In October 2023, California Governor Gavin Newsom signed two landmark laws that will require companies with more than $1 billion in annual revenues operating in California to disclose both direct and indirect emissions resulting from their operations and report on climate-related financial risks.
SB 253
One of the new laws, SB 253, has been characterized as “the most sweeping mandate of its kind in the nation,” according to PBS.
Under SB 253, more than 5,300 companies will be impacted and required to report both Scope 1 and 2 emissions beginning in 2026. Scope 3 emissions reporting must be disclosed annually no later than 180 days after the entity has reported its annual Scope 1 and 2 emissions, beginning in 2027.
“The law … will bring more transparency to the public about how big businesses contribute to climate change, and it could nudge them to evaluate how they can reduce their emissions, advocates say. They argue many businesses already disclose some of their emissions to the state,” notes the PBS article. “But the California Chamber of Commerce, agricultural groups and oil giants that oppose the law say it will create new mandates for companies that don’t have the experience or expertise to accurately report their indirect emissions. They also say it is too soon to implement the requirements at a time when the federal government is weighing emissions disclosure rules for public companies.
“The measure could create ‘duplicative’ work if the federal standards are adopted, the chamber and other groups wrote in an alert opposing the bill,” PBS adds.
The law requires companies to use the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard to calculate emissions. It also uses the Greenhouse Gas Protocol’s definitions of Scope 1–3 emissions.
Disclosures are required to:
- Include the reporting entity’s name and any fictitious names, trade names, assumed names, and logos used by the reporting entity.
- Be structured to allow reporting entities to submit reports that meet other national and international reporting requirements.
- Consider acquisitions, divestments, mergers, and other structural changes that can impact greenhouse gas reporting.
- Be made in a manner that’s easily understandable and accessible and that “maximizes access” for consumers, investors, and other stakeholders.
Reporting entities will also be required to pay an annual fee, the amount of which is yet to be determined.
“Reporting entities must obtain an assurance engagement, performed by an independent third-party assurance provider, of their public disclosure, and provide the assurance report as part of their disclosure to the emissions reporting organization. The Act takes a phased approach to the type of assurance required,” Beveridge & Diamond PC says in a Lexology article. “Initially, assurance is only required for scope 1 and scope 2 emissions and must be performed at a limited assurance level beginning in 2026, and at a reasonable assurance level in 2030. CARB may establish, on or before January 2027, but no later than 2030, an assurance requirement for scope 3 emissions, which would be performed at a limited assurance level. Assurance providers must meet explicit qualifications outlined in the law, including experience in evaluating greenhouse gas emissions reporting. The qualifications for assurance providers are to be reviewed and updated by CARB as necessary in 2029.”
SB 261
“The second disclosure law, SB 261, aims at increasing ‘transparency to policy makers, investors, and shareholders … [and] improve[] decision making on where to invest private and public dollars,’” according to the Nickel Report. “Beginning January 2026, covered entities must prepare a biennial report disclosing (1) their climate-related financial risks and (2) measures they adopted to reduce and adapt to the disclosed climate-related financial risks. The bill defines climate-related financial risk as a ‘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.’ The disclosures must be made in accordance with the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017) published by the Task Force on Climate-related Financial Disclosures. Any required disclosures not made by a covered entity’s report must be explained with steps describing how the covered entity will complete the disclosure report.”
To implement these laws, the California Air Resources Board (CARB) will have to adopt regulations by 2025.
Companies required to make disclosures that fail to report, make a late report, or otherwise don’t comply with the requirements are subject to administrative penalties of up to $500,000 per report year.