New “Climate Reporting” Laws in California – Emissions and Climate-Related Financial Risk Disclosure Required
Two new bills have been passed in California as part of a “Climate Accountability Package” that require US-based companies “doing business”1 in California to make disclosures about their emissions and climate-related financial risks. These are (a) the Climate Corporate Data Accountability Act (California Senate Bill 253 (SB-253)) and (b) the Climate-Related Financial Risk Act (California Senate Bill 261 (SB-261)). The laws remain subject to approval by the California Governor (who has until October 14, 2023, to sign or veto them).
To assist companies in preparing for these new climate-related disclosure requirements, we have provided a summary of some of the key requirements below.
SB-253: Climate Corporate Data Accountability Act (relating to emissions disclosure)
This law would establish the strictest corporate emissions disclosure requirements in the US – even stricter than the Securities and Exchange Commission’s (SEC’s) proposed climate disclosure rules. It would require certain US companies to disclose their greenhouse gas (GHG) emissions.
Who would be covered by the law?
The law would require the California Air Resources Board to adopt regulations by 2025 that would apply to all US companies – public or private – with over $1 billion in annual revenue that are “doing business”2 in California, regardless of where in the US such companies are headquartered.
More than 5,000 companies are expected to be subject to these new requirements. Unlike similar EU legislation, the law does not have extraterritorial effect. (See further our alert on this EU legislation (i.e., the EU Corporate Sustainability Reporting Directive).)
What emissions would need to be disclosed?
Companies would need to disclose their GHG emissions from Scope 1, 2, and 3 sources – with reporting for Scope 1 and 2 emissions to begin in 2026, and reporting for Scope 3 emissions to begin in 2027.
- Scope 1 emissions are direct emissions from owned or controlled sources.
- Scope 2 emissions are indirect emissions from the generation of purchased or acquired electricity, steam, heat, or cooling.
- Scope 3 emissions, also sometimes referred to as value chain emissions, are all other indirect upstream and downstream emissions from a company’s supply chain.
Disclosures of Scope 3 emissions are expected to be the most burdensome and complex, which the new law recognizes by providing an additional 180-day grace period to disclose Scope 3 emissions following the disclosure of a company’s Scope 1 and Scope 2 emissions.3 The GHG Protocol (referenced below) defines 15 categories of Scope 3 emissions that include emissions both upstream and downstream from a company’s activities, though not every category will be relevant to all companies.
Examples of Scope 3 emissions include waste generated in operations, business travel, employee commuting, transportation and distribution, investments, and financed emissions (i.e., emissions generated by a borrower of a bank or other financial institution).
As noted above, the SEC has also proposed rules that would require publicly traded companies to report both direct and indirect emissions, but the California requirements would reach beyond these mandates by making the same demands of private companies.
What disclosure standards would a company need to comply with?
Companies would need to disclose their emissions in accordance with standards and guidance of the Greenhouse Gas Protocol, which is a global standard for GHG emissions accounting and reporting, including the GHG Protocol Corporate Accounting and Reporting Standard and the Greenhouse Gas Protocol Corporate Value Chain (Scope 3).
The emissions must be disclosed annually in a publicly accessible website. Companies would also need to obtain an assurance engagement4 of their emissions disclosures from an independent third party.
Together with its annual report, companies would be required to pay an annual fee to be deposited into a Climate Accountability and Emissions Disclosure Fund, which will be used to cover the costs of implementing the law.
What are the penalties for failure to comply?
If a company is required to disclose its emissions, but fails to file, makes a late filing, or otherwise fails to meet the requirements of the law, it would be subject to administrative penalties not to exceed $500,000 per report year.
SB-261: Climate-Related Financial Risk Act (relating to climate-related financial risk disclosure)
This law would require certain US companies to disclose their climate-related financial risk and measures taken to reduce such risk.
Who would be covered by the law?
The law would apply to all US companies – public or private – with over $500 million in annual revenue that are “doing business”5 in California, regardless of where such companies are headquartered in the US, excluding companies subject to regulation by the California Department of Insurance or that are in the insurance business in another state.
More than 10,000 companies are expected to be subject to these new requirements. Again, unlike similar EU legislation, the law does not have extraterritorial effect.
What disclosure would a company need to make?
No later than January 1, 2026, and every two years thereafter, a company covered by the law would need to publicly disclose on its website a report that addresses:
- its “climate-related financial risk”; and
- measures taken by it to reduce and adapt to such climate-related financial risk.
Companies’ disclosure of their climate-related financial risk would need to be prepared in accordance with the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017) of the Task Force on Climate-related Financial Disclosures (TCFD) or similar reporting standard (e.g., the IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board).
These risk reports may be consolidated at the parent entity level, such that a subsidiary meeting the requirements would not need to separately prepare a report.
Companies would also be required to pay an annual fee to be deposited into a Climate-Related Financial Risk Disclosure Fund, which will be used to cover the costs of implementing the law.
What are the penalties for failure to comply?
If a company fails to make the required report publicly available on its site or otherwise fails to comply with the law’s requirements, it would be subject to administrative penalties not to exceed $50,000 per report year.
Additional Notes from Other Jurisdictions:
While California may be viewed as leading the way in climate-related disclosures, many European and Asian regulators already require TCFD reporting – with many companies not already subject to mandatory reporting opting to voluntarily report under TCFD.
Also, certain US states are implementing climate-related disclosure requirements. For example, Minnesota recently passed a law requiring banks with more than $1 billion in assets to submit a completed climate risk disclosure survey (using a prescribed form) to the Minnesota Department of Commerce. The first completed survey will be due on July 30, 2024, and all information provided (except for trade secret information) will be made public.
If you are a company that is expected to be covered by SB-253 or SB-261, you should start preparing to comply as soon as possible because both laws are expected to receive final approval from the California Governor. Please contact us for further guidance or assistance on these matters.
1 Neither of these laws define “doing business” in California. Rather, a factual analysis would need to be undertaken to determine whether a company is doing business in California – taking into account other California law (e.g., Cal. Corp. Code § 191 and Cal. Rev. & Tax. Code § 23101). For further guidance on how to determine whether your company is “doing business” in California, see our prior alert on this topic: “Are You ‘Doing Business’ in California?”.
3 Even outside the context of SB-253, more companies are reaching into their value chains to understand the full GHG impact of their operations. In addition, because Scope 3 sources may represent most of a company’s GHG emissions (with some estimates suggesting they could comprise 65% to 95% of a company’s emissions), they often offer emissions reduction opportunities. Although these emissions are not under the company’s control, the company may be able to affect the activities that result in the emissions. The company may also be able to influence its suppliers or choose which vendors to contract with based on their practices.
4 “Assurance” generally relates to confirming emissions information is accurate and complete to an acceptable degree of certainty.
5 See “Are You ‘Doing Business’ in California?”, supra Note 1.
