In the rapidly evolving landscape of climate-conscious business practices, California has introduced leading legislation targeted against false and misleading claims about the environmental impact or benefits of a product or service (known as greenwashing) with the introduction of Assembly Bill 1305 ("AB 1305"). This legislative initiative is aimed at enhancing the credibility of climate-related claims, particularly in the voluntary carbon market. As businesses grapple with the complexities of navigating carbon reduction goals and green claims, the need for transparent and standardized practices becomes increasingly evident. Whether AB 1305 is the answer remains to be seen. Indeed, the U.K. Financial Conduct Authority recently attempted to introduce similar rules against greenwashing, but was forced to delay enactment of the rules in the face of industry response. See Press Release, Financial Conduct Authority, FCA Proposes New Rules To Tackle Greenwashing (October 25, 2022) https://www.fca.org.uk/news/press-releases/fca-proposes-new-rules-tackle-greenwashing; Kristen McGachey, FCA Delays Final Rules for ESG Labelling Regime, Financial News, July 18, 2023, https://www.fnlondon.com/articles/fca-delays-final-rules-for-esg-labelling-regime-20230718; Elliot Gulliver-Needham, FCA Delays SDR Policy Statement Until Q4 2023, Investment Week, July 18, 2023, https://www.investmentweek.co.uk/news/4120330/fca-delays-sdr-policy-statement-q4-2023. This article explores the multifaceted aspects of AB 1305, including what led to its enactment, the required disclosures, key takeaways, costs, and next steps for businesses.

Anti-Greenwashing Efforts

Spurred by the prevalence and impact of climate action and policies over the past few decades, businesses began marketing their climate friendly efforts to bolster their reputations in the eyes of the public and shareholders, sometimes beyond their capabilities. This phenomenon became known as "greenwashing"—an act of misrepresenting that one's practices, products, or services are environmentally friendly when they are not, or at least not to the extent claimed or implied.

Multiple federal agencies have taken anti-greenwashing action. The U.S. Securities and Exchange Commission ("SEC") proposed rules in March 2022 that would require extensive climate-related disclosures (e.g., the use of voluntary carbon offsets ("VCOs")). See The Enhancement and Standardization of Climate-Related Disclosures for Investors, SEC Release Nos. 33-11042; 34-94478, (Mar. 21, 2022). The Federal Trade Commission ("FTC") established "Green Guides" intended to scrutinize green marketing claims. See 16 C.F.R. § 260 (Dec. 20, 2022). The U.S. Commodity Futures Trading Commission ("CFTC") formed the Environmental Fraud Task Force that is focused on greenwashing, specifically fraud and manipulation in carbon credit markets and misrepresentations about environmental, social, and governmental ("ESG") investment strategies. See CFTC Division of Enforcement Creates Two New Task Forces, CFTC Release No. 8736-23 (June 29, 2023).

Not to be outdone by the federal government, California passed three separate climate-focused disclosure laws: the Voluntary Carbon Markets Disclosure Act (AB 1305), the Climate Corporate Data Accountability Act (SB 253) (n.b.: SB 253 requires U.S. companies with total annual revenues over $1 billion that do business in California to publicly disclose all Scope 1, 2, and 3 greenhouse gas ("GHG") emissions annually), and the Climate-Related Financial Risk Act (SB 261) (n.b., SB 261 requires U.S. companies with total annual revenues over $500 million that do business in California to publicly disclose climate-related financial risk in accordance with the Task Force on Climate-Related Financial Disclosures framework on a biennial basis). This article focuses on AB 1305. At its core, AB 1305 seeks to bridge the gap between corporate sustainability rhetoric and concrete actions directed at positive environmental impact. Primarily, the bill mandates that businesses engaging in carbon offset activities or making specific climate claims provide detailed and accurate information regarding their endeavors. See AB 1305, 2023 Leg. § 1 (Cal. 2023). This includes disclosing the methodologies employed in calculating carbon reductions, ensuring that claims are substantiated and not merely marketing ploys. AB 1305 also places a significant emphasis on harmonizing the terminology used in the voluntary carbon market, aiming to contribute to a standardized and understandable framework for stakeholders. For example, companies that sell or market a product that claims to be a "greenhouse gas emissions offset," a "voluntary emissions reduction," a "retail offset" must disclose prescribed details on their website to substantiate their claims. Likewise, entities that make claims regarding net zero emissions or carbon neutrality, or that make claims that a product does not add net carbon dioxide or greenhouse gases to the atmosphere, must disclose how such claims were accomplished and measured.

Required Disclosures

The disclosure requirements apply to any entity operating in California regardless of size, making AB 1305 the baseline expectation compared to its counterparts, including the recently enacted SB 253 ($1 billion in annual revenue required) and SB 261 (California companies with over $500 million in annual revenue). AB 1305 applies to California and foreign entities with no minimum activity threshold.

The legislation provides no definition for what it means to "operate" or "make claims" in California. Accordingly, such terms may be construed broadly to provide sweeping force to AB 1305. Indeed, it is difficult to determine or predict the confines of AB 1305—not only because this first-of-its-kind legislation has critical undefined terms, but also because of the nature of internet communications. Public companies, for example, often make statements regarding climate policies or practices in SEC filings, which are available online. But even private companies regularly publish these statements on their websites, in advertising and marketing materials and in sustainability reports. To the extent these companies "operate" in California, they may be subject to AB 1305 for "making claims" regarding their climate initiatives. Similarly, even if a company has no California operations, mere marketing of VCOs may subject it to AB 1305, as "marketing" remains undefined. On its face, AB 1305 could conceivably cover every claim on a website of a company as long as the website is accessible in California—an incredibly broad application.

Because significant aspects of AB 1305 are open to interpretation, many questions regarding its scope and applicability will likely be litigated in the coming years. Until then, companies will be expected to comply with various disclosure obligations:

Section 44475 applies specifically to business entities that market or sell VCOs within the state. Such businesses are required to post all of the following information on their website:

  • Details regarding the applicable carbon offset project, including all of the following information:
    1. The specific protocol used to estimate emissions reductions or removal benefits.
    2. The location of the offset project site and project timeline, including the start date.
    3. The date when a specified quantity of emissions reductions or removals started, will start, was modified, or was reversed.
    4. The type of project, including whether the offsets from the project are derived from a carbon removal, an avoided emission, or, in the case of a project with both carbon removals and avoided emissions, the breakdown of offsets from each.
    5. Whether the project meets any standards established by law or by a nonprofit entity.
    6. The durability period for any project for which the seller knows or should know that the durability of the project's greenhouse gas reductions or greenhouse gas removal enhancements is less than the atmospheric lifetime of carbon dioxide emissions.
    7. Whether there is independent expert or third-party validation or verification of the project attributes.
    8. Emissions reduced or carbon removed on an annual basis.
  • Accountability measures if a project is not completed or does not meet the projected emissions reductions or removal benefits, including details about what an entity will do if carbon storage projects are reversed or future emissions reductions do not materialize.
  • Data and methods to reproduce and verify the number of emissions reduction or removal credits issued.

Section 44475.1 applies to entities that operate within California or purchase or use VCOs sold within the state and make marketing claims regarding emissions. These businesses must disclose all of the following on their website:

  • The business selling the VCO and a project ID number or name if applicable.
  • The offset project type, including whether it is purchased or derived from a carbon removal, avoided emission, or combination of both.
  • The protocol used to estimate emissions reductions or removal benefits.
  • Whether there is independent third-party verification.

Section 44475.2 applies to entities that are operating in the state and are making emissions marketing claims within the state. Their disclosure requirements include:

  • All information documenting how its emissions claim was determined to be accurate or actually accomplished or how its interim progress is measured.
  • Whether there is independent third-party verification of the company data and claims listed.

As noted above, it is unclear what activities would constitute operating in California and thereby trigger the disclosure requirements under this Section. The statute may be read broadly to encompass any company subject to personal jurisdiction in California, for example.

Enforcement and Costs

AB 1305 imposes civil fines of not more than $2,500 each day that information is not available or is inaccurate on an entity's website. Such penalties cannot exceed a total amount of $500,000. Enforcement of AB 1305 will come in the form of civil actions brought by California's Attorney General, district attorneys, county counsel, or city attorneys in courts of competent jurisdiction. See AB 1305, 2023 Leg. § 1 (Cal. 2023).

Because private litigants cannot enforce the terms of AB 1305, there is no immediate risk of a flood of enforcement suits. However, because AB 1305 (and SB 253 and SB 261) impose affirmative disclosure obligations, companies may nevertheless experience an increase in litigation involving climate claims, including securities class actions. This is due to the additional public information that will be available to enterprising plaintiffs, activists, and regulatory authorities who were already pursuing litigation based on environmental claims before the passage of AB 1305. The disclosure obligations of AB 1305 will, in effect, give such entities free pre-suit discovery into a company's underlying ESG data and strategies, exposing those companies to greater scrutiny—particularly public companies that have expressed various ESG goals and commitments to their shareholders and the public. Companies will need to be prepared to defend not only the substance of their statements, but also the due diligence exercised in making them, their methodology and accuracy, and corporate oversight of the process.

Companies and their legal teams will want to evaluate the risk of liability and weigh it against the value of their current or expected climate-related statements to ensure the risk is worth the reward. Companies likely have already started to adjust their climate-related communications in response to SEC, FTC, and CFTC actions, but one can expect more drastic changes given the increased pressure and consequences of failing to comply (or complying) with AB 1305.

Key Takeaways

AB 1305 sets the stage for a paradigm shift in how businesses, particularly private businesses, approach and communicate their environmental commitments. Looking ahead, it is anticipated that AB 1305 will catalyze a new era of corporate practices where climate goals are not merely lofty marketing statements but verifiable and quantifiable commitments. Moreover, AB 1305 represents significant legislation at the state level to address greenwashing by establishing robust requirements for businesses to substantiate their climate-related claims. The legislation aims to ensure that environmental assertions are accurate, transparent, and align with genuine sustainability efforts.

The legislation also places a particular emphasis on fortifying the integrity of voluntary carbon markets. Businesses engaging in carbon offset activities are now required to provide detailed information on methodologies used in calculating carbon reductions, contributing to a more standardized and credible voluntary carbon market.

AB 1305 seeks to standardize the terminology used in climate-related claims, creating a consistent framework that enhances clarity for businesses, consumers, and other stakeholders. This move towards standardized disclosure aims to reduce ambiguity and enhance the reliability of reported environmental achievements.

One of the enduring impacts of AB 1305 may lay in its potential to reshape consumer trust. By demanding accurate and substantiated climate-related claims, the legislation signals a departure from the era of greenwashing, with a goal of fostering an environment in which businesses are held accountable for their environmental stewardship. This shift towards transparency is likely to resonate with environmentally conscious consumers who are increasingly demanding authenticity and ethical practices from the brands they support.

Further, the legislation's influence is expected to extend beyond California's borders. As a trendsetter in environmental regulations, California's adoption of AB 1305 may prompt other jurisdictions to reconsider and enhance their own climate disclosure frameworks. This harmonization of standards could contribute to a more cohesive global effort in addressing climate change, with businesses worldwide aligning their practices with increasingly stringent environmental expectations. Certainly, companies outside California will wait to see how AB 1305 will be enforced, how long it will take before it is applied in other states, and what the FTC will update next in its Green Guides.

These key takeaways underscore the transformative nature of AB 1305, not only in terms of compliance for businesses but also in shaping a more transparent, accountable, and sustainable future for the business landscape and the fight against climate change.

Next Steps

AB 1305 became effective January 1, 2024—a tight turnaround for companies to ensure that they are in compliance with the new law. With the new legislation now in full force, companies should begin taking at least the following steps:

  • Analyze current advertising and marketing claims to determine whether they are subject to the new regulation;
  • Substantiate current or planned net zero, carbon neutrality, or emissions reduction disclosures;
  • Ensure that any claims related to future goals or achievements are backed by a substantive plan;
  • Gather data on offsets sufficient to make any disclosures;
  • Exercise due diligence when purchasing carbon credits to ensure they meet market and/or regulatory expectations;
  • Develop and maintain detailed records regarding carbon credits;
  • Engage a third-party to perform independent audits or reviews; and
  • Prepare a plan for a consistent assessment of marketing claims.

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