Legal Questions for Your Sustainability Team #3

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 whether the revenue used to evaluate the applicability of the climate-related financial disclosure report requirement under California Health and Safety Code Section 38533 can be determined for each entity doing business in California or whether it will have to be consolidated at the parent level of the enterprise.

If your company must make a climate-related financial disclosure report, ask your sustainability team if they are preparing a report that is specific to the entity or entities covered by the law or if they expect to use one prepared for the enterprise as a whole.  The law requires a “covered entity” to file a report.  A “covered entity” is a business entity that does business in California and meets the $500 million revenue threshold.  Our previous two posts suggested possible interpretations of the law that would limit the “covered entity” definition to specific entities within an enterprise rather than covering the entire enterprise. 

Take for example an enterprise with 20 subsidiary entities but only one of which is a covered entity for purposes of the law.  The required report would only need to address the covered entity.  There may already be a report that addresses many of the required reporting elements at the enterprise level though.  It takes some thought to identify portions of the enterprise-level report that are applicable to the covered entity and to consider if there are climate-related financial risks that are material to the covered entity that are not reflected in the enterprise-level report.  In this situation, the consolidation that is allowed by the law may be a path to valid use of enterprise-level information.

The good news is that the California Air Resources Board appears to be prepared to give covered entities some leeway in determining how initial reports are prepared.  For example, CARB issued an FAQs document that offers options to covered entities in selecting fiscal reporting periods and benefitting from good faith compliance efforts.