California cracks down on corporate greenwashing

In the United States, a lot of people are concerned about climate change. A 2022 Pew Research poll found 54% of Americans "describe climate change as a major threat to the country’s well-being." An even larger number of Americans, 67%, believe that corporations are "large businesses and corporations are doing too little to reduce the effects of climate change."

So corporations, eager to improve their image among American consumers, have made dramatic announcements about their commitment to combating climate change. "What was once called climate change is now a climate crisis," Walmart CEO Doug McMillon said on September 21, 2020. "Ice sheets are collapsing, extreme weather events are increasing, catastrophic fires are occurring, oceans are acidifying and biodiversity is decreasing." McMillon announced Walmart's new goal to "achieve zero emissions in our global operations by 2040." 

It is fairly easy to make promises about 2040, which is still quite far away. It is harder to make real progress now.

So, how is Walmart's effort going? According to Walmart's website, the company is doing great. It has reduced its carbon emission from 17.2 million metric tons of carbon dioxide (MMT CO2e) in 2019 to 15.93 MMT CO2e in 2020, to 13.99 MMT CO2e in 2021. (The company has not yet released data for 2022.) 

But there are no enforceable standards for this kind of reporting. Walmart gets to decide what emissions it wants to include in its public reports, and what it does not. In Walmart's case, it has decided to include emissions it directly produces, known as Scope 1, and emissions from energy it purchases, known as Scope 2. Notably, Walmart's Scope 1 carbon emissions have been increasing in recent years, from 6.85 MMT CO2e in 2019 to 7.37 MMT CO2e. The overall reported reduction at Walmart was achieved through buying cleaner energy. 

But Walmart has decided to exclude from its public reporting all carbon emissions from the products it sells in its stores, known as Scope 3. According to estimates cited by Walmart, Scope 3 emissions account for approximately 95% of Walmart's carbon footprint. It is true that Scope 3 emissions are more difficult to calculate. But Walmart is not making any public effort to do so. That is inconsistent with the Greenhouse Gas Protocol, a "comprehensive global standardized framework[] to measure and manage greenhouse gas emissions."

This makes Walmart's disclosure essentially meaningless. The reported numbers do not indicate whether Walmart is responsible for more or less carbon emissions than the year before. That's why the New Climate Institute, a nonprofit organization that evaluates carbon emissions disclosures, characterized Walmart's disclosures as "low integrity." There are many other large corporations producing climate disclosures that are similarly lacking. 

California, however, recently enacted legislation that could force Walmart and other large corporations to come clean. On Saturday, Governor Gavin Newsom (D) signed historic legislation that will require "more than 5,300 companies that operate in California and make more than $1 billion in annual revenues" to annually report their carbon emissions to the state. Critically, these companies will be required to report Scope 1, 2, and 3 emissions, consistent with the Greenhouse Gas Protocol. The law is premised on the idea that Californians "have a right to know about the sources of carbon pollution. . . in order to make informed decisions.” 

The law will apply to any company "doing business" in California. This does not just include companies that are headquartered or have physical locations in California. Any company that engages "in any transaction for the purpose of financial gain within California" is considered "doing business" in California. This includes Walmart and most of the world's largest companies. 

The new law, the Climate Corporate Data Accountability Act, will require companies to report their Scope 1 and Scope 2 emissions in 2026, and their Scope 3 emission in 2027. The data will be "housed on a new publicly available digital registry administered by an organization contracted by the California State Air Resources Board." 

Failure to accurately report data could result in fines of up to $500,000. Companies who demonstrate they had a "reasonable basis" for their Scope 3 data would not be subject to fines. 

Corporate lobbyists are not done yet

The Climate Corporate Data Accountability Act was adamantly opposed by corporate lobbyists and trade groups. Corporations strongly prefer the status quo, which enables them to set the standards for any carbon emissions disclosure. 

The California Chamber of Commerce (CalChamber), which counts Walmart, Boeing, CVS, and many other major corporations as members, slammed the disclosure law as "a costly reporting requirement that does not help us meet our climate goals." The group claimed the law would give "out-of-state and foreign companies a market advantage, driving production out-of-state and increasing the cost of goods for California residents." CalChamber also claims that "assessing Scope 3 emissions data with any degree of accuracy is not yet possible." (Thousands of companies, however, are already calculating their Scope 3 emissions.) 

Not all corporations, however, agreed with the California Chamber of Commerce's assessment. Microsoft, IKEA USA, Sierra Nevada Brewing Co., Patagonia, Adobe, and others signed an August letter supporting the Climate Corporate Data Accountability Act. The companies said that "disclosure will help companies, investors, and the State better understand emission output, and strengthen the ability of economic actors to strategize in combatting costly risks associated with climate change." The companies argued that "consistent, comparable, and reliable emissions data at scale is necessary to fully assess the global economy’s risk exposure and to navigate the path to a net-zero future." In September, Apple, which is based in California, announced its support for the legislation. 

Corporate lobbyists have not given up. After Newsom signed the legislation, CalChamber released a statement: "We look forward to working with the Governor’s office on SB 253 clean-up legislation that will address some of the major concerns of our members, particularly the impact on small business." The reference to "small business" indicates that CalChamber will seek to undercut the Scope 3 reporting in the law. Although reporting is only required for businesses with more than $1 billion in annual revenue, CalChamber claims that including Scope 3 emissions will require small businesses that contract with larger businesses to calculate carbon emissions estimates. 

Newsom appears open to the idea, telling the New York Times' David Gelles that he wanted "some cleanup" of the new law. Newsom "did not clarify the changes that he wished to make."

The federal factor

Corporate opponents of California's new law argue that it is duplicative because the federal Securities and Exchange Commission (SEC) is considering imposing its own carbon emissions reporting requirements. 

But California's new law differs from the SEC's proposed rules in two key ways. First, the SEC's rules would only apply to public companies. California's rules cover private and public companies. Second, the SEC's rules would not comprehensively require disclosure of Scope 3 emissions. Scope 3 emissions would have to be disclosed if they are "material" for investors or if the company made specific public commitments to reduce Scope 3 emissions. 

SEC Chairman Gary Gensler appeared supportive of California's proposed disclosure requirements during a September 27 appearance during a House oversight hearing. Many corporations have objected to the proposed SEC rule, citing the cost. Gensler argued that complying with the SEC rule would be less expensive than previously estimated since many companies would already be producing similar information for California.