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- Disclosure of Scope 1 and Scope 2 greenhouse gas (GHG) emissions beginning in 2026 and Scope 3 GHG emissions in 2027
- Submission of biennial climate-related financial risk reports to the California Air Resources Board (CARB) beginning in 2026
California’s new legislation sets the U.S. standard for climate-related disclosures and has the potential to reach every part of a company’s value chain
Climate Corporate Data Accountability Act (SB 253)
Who Is Covered?
SB 253 applies to “reporting entities,” which are defined as partnerships, corporations, limited liability companies, or other business entities formed under the laws of California or any other U.S. state or the District of Columbia or under an act of the U.S. Congress with total annual revenues exceeding $1 billion and doing business in California. As defined in existing law, “doing business” in California would include companies actively engaging in any transaction for the purpose of financial or pecuniary gain or profit within California, regardless of whether the company is domiciled in the state. A reporting entity’s revenue for the prior fiscal year will serve as the basis for determining whether the $1 billion annual revenue threshold has been met.
What Is Required?
A reporting entity will be required to disclose its Scope 1, Scope 2, and Scope 3 GHG emissions to California on an annual basis as well as to obtain third-party assurance of its disclosures. Scopes 1, 2, and 3 emissions are to be measured and reported in conformance with the Greenhouse Gas Protocol standards and guidance. As provided by the legislation, this will mandate expansive disclosure of GHG emissions across the company’s value chain:
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- 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 are 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.
GHG emissions data will be published on a digital platform featuring individual reporting entity disclosures as well as allowing consumers, investors, and other stakeholders to view aggregated data in a variety of ways, including over multiple years.
SB 253 also:
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- Requires a reporting entity to obtain an “assurance engagement” performed by a qualified independent third-party assurance provider and creates tiered levels of assurance to be provided in the assurance engagement; Scope 1 and Scope 2 emissions would be at a “limited assurance level” beginning in 2026 and at a “reasonable assurance level” beginning in 2030, and assurance for Scope 3 emissions would be required at a “limited assurance level” beginning in 2030
- Authorizes CARB to seek administrative penalties up to $500,000 in a reporting year for violations of the Act; between 2027 and 2030, penalties assessed on Scope 3 emissions reporting may occur only for non filing
- Establishes an annual fee for reporting entities to be set by CARB
- Directs CARB to adopt regulations that would reduce duplication with federal and international reporting requirements, though it remains to be seen how much the agency regulations implementing SB 253 will streamline multiple reporting requirements
When Will Reporting Start?
Reporting entities are required to publicly disclose their Scope 1 and Scope 2 GHG emissions beginning in 2026 and Scope 3 GHG emissions in 2027. Unlike the SEC’s proposed rules on climate-related disclosures, there is no phase-in of the requirements based on the size of the reporting entity. Starting in 2027, Scope 3 emissions must be disclosed no later than 180 days after the reporting entity discloses its Scope 1 and Scope 2 emissions for the prior fiscal year.
Climate-Related Financial Risk Act (SB 261)
Who is Covered?
SB 261 applies to “covered entities,” which are defined as partnerships, corporations, limited liability companies or other business entities formed under the laws of California or any other U.S. state or the District of Columbia or under an act of the U.S. Congress with total annual revenues exceeding $500 million and doing business in California. As with SB 253, a covered entity’s revenue for the prior fiscal year will serve as the basis for determining whether the $500 million annual revenue threshold has been met.
The act does not apply to business entities subject to regulation by the California Department of Insurance or in the business of insurance in any other state. As noted in Section 1(i) of the act, the National Association of Insurance Commissioners, which includes California’s Insurance Commissioner, has adopted a new standard for insurance companies to report their climate-related risks in alignment with the TCFD. Accordingly, California legislators elected not to require the preparation of duplicative reports by California insurance companies.
What Is Required?
SB 261 requires covered entities to prepare and submit climate-related financial risk reports to CARB on a biennial basis (every other year).
The report must disclose :
(i) The covered entity’s climate-related financial risks, in accordance with the recommendations of the TCFD,
(ii) Measures adopted by the covered entity to reduce and adapt to climate-related financial risks.
Notably, these disclosure requirements apply to any entity operating in California that makes these regardless of size, which is much broader than the reporting entities subject to the recently enacted SB 253 (which applies to U.S. companies doing business in California with over $1 billion in total annual revenues) and covered entities subject to SB 261 (which applies to U.S. companies doing business in California with over $500 million in total annual revenues).
AB 1305 defines a VCO as any product sold or marketed in California that claims to be a “greenhouse gas emissions offset,” a “voluntary emissions reduction,” a “retail offset,” or any like term that connotes that the product represents or corresponds to a reduction in the amount of GHGs present in the atmosphere or that prevents the emission of GHGs into the atmosphere that would have otherwise been emitted. VCOs do not include products that are legally mandated.
The specific disclosure requirements depend on the activities of the business entity and the claims that it makes related to VCOs or its business practices.
SB 261 also:
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- Allows a covered entity, if it does not complete a report consistent with all required disclosures, to provide the recommended disclosures to the best of its ability, provide a detailed explanation for any reporting gaps, and describe steps it will take to prepare complete disclosures
- Provides a covered entity with the option to prepare climate-related financial risk reports at the parent company level; a subsidiary is not required to prepare a separate climate-related financial risk report if consolidated reports are prepared
- Requires a covered entity to make its climate-related financial risk report available to the public on its corporate website
- Establishes an annual fee for covered entities to be set by CARB
- Authorizes CARB to adopt regulations for imposing administrative penalties up to $50,000 per reporting year for violations
When Will Reporting Start?
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- The legislation currently requires that all covered entities must prepare a climate-related financial risk report and make it available to the public on its website by no later than January 1, 2026, with CARB adopting implementation regulations by January 1, 2025. As with SB 253, there is no phase-in of the requirements based on the size of the covered entity. It is expected that in the early months of 2024 the California legislature will propose cleanup legislation that will extend these deadlines.
- Regardless of when the California reporting commences, any reporting a company does under any other standard must be done with the eye toward compliance in California as California public and private enforcers may enforce against any statement made in any forum if the company is also subject to the California reporting rules.
