It has been more than five decades since the first Earth Day. It showcases and celebrates efforts of motivated citizens to address environmental challenges and celebrate successes. In 2024, U.S. energy sector greenhouse gas emissions decreased by 4 percent. New York is a leader in this category. A wind farm located 35 miles east of Montauk can remarkably now power over 70,000 homes without any emissions. Even with many ongoing efforts to reduce emissions, concerns are growing that the goal of limiting global temperature increases to only 1.5 degrees Celsius may be unattainable, resulting in substantial, if unpredictable, consequences.
Today, climate initiatives are an increasing focus of government. Newly enacted laws address climate disclosure and climate trading programs, and bring market forces directly into the sustainability equation. Even though these market-focused approaches can be controversial, America’s CEOs note that sustainability strategies are their top operational priority in the next year, and they expect significant returns from sustainability investments throughout the next three to five years.
Many companies have voluntarily reported their sustainability efforts. Despite conflicting narratives, climate risk is a factor in the decision making of many businesses. In response, there is growing government consensus that larger companies need to transparently address their sustainability efforts. The new climate disclosure laws will impact tens of thousands of companies and become milestones in the field of climate risk and sustainable investment.
The Securities and Exchange Commission this year adopted a climate disclosure rule addressing climate-related risks deemed to have a material impact on businesses. The climate-related risks include direct emission impacts (Scope 1) and indirect impacts (Scope 2) for energy needed for operations. In the final rule, the SEC did not include indirect emissions (Scope 3) that a company does not directly control from the supply chain and customers, both upstream and downstream.
Recently, California enacted a law requiring that each year, companies review, assess and disclose financially related climate risks and the steps they are taking to manage these risks. Companies with a $500 million business threshold must address Scope 1, 2 and 3 emissions. Since almost every company of this size operates in California, estimates indicate over 10,000 large companies, not just those publicly traded, are covered. Another law focuses on annual disclosures of companies with at least $1 billion in revenue.
New York has yet to adopt its own disclosure law. There are, however, pending bills to address the climate disclosure and sustainability space. A leading bill takes a similar approach to California’s and will include supply chain Scope 3 emissions.
New York’s Climate Leadership and Community Protection Act requires a new Cap-and-Invest program accounting for [and cap] all state emissions to meet emission reductions of 40% by 2030, and at least 85% from 1990 levels by 2050. It relies upon market incentives and requires large sources to report emissions and obtain allowances equal to those emissions. The allowance prices will increase over time, providing the incentive to transition to lower-emitting sources. The proposal mandates climate emissions reductions, addresses disadvantaged community and affordability issues, and seeks to equitably support investments in climate mitigation, energy efficiency and clean transportation projects, among others. It will also fund annual rebates mitigating costs to consumers of this climate transition.
New governmental approaches rely upon direct market forces to address climate change. The new climate disclosure rules will set reporting requirements for climate risk and sustainability efforts. This information will then help inform sustainable investment strategies and impact risk aversion in the marketplace. The upcoming Cap-and-Invest program will take a market approach to decrease statewide emission levels.
Each of these laws will undoubtedly face challenges ahead. They represent new and important efforts to build a sustainable climate future.
John Parker is a partner with Sahn Ward Koblenz Coschignano PLLC and an environmental law attorney.
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