Legal Questions for Your Sustainability Team #2

This series of posts seeks to identify legal questions that can add definition and value to the good work that sustainability teams are doing.  Our last post focused on the applicability of the climate-related financial disclosure report requirement under California Health and Safety Code Section 38533 depending on whether an entity does business in California and has at least $500 million of revenue. 

For enterprises that have entities doing business in California, ask if your sustainability team is evaluating the revenue threshold based on the revenue of each relevant entity or the overall revenue of the enterprise on a consolidated basis.  The text of the law suggests that consolidation at the enterprise level is optional.  Section 38533(b)(2) provides that “reports may be consolidated at the parent company level.” 

The staff at the California Air Resources Board (CARB) have indicated they may not adopt this understanding, though.  During a public workshop that CARB held at the end of May, it asked if it should “define revenue as that of the Parent if a Subsidiary is doing business in California.”  This formulation could, arguably, mandate consolidation. 

The resolution of this question could make all the difference in applicability.  Take, for example, an enterprise that has three subsidiaries doing business in California, each with $200 million in revenue, and no other subsidiaries that do business in California.  Without consolidation, none of the three subsidiaries nor the enterprise as a whole would be subject to required reporting.  With consolidation, reporting could be required for the three subsidiaries as a group or perhaps for the enterprise as a whole.