From California to Chancery Lane: miscellaneous climate reporting news

Written by Corinne Mclean and Sam Williamson

The Aotearoa New Zealand Climate Standards are driving huge efforts to integrate consideration of climate risks and opportunities within reporting entities and to prepare disclosure to meet standards. In the midst of this effort, looking to overseas disclosure developments provide interesting insight for the ESG enthusiasts at SHIFT. The article refers to Scope 1, 2 and 3 GHG emissions – brief details of these emissions scopes are at the end of the article.

In October, California, which has been hard-hit by climate events in recent years, passed the most comprehensive climate disclosure laws in the United States. The state is estimated to be the world’s 5th largest economy and is a significant trading partner for New Zealand. Two key climate disclosure requirements were passed:

• The Climate Corporate Data Accountability Act (SB 253) requires GHG emissions disclosure of Scope 1, 2 and 3 emissions by companies with revenue of over US$1billion. The disclosure must be in accordance with the widely accepted Greenhouse Gas Protocol (GHG Protocol) standards.
• The Climate-Related Financial Risk Act (SB 261) requires TCFD-style climate risk disclosures by companies with revenue over US$500million. So both laws seek to draw on existing, familiar standards to reduce compliance burdens on the reporting entities.

This development means that California leapfrogs the SEC in enacting climate disclosure requirements and in some aspects the Californian regime is likely to go further than the anticipated SEC regime. For example, the Californian laws apply to private companies ”doing business in California” as well as public entities. The concept of “doing business in California” is anticipated to have a broad reach and cover many US companies. The Californian Senate estimated that 5,344 companies would be required to report under SB253 alone. Another key difference is that SB 253 requires disclosure of Scope 3 emissions, which has been the subject of debate in relation to the upcoming SEC regime.

Another one of the many notable features is that the California legislation is that it passed with the support of many large corporates, most of whom already prepare voluntarily climate disclosure and support the drive towards greater transparency and consistency.

Further detail, amendments and challenges to the Californian laws may come but it appears that a significant number of American companies will be required to report under these laws, and some New Zealand exporters are likely to comprise part of these reporting entities’ value chain and Scope 3 emissions.

As many New Zealand entities grapple with the challenge of Scope 3 emissions, we were fascinated to see the concept of ‘advised emissions’ (one type of Scope 4 emissions) being discussed in the context of the legal profession in the England and Wales.

Over the last several years the Law Society of England and Wales (LSEW) has increased its focus on the way that climate change policy impacts the legal profession. In April, the LSEW published guidance for solicitors on how to manage their business in a manner consistent with the ‘transition to net zero’ and noted that “Climate-related risks will affect most clients and nearly all areas of legal practice”.

The LSEW guidance suggests that law firms use the Greenhouse Gas (GHG) Protocol’s classification of ‘emissions scopes’ as a helpful mechanism for solicitors to understand and measure emissions related to their business. Larger law firms may already be mandated to undertake climate reporting under existing regulations, reporting on at least ‘Scope 1 and 2’ emissions.

The LSEW warns that the most significant GHG emissions associated with solicitor’s business are likely to be advised emissions (sometimes referred to as one type of Scope 4 emissions). In this context, these are downstream emissions associated with the matters upon which solicitors advise. Advised emissions are not currently included in the GHG Protocol however, the LSEW states that firms that are committed to reducing their emissions should “consider how they might be able to influence the reduction of advised emissions in line with their broader target setting”, this may include “placing limitations on the instructions they will accept citing their own organisation’s climate change commitments”. The guidance noted that “solicitors are not obliged to provide advice to every prospective client that seeks it. Solicitors have wide discretion in choosing whether to accept instructions. Climate-related issues may be valid considerations in determining whether to act….”

The LSEW guidance had the support of the Solicitor’s Regulatory Authority but is not a regulatory position. You can read more about the LSEW climate guidance on its website.

In New Zealand, many law firms are also acting to reduce their GHG emissions in a robust way, alongside making other sustainability efforts, and reporting actions on their websites. The NZ Law Society (NZLS) consulted on a Draft Climate Change Policy I in May this year, this draft policy is very similar to the LSEW’s Climate Change Resolution published in 2021. The NZLS draft policy includes the aims of: supporting lawyers to be fully informed on climate change and how they might act to mitigate it by providing information and guidance, informing lawyers and law firms on how to operate in a climate conscious manner, and supporting lawyers to incorporate into their daily practice advice on the impacts of climate change. While NZLS has not announced an intention to publish similar guidance as the LSEW to date, we may well see its approach develop as climate-related advice becomes more integrated into the provision of legal advice.

Brief overview of Scopes 1, 2 and 3 emissions outlined in the GHG Protocol:

• Scope 1 – direct emissions from owned or controlled sources (e.g., fuel used to heat an organisation’s offices)
• Scope 2 – indirect emissions from the generation of purchased energy (e.g., electricity used to light, heat, and power an organisation’s offices)
• Scope 3 – all indirect emissions, not included in Scope 2, that occur in the business’ value chain including those related to suppliers (e.g., emissions associated with business travel, catering, IT services, stationery, and furniture)

Source for reference https://corpgov.law.harvard.edu/2023/10/22/california-enacts-major-climate-related-disclosure-laws/