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California Legislature Passes Climate Disclosure BillsSeptember 14, 2023
This week, the California legislature passed two first-in-the-nation climate disclosure bills. If signed into law by Governor Newson, the California Corporate Data Accountability Act (SB 253) will impose greenhouse gas (GHG) emissions reporting obligations on public and private companies with annual revenues over $1 billion that operate in California. SB 261 will require companies with annual revenues over $500 million that operate in California to publish biennial reports on climate-related financial risks.
The California State Senate passed SB 253 on September 12, 2023. The bill, if signed into law, will make California the first state to require large companies to publicly disclose their GHG emissions.
SB 253’s reporting requirements will apply to companies that do business in California and have total annual revenues in excess of $1 billion. The reporting requirements will not kick in until 2026, after the California Air Resources Board (CARB) has adopted implementing regulations, which the agency must do by January 1, 2025. CARB’s regulations will finalize many of the details of the reporting process, including the following key requirements:
- Scope 1 and 2 Emissions. Beginning in 2026, reporting entities must annually publicly disclose their scope 1 and scope 2 GHG emissions for the prior fiscal year. The bill defines Scope 1 emissions as “all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.” Scope 2 emissions are defined as “indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.”
- Scope 3 Emissions. Beginning in 2027, reporting entities must also annually publicly disclose their scope 3 emissions for the prior fiscal year. Scope 3 emissions include “indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control,” which may include “purchased goods and services, business travel, employee commutes, and process and use of sold products.”
- Reporting Standards. Reporting entities must measure and report their GHG emissions in conformance with the Greenhouse Gas Protocol, a set of reporting standards developed by the World Resources Institute and the World Business Council for Sustainable Development. Reporting entities must also engage an independent third-party assurance provider to audit their scope 1 and 2 emissions beginning in 2026, and their scope 3 emissions beginning in 2030.
- Annual Fees. Reporting entities must pay an annual fee to CARB upon filing their annual disclosures. These fees will be used to fund CARB’s oversight of the program.
- Administrative Penalties. Reporting entities that fail to timely file their annual disclosures will be subject to administrative penalties of up to $500,000 per reporting year. Administrative penalties will not be applied to misstatements with regard to scope 3 emissions if they are made with a reasonable basis and disclosed in good faith, or to late filings of scope 3 emissions prior to 2030.
SB 253 is expected to apply to approximately 5,000 large companies that do business in California. Many large companies are already tracking and reporting their scope 1 and 2 emissions, so at least initially, SB 253 should not impose significant new burdens. In a number of ways, the bill recognizes that scope 3 reporting is more challenging. While many companies are already tracking their scope 3 emissions, the bill will force more widespread adoption in line with developments in the EU.
The California State Senate passed SB 261 on September 13, 2023. The bill, if signed into law, will require companies with annual revenues in excess of $500 million that do business in California to prepare biennial climate-related financial risk reports, with the first report due by January 1, 2026.
SB 261 broadly defines “climate-related financial risk” as “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.”
Reports under SB 261 must be prepared in accordance with the disclosure framework recommended by the Task Force on Climate-related Financial Disclosures in 2017. Reports may be consolidated at the parent company level, and companies that already prepare reports under the International Financial Reporting Standards Sustainability Disclosure Standards may use such reports to satisfy SB 261. The bill directs CARB to adopt regulations that authorize it to seek administrative penalties of up to $50,000 per year from covered entities that fail to submit the required reports.
Due to the smaller revenue threshold as compared to SB 253, SB 261 is expected to apply to approximately 10,000 companies doing business in California.
SB 253 and SB 261, if signed into law, will make California the first state to require GHG emissions and climate risk reporting from large companies. The bills come ahead of the U.S. Securities and Exchange Commission’s expected revised rule on Enhancement and Standardization of Climate-Related Disclosures for Investors. First proposed on March 21, 2022, the rule, if adopted, would also require disclosure of GHG emissions and climate-related financial risks by publicly traded companies.
The EU’s new Corporate Sustainability Reporting Directive (CSRD) also requires the reporting of scope 1, 2 and 3 emissions and climate-related financial risks, in addition to a much broader array of sustainability-related information. That directive applies to non-EU entities in addition to EU entities, depending on whether they have shares listed in the EU or do a certain amount of business in the EU. Depending on a number of factors, the CSRD will begin applying to covered non-EU entities beginning in 2024, 2025, 2026, or 2028.
Governor Newsom has until October 14, 2023 to veto SB 253 and SB 261, or they will automatically become state law.
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