, that sort of thing. They would report the emissions associated with the utilization of energy. Scope three are indirect emissions that are associated with supply chain both upstream and downstream for the company. So if you think about the inputs, associated with manufacturing a car, it might be steel, might be rubber, they would need to report the emissions associated with the manufacture of those things, as well as going downstream to the actual end users of the cars and they'd have to calculate and report the emissions associated with the actual utilization of the cars that they manufacture. So these scopes scope one, scope two, and scope three are well defined, they've been in existence for some time. They've been used extensively by European and Asian regulators. And also some US companies have voluntarily disclosed their scope one, scope two, scope three emissions, this is the first time that a law has been enacted to require the disclosure of these emissions.

DOERING: Why are these kinds of disclosures important?

JONES: It's critically important to understand the extent to which companies and financial institutions are contributing to climate change through their emissions. There's no question that climate change is real, we're seeing global temperatures rise, it's causing more severe and frequent weather related disasters, that's killing more people, injuring more people, destroying more communities. You saw this recently, sadly, in Maui floods, in Vermont, the list goes on and on and on of these climate driven events. And sadly, there's so much temperature rise already baked into the system due to greenhouse gas emissions, that we're going to see this continued increase in frequency and severity of these events. So in order to combat that, we need to understand to what extent are corporations and financial institutions contributing to the greenhouse gas emissions that are literally posing an existential threat to life as we know it on the planet. Before we can actually manage this problem well, we need to measure it so that policymakers and regulators and consumers and investors understand what contribution that company or financial institution is making to this problem. And then they can determine what sort of response or measures they want to take to respond to that.


Senator Scott Wiener sponsored Senate Bill 253, the Climate Corporate Accountability Act. (Photo: Scott Wiener, Wikimedia Commons, CC BY-SA 3.0)

DOERING: So California is the world's fifth largest economy. So how might these bills impact other states?

JONES: Because California is the fifth and maybe becoming the fourth largest economy in the world, major corporations throughout the United States and major financial institutions are in California's market. And that allows California to reach corporations regardless of where they're headquartered, and financial institutions regardless, where they're headquartered with these two requirements, in effect setting a national standard. It's critically important to have a national standard because so far, United States federal regulators have not required greenhouse gas emissions reporting, or for that matter, reporting of financial risks associated with climate change in a comprehensive and systemic way. And so US Federal Financial regulators are behind. So California has decided not to wait, but rather to act, and in so doing establish a national standard.

DOERING: Now I understand the US Securities and Exchange Commission is preparing to release its own finalized rules on climate disclosure. From what we know so far how do the California bills compare and interact with those rules?

JONES: The chair of the SEC, Gary Gensler announced the other day, in the wake of the governor of California's announcement that he was going to sign the bills that these bills SB 253, and SB 261, the greenhouse gas emissions bill and the financial climate risk disclosure bill are in alignment with what the SEC is considering and actually support what the SEC is considering. The SEC has to actually do a cost benefit analysis as a part of issuing a new rule of disclosure for stock companies and the fact that California is enacting a law that already requires some 10,000 companies to do financial risk disclosure, actually will reduce the cost impact of the SEC rule and make it a little more easier for the SEC to put forward and move forward with that rule. So what California is doing is definitely in alignment with but it's also designed to try to encourage the US financial federal regulators to move ahead and to catch up with their European and Asian colleagues. So it's very exciting in the sense that it's taken some time to get to this place, but to see these two bills passed, and on the governor's desk and the Governor announced that he's going to sign them that's a really big deal.

DOERING: Dave Jones directs the climate risk initiative at Berkeley Law thank you so much Dave.

JONES: My pleasure.

 

Links

Cal Matters | “Newsom to Sign Corporate Climate Accountability Bills”

CA Gov | “Governor Newsom Doubles Down on Building California’s Future to Achieve World-Leading Climate Goals”

Learn more about Dave Jones

CA Gov | “Governor Newsom Calls Out Oil Industry at UN: ‘This is a Fossil Fuel Crisis’”

Learn more on the Task Force of Climate Related Finance Disclosures

Learn more about SB-253

Learn more about SB-261

 

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