California has enacted two new laws on corporate disclosure of direct and indirect greenhouse gas (GHG) emissions and climate-related financial risks. Senate Bill (SB) 253, the Climate Corporate Data Accountability Act, expands state GHG emissions reporting requirements to large U.S. companies doing business in California. SB 261 requires biennial disclosure of climate-related financial risks.
SB 253 – The Climate Corporate Data Accountability Act
California’s new corporate GHG emissions disclosure law considerably broadens the state’s current mandatory GHG reporting – expanding both the scope of GHG emissions that must be reported and the universe of companies that must report. Many companies report their annual GHG emissions to California and the federal government under regulations adopted over a decade ago. However, these existing regulations attach only to certain kinds of companies and facilities, and apply an emissions threshold below which no reporting is necessary. In addition, current regulations only require reporting of direct GHG emissions.
In contrast, the new reporting requirements apply universally to any partnership, corporation, limited liability company, or other business entity – whether formed in California, another U.S. state or the District of Columbia, or by an act of the U.S. Congress – that is doing business in California and has total annual revenues greater than $1 billion. The $1 billion threshold will be evaluated against the business’ revenue for the prior fiscal year. Whether a company is doing business in California will be evaluated under existing state Tax Code provisions and includes engaging in transactions for the purpose of financial gain within California, being organized or commercially domiciled in California, or having California sales, property, or payroll exceed certain thresholds.
GHG Emissions Data
Businesses subject to SB 253 will report their Scope 1, 2, and 3 GHG emissions. This means reporting not only direct GHG emissions, but also indirect GHG emissions from energy consumed and other upstream and downstream sources.
More specifically, Scope 1 emissions are those emissions from sources that a company owns or directly controls, regardless of the location, and includes emissions from fuel combustion. Scope 2 emissions are indirect emissions from electricity, steam, heating, or cooling, purchased or acquired, and consumed, by a company. Scope 3 emissions are indirect emissions other than Scope 2 emissions that are upstream or downstream of the company, from sources the company does not own or directly control. Examples of Scope 3 are emissions from purchased goods or services, business travel, employee commutes, and the processing and use of products sold by a company.
Up to the present, GHG reporting in California has centered on direct, or Scope 1, emissions only. Where multiple entities have a hand in a product like electricity or fuel, one entity along the chain of commerce has been tagged with the reporting obligation, such as the electricity or fuel importer or the fuel supplier holding a position at the fuel terminal rack. Addressing Scope 2 and 3 emissions adds a significant layer of complexity to reporting under SB 253.
Reporting will initially be done in accordance with the Greenhouse Gas Protocol standards, a set of GHG accounting standards that are widely used to measure and report emissions in a consistent and transparent manner. Starting in 2033, every five years, the California Air Resources Board (ARB) will assess whether to shift to a different GHG accounting and reporting standard. ARB will also look to minimize duplication of efforts with reporting under California’s existing mandatory GHG reporting regulation, as well as under other national and international requirements.
Emissions data will be provided to a nonprofit emissions reporting organization contracted by ARB. A publicly accessible digital platform will be created to house the reported emissions data.
ARB will put regulations in place by January 1, 2025 to implement SB 253. Annual reporting of Scope 1 and 2 emissions for a company’s prior fiscal year will start in 2026, though SB 253 allows ARB to shift this date. For Scope 3 emissions, reporting will begin in 2027. Annual reporting of Scope 3 emissions may be staggered, with disclosures made no later than 180 days after disclosure of Scope 1 and 2 emissions. In 2029, ARB will assess whether to shift this timeframe to bring the reporting of Scope 3 emissions closer to the reporting deadline for Scope 1 and 2 emissions.
Third-Party Assurance and Reporting Costs
Like third-party verification of carbon offsets, a business reporting under SB 253 must obtain an “assurance engagement” of its reported emissions, which must be performed by an independent, third-party “assurance provider.” The level of assurance required for Scope 1, 2, and 3 emissions will increase over time. The assurance engagement for Scope 1 and 2 emissions must be performed at a limited assurance level beginning in 2026 and at a reasonable assurance level in 2030. ARB may establish an assurance requirement for Scope 3 emissions on or before January 1, 2027 based on trends in third-party assurance requirements for Scope 3 emissions. Beginning in 2030, the assurance engagement for Scope 3 emissions must be performed at a limited assurance level. The report prepared by the third-party assurance provider will be submitted to the emissions reporting organization.
ARB will establish an annual fee for reporting to cover the costs of administration and implementation of SB 253.
As part of its rulemaking to implement SB 253, ARB will adopt regulations allowing it to seek administrative penalties for any failure to file, late filing, and other non-compliance with SB 253. Of note, ARB may not impose any penalty on a reporting entity exceeding $500,000 in a given reporting year.
Two important caveats apply with respect to penalties and reporting of Scope 3 emissions. First, penalties related to Scope 3 emissions reporting between 2027 and 2030 may only be assessed for a failure to file. Second, a company will not be subject to penalties for any misstatements with regard to Scope 3 emissions disclosures made with a reasonable basis and disclosed in good faith.
SB 261 – Climate-Related Financial Risk Disclosures
Along with SB 253, California enacted SB 261, requiring corporate disclosure of climate-related financial risks. Under SB 261, many large U.S. companies doing business in California will be required to prepare a biennial report comprised of two elements. First, the report will disclose a company’s climate-related financial risk, in accordance with the recommended framework and disclosures contained in the Task Force on Climate-related Financial Disclosures’ (TCFD) Final Report of Recommendations, published in June 2017. Second, the report will include the measures the company has adopted to reduce and adapt to its disclosed climate-related financial risks. Businesses are required to make their biennial reports available on their website. The first report must be filed before January 1, 2026.
Like SB 253, SB 261 applies to any partnership, corporation, limited liability company, or other business entity, formed in California, another U.S. state, or the District of Columbia or by an act of the U.S. Congress, and that is doing business in California. The threshold of total annual revenue triggering SB 261 disclosure requirements is $500 million, lower than the threshold for SB 253. SB 261 exempts insurance companies from disclosure requirements given that the National Association of Insurance Commissioners adopted new standards in 2022 for insurance companies to report climate-related risks in alignment with the TCFD.
The new law offers certain flexibility in three key ways. First, a business falling within the purview of SB 261 can satisfy its reporting obligations if it otherwise prepares a publicly accessible biennial report that includes climate-related financial risk disclosure information, either pursuant to a similar regulatory reporting regime or voluntary framework. More specifically:
- Under any law, regulation, or listing requirement of a regulated exchange, a national government (including the U.S. government), or other governmental entity, that incorporates disclosure requirements consistent with SB 261’s requirements, including under the International Financial Reporting Standards Sustainability Disclosure Standards issued by the International Sustainability Standards Board.
- By voluntarily using a framework that meets the requirements for reporting under SB 261 or the International Financial Reporting Standards Sustainability Disclosure Standards.
Reporting under the U.S. Securities and Exchange Commission’s proposed rule on climate-related disclosures for investors, when finalized, would likely fulfill SB 261 reporting obligations.
Second, SB 261 allows businesses to consolidate their reporting at the parent company level.
Third, as a significant concession, SB 261 provides that if a business does not complete a report consistent with TCFD recommendations, the business may provide the recommended disclosures to the best of its ability, provide a detailed explanation for any reporting gaps, and describe steps the business will take to prepare complete disclosures.
Implementing SB 261
ARB will establish a fee associated with the climate-related financial risk reports to cover the costs of administrating and implementing SB 261. ARB will contract with a “climate reporting organization,” with experience with climate-related financial risk disclosure, to administer the new reporting regime. Biennial reports will be filed with the climate reporting organization, and every two years the organization will prepare a public report under SB 261. The public report will (1) include a review of disclosures from a subset of the biennial reports, by industry, (2) analyze systemic and sector-wide climate-related financial risks facing California, based on the biennial disclosures, including potential impacts on economically vulnerable communities, and (3) identify inadequate or insufficient reports.
In line with SB 253, ARB will adopt regulations under SB 261 allowing it to seek administrative penalties where a business fails to make its biennial disclosure report publicly available on its website or where a business publishes an inadequate or insufficient report. In contrast to SB 253, ARB may not impose any penalty on a reporting entity exceeding $50,000 in a given reporting year.
SB 253 provides the governing principles for California’s new GHG emissions disclosure regime and outlines many of the specific elements for the program. To flesh out the remaining details, ARB will undertake a rulemaking, with implementing regulations adopted by January 1, 2025. In developing the regulations, ARB will consult with (1) the California Attorney General, (2) other government stakeholders, including experts in climate science and corporate carbon emissions accounting and reporting, (3) investors, (4) stakeholders representing consumer and environmental justice interests, and (5) reporting entities that have demonstrated leadership in full-scope GHG emission accounting and public disclosure and GHG emissions reductions. As with any ARB rulemaking, there will be opportunities for public comment from other interested parties. Regulations will also be adopted for SB 261, at a minimum, to implement ARB’s statutory enforcement authority.
To allow the SB 261 reporting regime to evolve as climate-related financial risk disclosure matures, the climate reporting organization administering the program will regularly convene a group of representatives to offer input on current best practices for disclosure of financial risks resulting from climate change, including proposals to update the definition of “climate-related financial risk” and the framework or disclosure standard for climate-related financial risk reports. This group will include state agencies responsible for oversight of reporting sectors, investment managers, academic experts, standard-setting organizations, climate and corporate sustainability organizations, labor union representatives whose members work in impacted sectors, and other stakeholders.
We will keep you apprised of developments as ARB undertakes its rulemakings and sets the SB 253 and SB 261 programs in place.