A federal appeals court has drawn a significant line through California’s landmark corporate climate-disclosure regime, with consequences reaching well beyond the state’s borders.
The Ninth Circuit’s decision in US Chamber of Commerce v. Sanchez curtailed two California laws enacted in 2023 that together represented the most ambitious state-level attempt to mandate corporate climate transparency in American history.
SB 253 required large companies to publicly disclose their greenhouse gas emissions across three distinct categories, while SB 261 compelled reporting of climate-related financial risks and the steps companies had taken to address them.
Business groups challenged both laws as unconstitutional compelled speech, arguing the First Amendment restricts the government’s power to force companies to make public declarations they would otherwise choose not to make.
The court drew its sharpest distinction around so-called Scope 3 emissions, which cover indirect greenhouse gases generated throughout a company’s value chain, including suppliers, customers, transportation networks, employee commuting, and the use of products after they are sold.
Scope 1 and Scope 2 reporting, covering emissions from a company’s own facilities and its purchased energy respectively, survived the challenge because the court treated them as commercial speech closely tied to the company’s own operations, which carries reduced First Amendment protection.
Scope 3 disclosures are a different matter entirely: because those emissions arise principally from activities outside a company’s ownership or control, often requiring estimates or data obtained from third parties, the court concluded they cannot receive the same reduced constitutional protection.
SB 261 fared equally badly, with the court finding that reporting climate-related financial risks requires predictions and judgments about an uncertain future, triggering strict scrutiny — the most demanding constitutional standard — which the challenged provisions were found unlikely to survive.
The ruling arrives at a moment when boards of directors are already grappling with a separate but related legal obligation: the duty established under Delaware’s Caremark doctrine to actively monitor and understand significant risks facing the company, including those originating outside its own operations.
Caremark and the Ninth Circuit’s ruling operate in fundamentally opposite directions, one governing what information must flow into the boardroom, the other limiting what the government can force a company to broadcast outward to regulators and investors.
A board may have a genuine governance obligation to understand the vulnerabilities buried in its supply chain — energy constraints, water shortages, trade disruptions, environmental liabilities — without any corresponding constitutional power allowing the state to compel calculation and publication of a detailed greenhouse gas inventory for every participant in that chain.
That distinction carries immediate practical weight for manufacturers or retailers whose operations depend on a small number of critical suppliers exposed to environmental or physical climate risks that could disrupt production or inflate costs.
The decision has also prompted a sharper four-part framework for companies navigating contested sustainability requirements: identify what the law actually requires; clarify what voluntary initiatives are legally permissible; assess what simply makes business sense regardless of labelling; and now ask what the government can constitutionally make the company say.
That fourth question grows more consequential as disclosure regimes expand into nature-related reporting covering water, land use, biodiversity, and ecosystem dependencies — areas considerably harder to measure than emissions from a company-owned facility and far more reliant on third-party data and geographic variables.
The further any disclosure framework moves from verifiable facts about a company’s own activities toward modelling, third-party conduct, and forward-looking judgments, the more the Ninth Circuit’s constitutional reasoning will constrain it.
Critically, the court’s ruling offers no shelter for boards tempted to treat a constitutional limit on disclosure as permission to remain ignorant of risks that could materially threaten the business.
As one analysis of the decision put it: “Boards should keep their heads out of the sand. But not being an ostrich does not mean you have to crow.”
Knowing what threatens the business and being compelled to publicly quantify it are, the court has now confirmed, two separate legal questions that can produce two entirely different answers.