Banks brace for California law mandating emissions disclosure

Receive free US politics & policy updates

We’ll send you a myFT Daily Digest email rounding up the latest US politics & policy news every morning.

Big banks are bracing for a sweeping new climate law in California that would for the first time force them to calculate and disclose carbon emissions tied to lending.

Both houses of California’s state legislature this week passed the Climate Corporate Data Accountability Act, sending it to governor Gavin Newsom. The bill will require public and private companies with more than $1bn in annual revenues that conduct business in the state to disclose emissions.

Beginning in 2027, companies would need to report so-called scope 3 carbon emissions, which are associated with a company’s suppliers and customers. For banks, the legislation requires reporting on “financed emissions” — carbon pollution associated with their borrowers — sparking worries in the financial industry.

“It is extremely difficult for financial institutions to calculate and report Scope 3 emissions with a high degree of confidence,” said Sonja Gibbs, a managing director and head of sustainable finance at the Institute of International Finance, an industry association.

California, the largest US state by population, has long had outsized influence on national environmental policy. The emission reporting bill comes as the US Securities and Exchange Commission has proposed, but not finished, a separate rule that would require reporting of scope 3 and other emissions.

Banking industry groups opposed the California bill. A coalition that included the American Bankers Association warned in June that requiring banks to calculate and report of financed emissions “would sweep in a tremendous amount of duplicative information” given the breadth of their clientele.

By contrast, technology companies generally supported California’s emissions legislation. 

Newsom, a Democrat, has until October 14 to act on the legislation. “I struggle to see the governor vetoing something like this,” said John Miller, a managing director at TD Cowen. 

Companies still have options to stop the legislation. Miller noted that businesses successfully sued to overturn a state law that required companies to include minorities on their boards of directors.

Companies can also fight for a ballot referendum that would let Californians vote on the issue. In 2020, Uber and Lyft funded and won a ballot referendum that allowed them to keep treating their workers as independent contractors.

The emissions legislation requires the California Air Resources Board to spell out the details of carbon emissions reporting by 2025. This process will offer companies another opportunity to dilute the carbon reporting requirements, Miller said.

If it survives, the legislation “would require significantly more information than is currently disclosed by many banks,” said Marc Rotter, a counsel at law firm Ropes and Gray. 

In January, the Federal Reserve published research showing that only eight of the world’s 30 largest banks are measuring their scope 3 emissions, and they are only doing it partially.

“Scope 3 emissions constitute the lion’s share of banks’ overall emissions,” the research paper said, adding that the banks might be struggling with scope 3 reporting because there are not clear standards yet.

Although banks have been increasing financing for clean and renewable energy, “fossil fuel financing remains strong,” the Fed paper said.

In the days ahead, California legislators are also expected to approve laws that would require companies with business in the state to report their financial risks posed by climate change.