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Looming climate disclosure rules, including California measures that would require large businesses to disclose all greenhouse gas emissions related to their operations, could lead to added liability and reputational risks for directors and officers.
The recently passed California bills, which have been sent to Gov. Gavin Newsom, would impact a broad group of businesses and could create additional exposures, though the continued soft D&O market will have a mitigating effect on any rate increases, experts say.
Gov. Newsom has until Oct. 14 to act on the legislation and announced Sept. 18 in New York that he would sign S.B. 253, which would create the Climate Corporate Data Accountability Act, subject to slight language changes.
The measure would require companies with annual global revenue of at least $1 billion to disclose Scope 1, Scope 2 and Scope 3 greenhouse gas emissions. A tandem bill, S.B. 261, would require companies with annual revenue of at least $500 million to disclose climate-related risks.
The bills apply to any company doing business in California and unlike under proposed U.S. Securities and Exchange Commission climate disclosure rules, both publicly traded and private companies would be required to report.
Legal challenges to the rules are expected, experts said.
If signed into law, the California rules would apply to thousands of businesses, said David Smith, San Francisco-based partner, Manatt, Phelps & Phillips LLP. “Companies can’t ignore them just because they don’t hit the threshold triggers,” he said.
Scope 3 emissions – which are indirect emissions from suppliers and customers – are included in the disclosure bills and are expected to be part of the pending SEC rules, which means that if a business is in the chain of a reporting entity it’s “highly likely” it would have to comply and gather data for disclosures, Mr. Smith said.
“The actual impact of the laws is exponentially larger than just those who were subject to the face of the laws,” he said.
The California legislation is not happening in isolation, said Kevin LaCroix, executive vice president in Beachwood, Ohio, for RT ProExec, a division of R-T Specialty LLC.
Mr. LaCroix noted European Union disclosure requirements that went into effect in July, following United Kingdom requirements that became mandatory in 2022, in addition to the proposed SEC rules.
Varying rules are a concern because global companies could be subjected to numerous different reporting regimes, which means that their environmental, social and governance-related disclosures in one jurisdiction could be compared with those in another, Mr. LaCroix said.
“Anytime there’s a new disclosure regime, you run the risk that plaintiffs lawyers armed with the benefit of hindsight will take subsequent events and look at prior disclosures and say, ‘You failed to adequately tell us about that risk,’” he said.
Additional regulatory requirements will lead to allegations that disclosures were inadequate, which will likely prompt more litigation, said William G. Passannante, a shareholder with Anderson Kill P.C. in New York.
“It’s one thing to require a reporting company – whether it’s the SEC or California – to disclose their direct emissions, but the Scope 2 and Scope 3 emissions are things that there will be debates about,” Mr. Passannante said.
Nonpublic companies thrust into that scheme will be facing regulatory requirements that are new and different, and “snafus” can be expected, he said.
The differing disclosure requirements will be a concern for D&O underwriters, experts said.
All sectors of the D&O insurance market, especially the public company market, have been softening due to an ample supply of capacity, and this won’t “break that cycle,” Mr. LaCroix said. But from the underwriting perspective insurers continue to struggle with how to price ESG risks, he said.
If the California legislation is enacted, underwriters would likely have to revisit D&O coverage for nonpublic companies, Mr. Passannante said.
“That aspect of the California legislation is probably something which will cause underwriters to knit their brows somewhat as they’re doing renewals,” he said.
Many companies are more concerned about reputational impacts than legal liability, Mr. Smith said.
“You will have interest groups, consumer advocacy groups and, frankly, competitors pointing to each other’s numbers as to who is the greenest,” he said.