On September 12 and 13, 2023, the California State Legislature passed two state bills mandating climate-related disclosures by U.S. corporate entities that do business in California and meet certain annual revenue thresholds.
The first, the Climate Corporate Data Accountability Act (SB 253), requires U.S.-based businesses with total annual revenues over one billion dollars and doing business in California to annually report their Scope 1, Scope 2, and Scope 3 greenhouse gas emissions.
The second, the Climate-Related Financial Risk Act (SB 261), requires U.S.-based businesses with total annual revenues over five hundred million dollars and doing business in California to prepare biennial climate-related financial risk disclosures aligned with the Task Force on Climate-related Financial Disclosures (“TCFD”) reporting framework or another equivalent framework. On September 17, California Governor Gavin Newson announced that he intends to sign the bills into law.
The California Air Resources Board (“CARB”) is required to adopt regulations implementing the new, mandatory disclosure requirements. Notably, as described below, these California climate disclosure laws are broader for U.S.-based companies than those proposed by the U.S. Securities and Exchange Commission (“SEC”), both in terms of the entities impacted and the reporting requirements (see our recent analysis of the proposed SEC rules here and here. The SEC’s most recent agenda indicates that the SEC anticipates finalizing its rule in October. However, the rule has been delayed before and the SEC is currently reviewing thousands of comments received regarding its proposed rule. In contrast to the SEC’s proposal, both SB 253 and SB 261 apply to both public and private U.S. companies, whereas the SEC has proposed requirements for only public companies (that is, those that are subject to the SEC’s reporting requirements, whether U.S. or non-U.S. companies).
SB 253 – The Climate Corporate Data Accountability Act
At its core, SB 253 requires a “reporting entity” to annually report Scope 1, Scope 2, and Scope 3 greenhouse gas (“GHG”) emissions and to obtain assurance for their reported emissions. A “reporting entity” is defined as a partnership, corporation, LLC, or other business entity formed under the laws of California, the laws of any other U.S. state or the District of Columbia, or under an act of the U.S. Congress, with total annual revenues in excess of one billion dollars ($1,000,000,000) and that does business in California. The definition includes both public and private U.S. companies, but excludes foreign-formed companies. The exclusion of foreign companies from this reporting scheme will no doubt raise concerns from domestic companies that domestic companies are being unfairly burdened. However, because a number of jurisdictions worldwide have adopted climate-related disclosure mandates, foreign companies may still face disclosure requirements in their home jurisdictions or in jurisdictions in which they do business.
Beginning in 2026, SB 253 requires a reporting entity to measure and report its GHG emissions in conformance with the Greenhouse Gas Protocol (“GHGP”) standards and guidance, including the GHGP Corporate Accounting and Reporting Standard and the GHGP Corporate Value Chain (Scope 3) Accounting and Reporting Standard, as developed by the World Resources Institute and the World Business Council for Sustainable Development.
SB 253 adopts definitions of Scope 1, Scope 2, and Scope 3 emissions, as follows:
- “Scope 1 emissions” means all direct GHG 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” means indirect GHG emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.
- “Scope 3 emissions” means indirect upstream and downstream GHG emissions, other than Scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.
SB 253’s mandate to report Scope 3 emissions also differs from the SEC’s proposed climate-related financial disclosures rule, which, as proposed, requires Scope 3 emissions to be reported only when “material” or when the company has adopted an internal Scope 3 emissions reduction target. SB 253 thus requires reporting of Scope 3 emissions without regard for materiality or whether the entity has established a target. Given the number of large companies doing business in California, this requirement is likely to substantially expand the number of U.S. companies subject to mandatory Scope 3 emissions reporting. The program may also place indirect pressures on small businesses, which may not meet the reporting mandate’s revenue threshold, yet whose emissions may nevertheless be implicated by the need for larger reporting entities to properly account for supply chain emissions.
Alongside SB 253’s emissions reporting requirements, SB 253 establishes assurance requirements. In particular, reporting entities must obtain review, by an appropriately experienced third-party assurance provider, of all the entity’s Scope 1, Scope 2, and Scope 3 emissions reported under the program.
SB 253 also provides for administrative penalties to be imposed upon failure to comply with the program’s requirements. In particular, for nonfiling, late filing, or “other failure to meet the requirements” of the program, CARB may impose a penalty of up to $500,000 in a reporting year. Before penalties are imposed, SB 253 requires “all relevant circumstances” to be considered, including past and present compliance and good faith efforts to comply. SB 253 also establishes certain limits on the bases for penalty imposition, such as providing that penalties assessed on Scope 3 reporting between 2027 and 2030 shall occur only for nonfiling. In addition, for post-2030 filing, reporting entities are not subject to administrative penalties “for any misstatements with regard to scope 3 emissions disclosures made with a reasonable basis and disclosed in good faith.”
SB 253’s requirements are to be phased in over multiple years. Reporting entities must begin reporting Scope 1 and Scope 2 emissions in 2026. In contrast, Scope 3 emissions reporting requirements would begin in 2027. Assurance requirements are similarly phased in. For Scope 1 and Scope 2 emissions, the assurance engagement must be performed at a limited assurance level beginning in 2026 and at a reasonable assurance level beginning in 2030. CARB would have until January 1, 2027, to establish a requirement for Scope 3 emissions assurance, which would begin at a limited assurance level in 2030. When further establishing the program’s initial reporting timelines, SB 253 requires the timelines to consider industry stakeholder input and consider the timelines by which reporting entities typically receive Scope 1, Scope 2, and Scope 3 emissions data, as well as the capacity of the independent assurance industry to perform assurances for reporting entities.
Finally, the program would require the state to contract with an emissions reporting organization to develop a reporting program to receive and make publicly available the disclosures submitted under the rule. SB 253 also incorporates provisions to ensure the reporting program remains in conformance with effective accounting and reporting standards. Accordingly, starting in 2033 and every five years thereafter, the program administrator may survey and assess currently available GHG accounting and reporting standards and may adopt a globally recognized alternative accounting and reporting standard if it is determined that such an alternative would more effectively further the program’s goals. SB 253 also provides that the program shall be reviewed and updated as necessary to ensure public emissions disclosure deadlines are consistent with reporting trends, especially regarding trends in Scope 3 emissions data and reporting.
SB 261 – Climate-Related Financial Risk Act
SB 261 requires a “covered entity,” on or before January 1, 2026, and biennially thereafter, to prepare a climate-related financial risk report disclosing the entity’s climate-related financial risk and measures adopted to reduce and adapt to climate-related financial risk. A “covered entity” includes corporations, partnerships, LLCs, or other business entities formed under the laws of California, the laws of any other U.S. state or the District of Columbia, or under an act of the U.S. Congress, with total annual revenues in excess of five hundred million dollars ($500,000,000) and that does business in California. Notably, a “covered entity” does not include a business entity subject to regulation by the California Department of Insurance or “that is in the business of insurance in any other state.” The definition therefore includes both public and private U.S. companies but excludes foreign-formed companies, which, as noted above, may nevertheless be subject to climate-related disclosure mandates in their home jurisdictions or jurisdictions in which they do business.
In developing the program, SB 261 also provides a definition of “climate-related financial risk,” which means “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.”
SB 261 provides substantive requirements guiding the contents of climate-related financial risk reports. When preparing a climate-related financial risk report pursuant to the program, SB 261 directs covered entities to report in accordance with the recommended framework and disclosures in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017), or any successor thereto, published by the Task Force on Climate-related Financial Disclosures (“TCFD”). The TCFD framework centers around disclosures in four pillars, which include governance, strategy, risk management, and metrics and targets. SB 261 also provides that a covered entity may satisfy its reporting obligation by using an equivalent reporting framework “incorporating disclosure requirements consistent with” the TCFD’s framework. Such equivalent reporting frameworks include disclosures made “pursuant to a law, regulation, or listing requirement issued by any regulated exchanged, national government, or other governmental entity, including a law or regulation issued by the United States government,” and includes the International Financial Reporting Standards Sustainability Disclosure Standards, as issued by the International Sustainability Standards Board (“ISSB”).
SB 261 also requires CARB to contract with a climate reporting organization to biennially prepare a public report, which would include a review of the disclosure of climate-related financial risk contained in a subset of publicly available climate-related financial risk reports by industry, an analysis of the system and sector-wide climate-related financial risks facing California, and an identification of inadequate or insufficient reports.
Finally, in addition to its reporting provisions, SB 261 requires CARB to develop regulations providing for the payment by covered entities of an annual fee to administer and implement the program, which would fund a Climate-Related Financial Risk Disclosure Fund. SB 261 also directs CARB to develop regulations providing for the payment of administrative penalties, not to exceed $50,000 in a reporting year, when a covered entity fails to make the report required by the program publicly available on its internet website or publishes an inadequate or insufficient report. As with SB 253, in considering whether to impose administrative penalties, SB 261 directs CARB to consider all relevant circumstances, including the covered entity’s past and present compliance with the program and whether, and, if so, when, the covered entity took good faith measures to comply.
California’s climate-related disclosure mandates come at a time when businesses face increasing pressures to disclose their climate-related financial risks and associated governance concerns. As a growing number of jurisdictions worldwide have adopted or are considering adopting climate-related disclosure mandates, California’s requirements are among the more stringent requirements facing companies. In particular, the mandate to report Scope 3 emissions without regard to materiality or whether the company has set a Scope 3 emissions target is likely to increase the number of companies reporting such emissions and to increase the demand for the appropriate legal, technical, and accounting expertise needed to comply with increasingly substantive climate-related disclosure mandates.
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