Picture this. You’ve spent a year cramming for a big exam, and the night before, someone cancels half the questions. That’s roughly what happened to thousands of large companies this week. On November 9, a U.S. appeals court ruled on the California climate disclosure laws, and it kept some of the rules while freezing others.
The timing was wild, too. The first emissions reports were due the very next day. So who won? Honestly, a bit of everyone. But if you care where your money goes, or you work anywhere near ESG, this one’s worth five minutes of your time.
So what actually happened in court?
California has two climate reporting laws. The first, SB 253, covers companies with more than $1 billion in yearly revenue that do business in the state, and it makes them report their greenhouse gas emissions every year. The second, SB 261, targets firms with more than $500 million in revenue. It asks them to publish a report on how climate change could hurt their finances.
Business groups led by the U.S. Chamber of Commerce sued in early 2025. Their argument? Forcing companies to say these things breaks the First Amendment, the part of the U.S. Constitution that protects free speech. Late last year, the same court had already paused SB 261 while the appeal played out, but it let SB 253 go ahead.
Now the Ninth Circuit has given a fuller answer. It isn’t the final word on whether the laws are constitutional, though. Instead, it decides which rules California can enforce while the case carries on. And that’s still a pretty big deal, because a 2025 preliminary list from the state’s air regulator named more than 4,000 U.S. companies that are likely in scope.
Which parts survived, and which didn’t?
Here’s where it gets a little technical, so let’s keep it simple. Emissions reporting comes in three “scopes.” Scope 1 is the pollution a company makes directly, like burning gas in its own boilers. Scope 2 comes from the electricity it buys. Then Scope 3 covers everything else in its value chain, from suppliers to customers using its products.
The court kept Scope 1 and 2. It said those numbers count as “commercial speech,” which governments can regulate more easily. It also said they serve real goals, such as giving investors reliable emissions data. So those reports still stand.
Scope 3 didn’t make it. The judges found it “insufficiently tethered to the reporting entity’s own operations and capital transactions.” In other words, it asks a company to speak for things it doesn’t fully control. They decided it likely violates the First Amendment.
SB 261 fell too. According to the court, the climate risk reports would force companies into “subjective ideological assessments,” and that goes beyond commercial speech. So that law stays on ice.
One judge, Judge Bennett, partly dissented. In fact, he’d have blocked both laws entirely. That means this wasn’t even the harshest outcome on the table for California.
Why the California climate disclosure fight matters to investors
You might be thinking: I don’t run a billion-dollar company, so why should I care? Fair question. But if you’ve got a pension, an ESG fund or an impact portfolio, you lean on this kind of data, even if you’ve never thought about it.
Business groups are thrilled, of course. Daryl Joseffer of the U.S. Chamber Litigation Center called it “an important victory for businesses.” He also said it stops the state from imposing “massive compliance costs on companies, especially small businesses.”
We get the cost worry. Reporting isn’t free, and California charges a flat fee of $3,106 per company just for SB 253. Yet here’s our honest take: you can’t price a risk you can’t see. Scope 1 and 2 tell you what happens inside a company’s own walls. Scope 3 is where you’d spot the risks hiding in its supply chain, and that’s the piece that just got frozen.
For impact investors, that matters a lot. It’s hard to claim a fund is greener than average when half the picture is missing. If you want to see how regulators elsewhere are tightening up those claims, our piece on ESMA’s new rules for impact funds is a good next read.
Okay, but does this matter outside America?
Short answer: yes, though less than the headlines suggest. California isn’t the only place asking for this stuff. Watershed, a company that sells climate reporting software, points out that Scope 3 work still matters for frameworks like IFRS S2, Europe’s CSRD and the UK’s upcoming SRS. Those are reporting rule books used in other big markets.
The global trend hasn’t reversed, either. Britain is moving to regulate the firms that score companies on ESG, as we covered in our look at the new UK ESG ratings rules. Meanwhile, standard setters keep adding new topics, like the ISSB’s draft on nature risk.
For us at EIF, and for anyone building a company in Armenia or another emerging market, the lesson’s pretty practical. If you sell to big multinationals, you’re part of their Scope 3. Their questions about your emissions won’t vanish because one U.S. court hit pause. So it’s still smart to know your own numbers.
Where California climate disclosure goes from here
This fight isn’t over. The case now goes back to a lower court, which has to decide whether Scope 3 can be cut out of SB 253 on its own. If it can’t, ESG Today notes that the whole law could end up blocked.
Both sides also have 14 days to ask for a rehearing, including before a larger panel of judges. After that, the Supreme Court could step in. Meanwhile, law firm Clark Hill tells companies to keep meeting their Scope 1 and 2 duties and to watch for appeals.
There’s some breathing room, too. California’s air regulator has promised to go easy in the first year on companies that show good faith, even if their data’s incomplete. Still, the maximum yearly penalty under SB 253 is $500,000, so nobody’s ignoring it.
So here’s the question we keep coming back to. If the most detailed part of the California climate disclosure rules can’t survive in court, will investors start demanding that data themselves? Our bet is yes. Because in the end, money tends to ask harder questions than lawmakers do.