By Allen Campbell, JD, MBA
Are your environmental claims truthful?
For at least a decade or so, hearing that they need to be better stewards of our planetary environment, many companies have responded with public and investor relations campaigns showcasing their environmental virtues. Unfortunately, many of the alleged virtues are exaggerated, misleading or outright falsehoods. Critics call it “greenwashing”.
Legislators and regulators have jumped aboard the anti-greenwashing train. At the front of the train, on October 27 of last year, California Governor Newsom signed the Voluntary Carbon Market Disclosures Act (“VCMDA”, AB 1305). Effective January 1, 2024, it requires companies – both public and private – to provide publicly available disclosures to increase transparency and accountability with respect to climate-related claims. It applies to US and non-US companies of all sizes. As long as it meets the California nexus requirements, any company will be subject to the law. Companies are required to identify and substantiate all existing or planned net-zero, carbon-neutral, or climate-related claims. The reach of this law is extreme; it may apply to product marketing.
Climate performance claims or setting emissions goals
Section 44475.2 of the law creates disclosure obligations for (i) companies that operate within California and (ii) companies that make claims within California:
- Regarding the achievement of net zero emissions;
- That the entity, its affiliates or a product is carbon neutral, or that imply that such entities or products do not add net GHG emissions; or
- That such entities or products have made “significant reductions” to their GHG emissions.
In-scope companies are required to disclose:
- All information regarding how, if at all, a “carbon neutral, “net zero” or similar claim was determined to be accurate or accurately accomplished;
- How interim progress toward such goals is being measured; and
- Whether the data and claims listed have been subject to third-party verification.
Although not perfectly clear, Section 44475.2 probably applies to statements regarding historical achievements as well as to forward-looking goals (i.e., net zero or emissions-reduction targets). Accordingly, this provision may have extremely broad scope, snaring not only companies that make claims regarding the net zero performance of their overall business, but also the much larger universe of companies that set climate goals, or make claims or set goals regarding individual products. In addition, relevant claims include anything that implies that a business or product has achieved a “significant” reduction in emissions, potentially capturing many sustainability-related product marketing statements. The law does not specify what it means to operate in California or make claims within the state, though this may potentially cover all ESG publicity and product marketing statements by companies selling to California customers. Given the number of companies that sell into or otherwise operate in California and either set net zero targets or make claims regarding product emissions performance, Section 44475.2 disclosure obligations may apply to a large percentage of US and international companies – public and private – and remember, there is no revenue threshold.
Companies Making Net-Zero or Carbon-Neutral Claims
Businesses claiming the achievement of net-zero emissions or that the entity, a related or affiliated entity, or a product is “carbon neutral,” does not add net carbon dioxide or greenhouse gases to the climate, or made significant reductions to its emissions, must disclose information about the basis of such claims.
These companies need to disclose all information documenting how the claim was determined to be accurate or accomplished and how interim progress toward that goal is being measured. They must also disclose whether there is independent third-party verification of the company data and claims listed.
The law also does not say what “making claims” means. This is worrisome. At an extreme, does the law apply to companies that make claims on their website, which, while not intended to be directed at California residents, are accessible through the internet to California residents?
Which entities do the VCMDA disclosure obligations apply to?
One of the disclosure obligations imposed by the VCMDA applies to companies claiming (i) the achievement of net-zero emissions or (ii) that the entity, a related or affiliated entity, or a product is “carbon neutral,” does not add net carbon dioxide or greenhouse gases to the environment, or made significant reductions to its emissions.
The law excludes some companies from this disclosure obligation and says it does not apply to entities that “either do not operate within the state, or that do not make claims within the state.” Unfortunately, it does not say what it means to “operate” within California or to make net-zero or carbon-neutral claims within California.
Thus, if broadly interpreted, this requirement could apply to any business that transacts or does business in California or to any business making net-zero or carbon-neutral claims through marketing, advertisement, or sales of product that involve such claims in California. The law also leaves open the scope and applicability of this disclosure obligation as it relates to affiliated entities.
How often do disclosures need to be made?
In-scope companies must provide specified information on their websites and update the information at least once a year. We suggest that companies may do so more often than that.
Substantial Penalties
Violations of the disclosure obligations are subject to civil penalties of up to $2,500 per day for each day that information is not available or is inaccurate on the website, up to a maximum of $500,000 per violation.
The law is unclear about how these penalties will be calculated or applied. For example, if a company fails to accurately disclose several categories of information, will it be subject to one civil penalty of $2,500 per day or several civil penalties of $2,500 per day for each inaccurate disclosure?
When Must the First Disclosures Be Made?
While the VCMDA went into effect on January 1, 2024, it does not state when companies must make their initial disclosures. In the absence of clarification, we recommend that disclosure be made as soon as feasibly possible.
Companies may have extra time to comply. On November 30, 2023, Assembly Member Jesse Gabriel, the author of the law, says the compliance deadline is intended to be January 1, 2025. Therefore, it is possible that the VCMDA will not be enforced in practice until January 1, 2025.
Recommendations
- Review and take inventory of public- or consumer-facing claims – in marketing materials, sustainability reports, websites or elsewhere.
- Consider whether they can reasonably be viewed as being made to persons in California.
- If the claims may be captured by the VCMDA, then (i) review the support for them, including third-party verification, (ii) decide whether they should be modified or removed from public- or consumer-facing materials, and (iii) perhaps make suitable high-level disclosures on the company website. to comply with the VCMDA.
- Begin developing internal controls and procedures to monitor claims made, and to prepare for annual disclosure updates.
Note regarding Carbon Offsets: The VCMDA has a second area of focus, voluntary carbon offsets, but this article does not discuss those provisions of the law.
Note: These new rules supplement new rules contained in SB 253 and SB 261 (together known as the California Climate Accountability Package, or CCAP) which Governor Newsom also signed on October 7. (See our September 23rd blog post entitled Momentous California Climate Accountability Laws Await Governor’s Signature (https://mcalan.com/momentous-california-climate-accountability-laws-await-governors-signature).