California Bill Would Require Climate-Related Financial Risk Reports
Earlier this month, I wrote about a California bill, SB 260, that would impose greenhouse gas emissions disclosure obligations on "publicly traded domestic corporations" and "publicly traded foreign corporations". That bill will is now set for hearing before the Senate Environmental Quality Committee on April 12.
The California legislature will also be mulling the enactment of another bill that would require the filing of climate-related financial risk reports with the Department of Financial Protection & Innovation. This bill, SB 449 (Stern), would apply to banks, corporations, credit unions, finance lenders, insurers, investment advisors, real estate investment trusts, and mortgage lenders, in each case as defined. The bill would define “Climate-related financial risk” to mean:
"material risk of harm to immediate and long-term financial outcomes due to climate change, including, but not limited to, risks to corporate operations, provision of goods and services, real estate, supply chains, employee health and safety, capital and financial investments, institutional investments, client investments, financial standing of loan recipients and borrowers, shareholder value, insured assets, consumer demand, and financial markets and economic health".
The bill defines "corporation" by reference to Section 162 of the California Corporations Code (i.e., a corporation organized under the General Corporation Law or subject to it under the provisions of Section 102(a)). Until January 1, 2025, the definition would also require that the corporation have annual gross revenues of at least $100,000,000 in the prior calendar year. Thereafter, the threshold is reduced to $50,000,000. There is no requirement that the corporation be subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 or that the corporation have any nexus (other than incorporation) to the state of California. Foreign corporations would not be subject to the reporting requirement unless they happen to fall within one of the other categories listed in the bill, such as finance lender.
The bill is remarkable for its sloppy drafting. For example, it defines "investment advisor" as, a broker-dealer or investment advisor licensed by the Department of Financial Protection & Innovation, in effect defining an equine quadruped as either an equine or a bovine quadruped. Because broker-dealers are generally licensed under both federal and state law and investment advisers are only licensed under federal or state law (but not both), the bill's definition would arbitrarily impose reporting requirements on all broker-dealers and only some investment advisers. The regulatory compass is further skewed by the additional requirement that the "investment advisor" transact or manage securities for accounts cumulatively totaling at least of $100,000,000 in the prior calendar year. The bill's author seems unaware that investment advisers may register under the federal Investment Company Act if they have at least $ 100 million in assets under management and must register if they have at least $110 million in assets under management. Under Section 203A(b) of the Investment Advisers Act, California cannot require state registration of federally registered investment advisers. Thus, only a few investment advisers initially would be "investment advisors", as defined. The number would increase when the threshold declines to $50,000,000 in 2025. It is unclear whether the term "manage securities for accounts" has the same meaning as "assets under management".