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Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership team.

Lindsey Hall: Welcome to ESG Insider, an S&P Global podcast, where Esther and I take you inside the environmental, social and governance issues that are shaping the rapidly evolving sustainability landscape.

Esther Whieldon: All this week, we've been on the ground at Climate Week NYC. ESG Insider is an official podcast of The Nest Climate Campus, and during this 3-day event, we got to speak to a lot of stakeholders from across the sustainability world.

Lindsey Hall: That's right. And that includes California State Senator Henry Stern. Senator Stern introduced 1 of 2 climate laws that California enacted in 2023. Senate Bill 261 requires certain companies to prepare reports on climate change risks. The other, Senate Bill 253, requires certain companies to estimate and publicly disclose their greenhouse gas emissions.

Taken together, these bills are known as the Climate Accountability Package. Earlier this year, the U.S. Chamber of Commerce and other business groups challenged the 2 laws in court. Senator Stern sat down with me on the sidelines of Climate Week NYC to talk about the laws and the future of climate disclosure. Here's our interview.

Sen. Henry Stern: I'm Henry Stern, and I'm a State Senator, and there's about 40 of us in California, so I represent about 1 million people in L.A. And California has a long history of doing work in the climate and environmental arena. So I chair the Joint Climate Committee for the state, and we passed some bills last year that a new era, I guess, in policymaking for us because a lot of times, the work we've done is looking at automobile emissions, looking at power plants, sort of these typical regulated sectors.

This is a little different. This isn't us actually trying to regulate the financial industry, but instead give a framework for disclosure that's going to provide some stability to the financial and sort of corporate sectors. And so SB 253 and 261, we passed them last year. They all take effect -- well, the rule-making start next year. And then by '26, hopefully, in alignment with some of the EU work and multinational work going on, we can sort of stabilize the marketplace.

Lindsey Hall: And what should our audience who's not familiar, what should they understand about those 2 bills?

Sen. Henry Stern: SB 253 requires Scope 1 to 3 emissions consistent with the GHG protocol and 261 requires submission of TCFD-aligned or ISSB-aligned reporting all to our sort of central regulator, the California Resources Board. The compliance dates really start in '26. Scope 1 and 2 is sort of phase 1 on the emission side. And then Scope 3 will kick in, in '27.

So we're hoping that's a sort of stair-step approach and learning approach for those who maybe aren't familiar with this yet or don't have to, maybe don't play ball in multiple markets, that we can walk them through it. But a lot of the big fish know how to do this stuff. This is not rocket science for them. It's just trying to, again, find them a venue that's going to give them enough stability to get a U.S. jurisdiction to stamp it and say, "This works."

Lindsey Hall: And what can you tell me about who is subject to these rules?

Sen. Henry Stern: The risk disclosure framework under 261, TCFD- and ISSB-aligned reporting is for companies doing business in California making more than $500 million a year in revenues. And the threshold on 253 is for $1 billion annual. And so this is a large group of companies, and it's not just public companies. So unlike the SEC rule, this applies to private equity, private companies and so not just those publicly traded. So it's a pretty broad swath.

Lindsey Hall: Okay, just a quick explanatory interlude from me. In March 2024, the U.S. Securities and Exchange Commission finalized its long-anticipated rule that requires thousands of publicly traded companies to disclose certain climate-related information. That rule quickly faced litigation and the SEC issued a voluntary stay. We'll include a link in our show notes to the podcast episode we released about that rule.

You heard Senator Stern talking about different scopes of emissions. So as a quick refresher, Scope 1 emissions are direct ones from a company's operations. Scope 2 emissions are indirect ones that are primarily derived from purchased energy. Then there are Scope 3 emissions, and those are the ones that occur up and down a company's supply chain as well as when a customer uses the product. California's Bill 253 includes Scope 1, 2 and 3 emissions, while the SEC's climate disclosure rule includes just Scope 1 and 2. You also heard Senator Stern using a couple of acronyms.

As a reminder, the ISSB, that's the International Sustainability Standards Board, which launched its first 2 sustainability-related standards in June 2023. Those standards build on existing frameworks like the Task Force on Climate-related Financial Disclosures, or TCFD, another acronym you heard mentioned. Then there's CSRD, that's the Corporate Sustainability Reporting Directive, a set of European sustainability reporting rules for companies. Okay, back to my interview with Senator Stern.

Okay. And you bring up the SEC rule. We have a lot of interest from our listeners in this rule. And in fact, our most popular episode we've ever done was on that climate disclosure rule from the U.S. Securities and Exchange Commission. What should our listeners understand about this landscape and how the California rules fit in with the SEC?

Sen. Henry Stern: You read the SEC rule, they talk about the California rules a lot, and they expressly mentioned that these are part of the regulatory landscape, too. And so while that rule has stayed voluntarily by the SEC as the litigation is pending, our rules are not. And so we really followed closely what the SEC was doing and tried to build a framework that would sort of, I guess, be consistent with, but I would say it's a little more thorough. We go all the way through Scope 3. We go into the private company space and not publicly traded or listed companies.

And so I'd say it's a little bit closer to where CSRD and the EU is than where the SEC is. And I'd say we're a little more robust than what the SEC is, but they also face different risks. And so for us, we have a lot more flexibility as a state to impose those under our health and safety rules and sort of my house burned down in a fire, Woolsey Fire a couple of years back. Our climate risks are so real and the structure of American law is such that states have their power to protect their people. We're facing a gauntlet of climate risk, and so we have the authority to get ahead of that and know what's coming.

Lindsey Hall: You're talking about your own personal house, your own town.

Sen. Henry Stern: Yes, I went through a wildfire myself. And actually, the district I represent has had some of the most catastrophic wildfires in U.S. history and not to mention the largest methane disaster in U.S. history. It's not my fault, I promise. It all happened on my watch, and I feel an obligation to get ahead of some of these big risks, deregulated fossil fuel infrastructure investment that's not being properly -- safety is not being properly taken into account, risk of wildfire, flood, sea level rise. This is all sort of very real.

We're in an insurance crisis also in California as a result of all this. So we want to get smart, get ahead of the market and really protect our businesses and our economy to not go sort of blindfolded into this dangerous new decade.

Lindsey Hall: So clearly, for California, the impacts of climate change are very visceral.

Sen. Henry Stern: Absolutely. I think we're on fire in 4 different places right now in the state. Our grid has to deal with extreme heat levels that we've never seen before. The Bay Area that's always supposed to be cool and breezy and magical is you're hitting 100 degrees 10 days in a row and people don't have air conditioners. So it's very real, regardless of whether you want to call it climate change. It's very hot or it's dangerous or you get evacuated from your home. And so it stops being political when your house is on fire.

Lindsey Hall: Right. And so is it political though? Are people -- talk to me about the reception to this rule.

Sen. Henry Stern: Well, the unfortunate thing is that I think the vast majority of the business community actually, that we've been talking to, knows how to do this. Most of the major financial institutions, traders, securities institutions, Fortune 500s, they all are pretty comfortable with both GHG protocol as well as TCFD and ISSB frameworks, but the U.S. Chamber, and we're still trying to understand how this came together, decided to litigate our laws.

And so right now in federal, in lower court, both laws are being challenged on very strange grounds, very novel kind of argument. And so their argument that the first amendment bars California from requiring this kind of data disclosure as a form of compelled political speech. I can't tell you what to say about politics. This is your freedom of speech to have. They ascribe that same freedom to a corporation, which, okay, but that the nature of this data disclosure is somehow tantamount to you holding a sign up at a rally saying how you feel about whatever new laws are being passed or who you want to vote for President.

And so they're injecting an argument that says, basically, any form of disclosure is a form of political speech that's being compelled by government and therefore, unconstitutional, which could have major ramifications. So we're really concerned that we want this off the presidential debate stage. We want this out of the headlines and really into the weeds and just to become sort of practical useful information for the market.

It's unfortunate that we've sort of -- the eye is upon us now, but we're hoping that -- the Attorney General is on stage right now. We're hoping we get this dismissed in lower court and really that some of the leaders in the corporate space step up and say, "Let's get out of the courtroom and let's get down to the brass tacks here," and that we can actually put a constructive path forward.

So the rule is not stayed by the courts. We're still -- we have a $10 million budget to go hire personnel and get going this next year, starting in January. So we're plowing ahead, but those storm clouds are certainly around.

Lindsey Hall: Okay. Two quick follow-ups. So you said the Attorney General is on stage right now. You're referring to the California State Attorney General, correct?

Sen. Henry Stern: Sure. Yes. Sorry. Yes, Rob Bonta is on stage at the event and has done a really good job in defending the case. And so there's a motion to dismiss now pending before Federal Circuit Court. And that trial, I think, is set for October, somewhere next month. So it's coming up, something to watch.

Lindsey Hall: So we'll be watching that.

Sen. Henry Stern: Yes, watch that trial and see how that plays out in court. Again, very novel, unprecedented kind of legal argument being made that we're worried about the ramifications. But meanwhile, we just have to keep plowing ahead and doing the legwork of getting these rules up and running.

Lindsey Hall: And just one more clarification. You said that the suit was brought by the Chamber of Commerce, that's the U.S. Chamber of Commerce?

Sen. Henry Stern: It's actually the U.S. Chamber and the California Chamber of Congress. So they combined forces. My hope is that corporate leaders start to step up and say, "Let's deescalate here and just get down to finding a practical way to get that material risk and emissions disclosure."

Lindsey Hall: I guess my final question for you today, Senator, is just there is a lot of the business community here represented at Climate Week NYC, either at the Nest Climate Campus or at some of the hundreds of other events that are taking place. What's the message that you're trying to get to that community?

Sen. Henry Stern: That we're here to help and that we need them, whether you're a CSO or Deputy General Counsel, to not let the politics invade the fiduciary duties of your companies to deliver good results to your shareholders, to disclose risk to your folks and to find some legal stability in the American marketplace. And so we're really going to need their help in speaking up because the concern is that if we let this sort of become just a talking point where Trump says this and Harris says that and pick a side that the economy is not going to benefit from that kind of division.

So we're hoping that they start to speak up and make their voices heard. We've had very good conversations all week from mid-caps all the way to the biggest fish out there about the feasibility of doing all this. So we feel really confident. It's just trying to disentangle politics from practicality.

Lindsey Hall: I said last question, but let me just follow up on that.

Sen. Henry Stern: Please, yes. I'm happy to be here.

Lindsey Hall: Thank you. What are you hearing? And can I dig in a little bit more? What are those conversations with the corporations?

Sen. Henry Stern: Well, the folks I'm talking to are the people already preparing for compliance under the new CSRD protocols and looking at what's coming out of Canada. We talk about a lot of what they're doing in other jurisdictions. And we've been talking about the magic staple. The intent here, at least in California, is that if you're going through all that legwork and going through a global emissions disclosure in the EU that we don't want you to write a whole new report and go through a whole new set of protocols. I just want you to put that magic staple on there and submit the same thing to California.

So the laws allow for that. So the deeper dives have really been with American companies that may not have exposure, say, in Europe or in Asian markets. And so for those folks, I think it's a little more of a learning curve. But for the bigs out there, it's been very affirming that we know this is doable and a lot of it is worried about getting caught up in ESG politics because there's a consequence. If you -- depending on how you market your work out there, you could get hit with threats of boycotts in certain states. We know there's been litigation pushing back on that.

And so that makes -- that's a deterrent effect. So we sort of have to push things back the other way and say, "No, no, first of all, if you comply in California, no one can sue you from another state for doing so." If you're complying with one state's rules, another state can't sue you or boycott you just for being in compliance with law. That's your federal obligation to comply with those contracts. And so I don't know, the other flank here. That's our job in California, is to try to find some equilibrium.

Lindsey Hall: And what about with other states? What are other state senators...

Sen. Henry Stern: So there's a bunch of states that have actually been very interested in passing a follow-on legislation that we've been in communication with here in New York, Washington, across the country, I've been talking to a lot of different of my counterparts. The idea, though, to avoid sort of a multi-jurisdictional, we don't want a patchwork of regulation. So the sort of general plan, at least as of right now, is to say, "Let's try to get these California rules up and running. Let's get past the courtroom battles and find a framework that really works."

And then by that time, maybe the SEC will start to step in and fill the gap for the other states. But you could even foresee interstate compacts and sort of follow-on legislation where they're doing it. But the way the law is written is if you're doing business in California, you could be a company from Iowa, a company from Japan. It doesn't just cut off at the state line. So this is not only about California companies.

So in some ways, we can do the legwork for the rest of the country and happy to do it. Those who aren't in 125-degree days walking their kids to school, if they're not yet, they will be. So anyway, it's pretty real out there.

Lindsey Hall: Well, thank you so much, Senator Stern, for sitting down with me.

Sen. Henry Stern: Such a pleasure to be on the podcast and keep up the good work. I'm a fan, too. So...

Lindsey Hall: Thank you.

Sen. Henry Stern: Yes. Thanks to all the audience out there for listening, and appreciate your time.

Lindsey Hall: So as Senator Stern said, this topic is still unfolding, and we'll continue to watch with interest.

Esther Whieldon: We'll bring you more coverage on this topic and other key themes from Climate Week in upcoming episodes. So please stay tuned.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider. If you like what you heard today, please subscribe, share and leave us a review wherever you get your podcast.

Esther Whieldon: And a special thanks to our agency partner, The 199. See you next time.

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