California Leads the Way with Climate Disclosure and Reporting Legislation

California Leads the Way with Climate Disclosure and Reporting Legislation

California, the world’s fifth largest economy, is leading the way in the U.S. fight against climate change with two groundbreaking legislative bills—Senate Bill (SB) 253 (Climate Corporate Data Accountability Act) and SB 261 (Greenhouse Gases: Climate-related Financial Risk). These bills represent a turning point in corporate climate accountability and transparency, pushing businesses to align their practices with climate goals.

The California Climate Accountability Package

The "Climate Accountability Package" refers to a suite of bills that were introduced early in the 2023 California state legislative session. The package aims to standardize disclosures and reporting, and to improve transparency for corporate action to combat climate change.

The two most notable bills in this package are SB 253 and SB 261. The bills each passed both houses of the CA legislature and are now on the Governor’s desk awaiting action. Per the state constitution, the Governor has until October 14 to either sign, veto or allow each bill to pass into law without action. As expected, Governor Newsom has publicly confirmed that he will sign both bills.

California has led the way in enacting climate law and setting new climate policies particularly in the energy and transportation sectors to accomplish greenhouse gas emission reduction goals. California Senator Henry Stern (D-Los Angeles) introduced SB 261, along with the comprehensive climate legislation package. California Senator State Scott Weiner (D-San Francisco) introduced SB 253, and said in a statement: “Once again, California is leading the nation on essential climate action.”

SB 253: The Climate Corporate Data Accountability Act

SB 253 mandates all public and private business entities that do business in California and generate annual revenues over $1B dollars report their Scope 1 (direct), Scope 2 (purchase and consumption of energy) and Scope 3 (value chain) emissions. The bill stipulates that these companies will need to report their full carbon inventories, including Scope 3, which often accounts for a significant portion of an organization's climate impact.

Covered companies must disclose their GHG emissions in conformance with the Greenhouse Gas Protocol. Those standards necessitate that companies take into account corporate structure changes including divestments, mergers and acquisitions.

SB 261: The Climate-Related Financial Risk Act

SB 261 requires companies with revenues exceeding $500M to disclose their climate-related financial risks in accordance with the Task Force on Climate-Related Financial Disclosures (TCFD) framework. This bill would obligate companies to disclose risk and mitigation measures related to climate change in their annual financial risk reports.

Compliance Timeline and Assurance

There is a phased compliance timeline. For SB 253, companies must begin reporting their Scope 1 and 2 emissions in 2026 for the prior fiscal year and they must start reporting their Scope 3 emissions in 2027 for the prior fiscal year, and annually thereafter.

For SB 261, the first climate-related financial risk report must be prepared by December 31, 2024. Additionally, all reported emissions must be independently verified or assured by a third-party assurance provider.

Covered Companies, Forthcoming Regs and Penalties

According to Politico, an estimated 5,400 companies are subject to SB 253 compliance, and it is expected that 10,000 companies will be covered under SB 261. This marks a significant shift toward comprehensive climate accountability in the corporate sector.

The California Air Resources Board (CARB) is required to adopt regulations before January 1, 2025, to guide the disclosures. CARB is directed to structure their regs to streamline reporting and to meet relevant national and international reporting requirements.

CARB is also authorized to adopt administrative penalties for non-filing, late filing or other compliance failures. For SB 253, the total penalties that can be imposed on a reporting entity in a single reporting year are limited to $500,000, while SB 261 limits total annual penalties to $50,000.

Corporate and Investor Support

There has been significant support from corporations and investors for SB 253 and SB 261, despite opposition from some quarters. Leading companies have expressed their backing and understanding of the importance of transparency and accountability in addressing climate change.

Beyond Borders: The Evolving Global Regulatory Framework

Passage of SB 253 and SB 261 marks a significant step toward a more sustainable future, setting a precedent for other jurisdictions to follow. It underlines the urgency of the climate crisis and the crucial role of corporate transparency and accountability in tackling it.

This has been a watershed few years for global executive, legislative and regulatory action on ESG and climate disclosure and transparency with significant actions taken in the United Kingdom, the European Union, China, Singapore, Canada, New Zealand, Japan, Switzerland and Brazil, and with expected final action from the U.S. Securities and Exchange Commission (SEC) on its proposed climate disclosure rule. Businesses, investors and society as a whole stand to benefit, paving the way for a more resilient, sustainable and equitable economy.

Preparing for Requirements: Companies Should Formulate Reporting and Compliance Plans

California joins many jurisdictions around the world adopting ESG and climate-related disclosure requirements. Companies can prepare for these requirements in advance by assessing and developing internal capabilities, processes and governance to support consistent and reliable disclosure. As with all nascent regulatory regimes, additional state and national action is expected within the coming years.  Corporate planning at the outset is critical to reporting, compliance and risk management.

©2023 Verde Impact LLC. For more information on the California climate legislation, contact Verde Impact @ info@verdeimpact.com.