California Adopts Sweeping and Unprecedented Climate-Related Disclosure Requirements

October 16, 2023 - On October 7, 2023, California Governor Gavin Newsom signed two sweeping and unprecedented climate-related disclosure bills into law as part of California’s comprehensive Climate Accountability Package. The Climate Corporate Data Accountability Act (“SB 253”)¹ and the Climate-Related Financial Risk Act (“SB 261”)² impose significant requirements on thousands of companies doing business in California, as these companies need to publicly disclose their greenhouse gas (“GHG”) emissions data and climate-related financial risks. We believe it is extraordinary for a state to adopt laws purporting to exercise such extensive control over businesses (including private companies) with only slight contact with that state.

Climate Corporate Data Accountability Act (SB 253)

SB 253 requires the California Air Resources Board (“CARB”) to adopt regulations by January 1, 2025, mandating all U.S. entities with over $1 billion in total annual revenues and that do business in California to disclose GHG emissions data (“Reporting Entities”)³. Starting in 2026, Reporting Entities will need to disclose their “Scope 1” and “Scope 2” emissions for the prior fiscal year. Starting in 2027, Reporting Entities will need to disclose their “Scope 3” GHG emissions for the prior fiscal year. Scope 1 emissions are direct GHG emissions from sources that a Reporting Entity owns or directly controls. Scope 2 emissions are indirect emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a Reporting Entity. Scope 3 emissions are all other indirect upstream and downstream GHG emissions from sources that the Reporting Entity does not own or directly control.⁴

The reach of SB 253 extends to public and private companies beyond those headquartered or having substantial operations in California. The law covers any entity “doing business” in California, which term broadly includes any entity (1) engaging in any transaction for the purpose of financial gain within California, (2) being organized or commercially domiciled in California, or (3) having California sales, property or payroll exceeding annually adjusted amounts, which in 2022 were: $690,144, $69,015, and $69,015, respectively or exceeding 25% of such entity’s total sales, property or payroll.⁵

The GHG emissions data will need to be measured and reported in conformance with the Greenhouse Gas Protocol (“GHG Protocol”) standards and guidance developed by the World Resources Institute and the World Business Council for Sustainable Development. Reporting Entities will need to annually disclose the emissions data to the public as well as obtain an assurance engagement performed by an independent third-party provider.

Reporting Entities that do not comply with the requirements may face penalties up to $500,000 in a reporting year. CARB will consider multiple factors in imposing penalties for a violation.⁶ However, SB 253 includes safe harbors and a phase-in component. Reporting Entities will not be subject to a penalty for any “misstatements with regard to [S]cope 3 emissions disclosures made with a reasonable basis and disclosed in good faith,” and between 2027 and 2030, penalties on Scope 3 reporting will only occur for non-filing.⁷ 

Climate-Related Financial Risk Act (SB 261)

SB 261 requires U.S. entities with over $500 million in total annual revenues and that do business in California to biennially prepare and disclose a climate-related financial risk report (“Covered Entities”).⁸ The first report is due by January 1, 2026 and must be made available on the Covered Entity’s own website. The report must include: (i) a description of the Covered Entity’s climate-related financial risk, which the law defines as the material risk of harm to immediate and long-term financial outcomes due to physical and transition risks⁹, and (ii) the measures the Covered Entity has adopted to reduce and adapt to the disclosed risk. 

The Covered Entities must prepare their disclosures in accordance with the recommended framework¹⁰ published by the Task Force on Climate-related Financial Disclosures (“TCFD”) or any successor, or pursuant to equivalent reporting requirements¹¹ as specified in SB 253. Moreover, the reports may be consolidated at the parent company level. If a subsidiary of a parent is also a Covered Entity, the subsidiary is not required to prepare a separate report.

Non-compliance with the requirements may include penalties up to $50,000 in a reporting year. As with SB 253, CARB will consider multiple factors in imposing penalties for a violation.

Further, both SB 253 and SB 261 require payment of an annual fee upon filing of their disclosures. CARB will use these fees for administration and implementation of the statutes.

Comparison to SEC Proposed Rule

Notably, SB 253 and SB 261 are similar to and in many ways overlap the SEC’s recently-proposed climate disclosure rule (the “SEC Proposed Rule”).¹² The SEC Proposed Rule would require SEC registrants to disclose certain climate-related information in their registration statements and annual reports, including, among other requirements, climate-related risks that are reasonably likely to have a material impact on their businesses, results of operations, or financial conditions, and whether any climate-related risks have affected or are likely to affect the registrant’s strategy, business model and outlook. Additionally, registrants would need to disclose GHG emissions and certain climate-related financial metrics in a registrant’s audited financial statements. 

SB 253 and SB 261, however, go well beyond the SEC Proposed Rule disclosure requirements in certain respects, including:

•  The SEC Proposed Rule would only apply to public companies, whereas SB 253 and SB 261impose disclosure requirements on all qualifying entities, both public and private. 
• The SEC Proposed Rule models the GHG Protocol and the TCFD standards in part, but would not entirely implement either standard, potentially leaving registrants with room for other options, whereas SB 253 strictly requires reporting based on the GHG Protocol standards, and SB 261 requires disclosure based on the TCFD standards or other equivalent reporting requirements.
•  Both SB 253 and the SEC Proposed Rule require disclosure of Scope 3 GHG emissions. The SEC Proposed Rule, however, would only require Scope 3 reporting where the emissions are material or if the registrant has set a reduction target or goal that includes its Scope 3 emissions, whereas SB 253 does not have a materiality standard and requires all Reporting Entities to disclose Scope 3 emissions in conformance with the GHG Protocol.¹³ 
• The SEC Proposed Rule requires attestation for Scope 1 and Scope 2 emissions, whereas SB 253 requires Reporting Entities to obtain an assurance engagement performed by an independent third-party provider on Scope 1 and Scope 2 emissions starting in 2026. Commencing in 2027, CARB may establish a third-party assurance requirement for Scope 3 emissions. 

Conclusion

SB 253 and SB 261 contain far-reaching, ground-breaking standards for climate-related disclosure. It is not clear how prepared the many covered entities will be for the laws and how they will apply to those entities, such as how to calculate coverage and how the laws will apply to subsidiaries of diversified or complex organizations. Given the broad and significant impact of SB 253 and SB 261, it is likely that much remains to be sorted out in their application, much of which may have to be resolved in the courts or by administrative action. Further, it is possible that the disclosure requirements may evolve. For example, if the final SEC Proposed Rule were adopted, portions of SB 253 and SB 261 may be modified to align with the SEC Proposed Rule. In the meantime, companies should consider whether they will be covered by the new laws and conduct internal assessments and develop plans to comply with these new climate-related disclosures.