The U.S. federal government’s intensified focus on environmental issues is reinforced by initiatives we have previously discussed, such as the Securities and Exchange Commission’s proposed climate-related disclosure requirements for public companies and the Department of Justice’s (DOJ) environmental justice enforcement strategy —a strategy that the DOJ is actively pursuing, exemplified by the recent environmental civil enforcement action against an internet retail company. Now, leading the charge at the state level is California, where, on October 7, 2023, Governor Newsom signed into law controversial landmark climate disclosure bills: SB-253 and SB-261.

These new California laws broadly apply to all companies – public and private – that operate in California, irrespective of where they are headquartered or organized. The new legislation requires that companies with total annual revenues over $1 billion (estimated to exceed 5,300 companies) must begin disclosing their Scope 1 (direct) and Scope 2 (indirect) greenhouse gas emissions by January 1, 2025, and their Scope 3 (indirect upstream and downstream) emissions by 2027. The new legislation also requires that companies with total annual revenues over $500 million (estimated to exceed 10,000 companies) must, by January 1, 2026, begin biennially reporting on their climate-related financial risks. Many observers have commented on the difficulty that companies might face in complying with these onerous disclosure requirements — particularly private companies that might lack robust and mature internal controls and reporting needed to accurately make the required disclosures. Even Governor Newsom himself has commented that the implementation deadlines of these new laws “are likely infeasible,” expressing concern that the laws could lead to “inconsistent reporting across businesses subject to the measure.”

With these new laws requiring burdensome disclosures comes enhanced risks for companies and their directors and officers (D&Os). Chief among such risks is the specter of shareholder litigation involving securities class action claims alleging misstatements with respect to companies’ environmental disclosures and derivative breach of fiduciary duty claims challenging D&Os’ oversight of companies’ environment-related practices and internal controls. Insureds should regularly audit their D&O insurance policies and work with an experienced broker to optimize coverage for environmental-related D&O claims.