Not Being an Ostrich Does Not Mean You Have to Crow: Corporate Oversight and the Limits of Compelled Climate Disclosure

Here is why that distinction matters now. California requires large companies to publicly report their greenhouse gas emissions (SB 253) and their climate-related financial risks (SB 261). Business groups challenged those mandates as compelled speech: the First Amendment limits the government’s power to force a company to say something it would rather not say. The Ninth Circuit has now agreed in part, and its reasoning draws a line between what a board needs to know and what the government can compel a company to say.

In US Chamber of Commerce v. Sanchez, the Ninth Circuit limited California’s climate-disclosure requirements. The First Amendment question turned on how closely the required reporting is tied to the company’s own business. The court treated Scope 1 and Scope 2 greenhouse gas emissions reporting as commercial speech tied to a company’s own activities, which receives reduced First Amendment protection. But it held that compelled Scope 3 reporting, which covers emissions from suppliers, customers, and other activities beyond a company’s own operations, reaches too far beyond those activities to receive the same reduced protection. The court also concluded that SB 261’s climate-related financial risk reporting requires predictions and judgments, so the challenged provisions face strict scrutiny, the most demanding constitutional test, which the court found them unlikely to survive.

The ruling also highlights a broader contrast. Corporate governance focuses on information flowing in, not out. The doctrines that grew out of the Delaware decision In re Caremark International Inc. Derivative Litigation require boards to establish systems reasonably designed to surface significant compliance risks. The First Amendment, by contrast, can limit the government’s power to compel a company to disclose information publicly.

The principle is simple but consequential: The law can require a board to know things the government cannot require the company to say. As sustainability regulation reaches into supply chains, climate risk, biodiversity, and predictions about an uncertain future, that distinction will matter more.

California’s Climate-Disclosure Laws Meet the First Amendment

California enacted SB 253 and SB 261 in 2023 as major components of its corporate climate-disclosure regime. (For background, see here.)

SB 253 requires covered companies to report greenhouse gas emissions. Scope 1 generally covers emissions from sources a company owns or controls. Scope 2 covers emissions from purchased energy. Scope 3 goes further, reaching indirect emissions throughout a company’s value chain, potentially including those tied to suppliers, customers, transportation, business travel, employee commuting, and use of sold products.

SB 261 addresses climate-related financial risk. It requires covered companies to report those risks and the measures adopted to reduce or adapt to them.

The Ninth Circuit drew its line at Scope 3. Scope 1 and Scope 2 reporting remains tied to a company’s own activities and therefore qualifies as commercial speech. Scope 3 emissions arise principally from activities outside the company’s ownership or control, so a company may have to obtain information from third parties or simply estimate. The court concluded that such reporting is too far removed from the company’s own operations and transactions to receive reduced First Amendment protection.

SB 261 fared no better. It requires companies to assess climate-related risks and opportunities and their effect on strategy and financial planning. That calls for predictions and judgments, so the challenged provisions faced strict scrutiny they likely could not survive.

A Right Not to Speak Is Not a License Not to Know

Some disclosure requirements may be unconstitutional, but that does not tell directors what they should know. Caremark and its progeny ask a different question.

Those cases require directors to make a good-faith effort to establish and monitor systems that bring important legal-compliance information to their attention. Directors cannot deliberately ignore legally significant risks just because the activities creating them occur outside the corporation.

Consider a manufacturer that depends on a few critical suppliers. Those suppliers may face environmental restrictions, energy constraints, water shortages, trade barriers, or physical disruptions, any of which could affect the manufacturer’s costs, production, or ability to deliver. Under Caremark, directors must assess mission-critical risks and create systems so information about those risks is factored into corporate decisions.

The Ninth Circuit’s decision does not make those risks disappear. What it does is separate two questions: 

• Does the company need information about conduct outside its operations to understand and manage risks to its own business? 
• Can the government compel the company to calculate and publicly report that information?

The answer to the second can be no even when the answer to the first is yes.

That is the difference between Caremark and compelled disclosure: information in versus information out. Caremark is concerned with information flowing into the corporation, so directors can oversee it. As we have previously discussed, Caremark is ultimately a doctrine about governance, not an independent mandate to pursue particular environmental or social policies. Compelled disclosure laws move information in the opposite direction, out to regulators, investors, or the public, and the First Amendment can limit the government’s ability to prescribe what a corporation must say. (Securities laws add yet another set of obligations governing what companies say once they speak. For more, see here.)

Knowing and saying are different legal acts, and Scope 3 shows why. A company may have compelling reasons, or even an obligation, to understand vulnerabilities throughout its supply chain without calculating and publicly reporting a comprehensive greenhouse-gas inventory for every participant in that chain. The information may overlap, but the legal obligations do not.

‘Must,’ ‘May,’ and ‘Makes Business Sense’

The decision reinforces a practical framework for companies navigating increasingly contested sustainability requirements.

• First, ask what the company must do. Identify the laws actually applicable to the business, including permitting requirements, emissions limits, product standards, disclosure rules, securities requirements, and contractual commitments.
• Second, ask what the company may do. Voluntary environmental or sustainability initiatives can raise separate questions under fiduciary, securities, antitrust, consumer-protection, and other laws.
• Third, ask what makes business sense anyway. Energy remains a cost. Scarce resources remain scarce. Environmental liabilities remain liabilities. Weather can disrupt facilities and supply chains. None of that depends on whether a company calls its response sustainability; environmental, social, and governance; resilience; or just sound management. We recently discussed these distinctions at length here.

The Ninth Circuit adds a fourth question: What can the government make the company say? That question matters more as sustainability reporting expands beyond carbon.

Nature-related reporting, for example, can require companies to consider dependencies and impacts involving water, land, biodiversity, ecosystems, and supply chains. Those subjects can be considerably harder to measure than emissions from a company-owned facility and may depend heavily on where operations and suppliers are located. (For more, see here.)

The farther a disclosure regime moves from measurable facts about a company’s own operations toward third-party conduct, modeling, predictions, and judgments about the future, the more the Ninth Circuit’s distinction will bite. Some of that information may be extremely valuable to directors and management, because developments outside the corporation can present very real risks inside it. But whether information matters to corporate decision making and whether the government can constitutionally compel its disclosure remains separate questions.

The Duty to Know Versus the Power to Compel

The decision marks a boundary between corporate oversight and compelled corporate speech. For boards and management, that boundary calls for discipline about information. Companies need information to comply with law, to identify and manage business risks, and to make appropriate public disclosures. Those categories overlap, but they are not coextensive.

A constitutional limit on disclosure should not become an excuse for corporate blindness. If supply-chain risks materially affect the business, directors and management have compelling reasons to understand them whether or not California can require the company to calculate and publish a particular metric.

The converse matters too. Information that might be useful to a prudent board does not give the government constitutional authority to make the corporation collect, characterize, and broadcast it. Governance asks whether those responsible for overseeing a corporation have the information they need to oversee it. The First Amendment asks how far the government may go in making the corporation speak. Boards should keep their heads out of the sand. But not being an ostrich does not mean you have to crow.