The Impact of California’s Groundbreaking Climate Disclosure Laws
California has once again taken the lead in climate-related policy by signing into law two groundbreaking climate disclosure bills in October 2023. SB253, the Climate Corporate Data Accountability Act, and SB261, the Climate-Related Financial Risk Act, require major corporations doing business in California to disclose their greenhouse gas (“GHG”) emissions and certain other climate-related risk data.
The Reach of the Laws
The Laws have a broad reach; they apply to most large U.S. companies doing business in California, both private and public, so long as they exceed certain revenue thresholds. SB253 requires “reporting entities” that have annual revenues in excess of $1 billion, do business in California, and were formed in the United States to disclose their Scope 1, 2, and 3 GHG emissions for the prior fiscal year to an “emissions reporting organization.” On the other hand, SB261 requires “covered entities” — companies with annual revenues in excess of $500 million, that do business in California, and were formed in the United States – to prepare and publish a publicly available report on the company’s website that discloses climate-related financial risks in accordance with the Final Report Recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (“TCFD”) and the measures the company is taking.
The Key Difference between SB253 and SEC Proposed Rule
A key difference between SB253 and the SEC Proposed Rule is that SB253 requires mandatory Scope 3 GHG emission disclosures for all companies subject to the law, while the SEC Proposed Rule only imposes a Scope 3 GHG emissions reporting requirement on companies that have set a Scope 3 GHG emission reduction target or that have material Scope 3 GHG emissions. The penalties for SB253 are more substantial as well, with companies that fail to comply could subject to an administrative penalty of up to $500, 000 in a reporting year.
Timeline and Implementation
Companies must begin reporting Scope 1 and 2 GHG emissions in 2026, and Scope 3 GHG emissions in 2027, however, Governor Newsom expressed concerns about the cost impacts of the Laws to businesses given that their implementation deadlines are “likely infeasible”. Although the law is self-implementing, many questions remain concerning the scope, timing and implementation of the Laws, especially the legal challenges against the Laws that are likely to be filed soon. Hence companies doing business in California should not wait for CARB’s rulemakings to begin preparing for compliance with the Laws.
To satisfy their obligation under SB261, companies can use either the SEC Proposed Rule or the TCFD framework on a voluntary basis. Companies can also satisfy reporting obligations under CESRD which also has the TCFD recommendations as its backbone. While SB253 requires “reporting entities” to obtain an “assurance” report from a third-party provider.
Despite uncertainties, the rising tide of governmental requirements for climate-related reporting cannot be denied. The Laws form the latest chapter of the “California effect,” where strict environmental regulations passed by California ripple outward, spreading to other states and beyond. The tight timeline of the Laws means that companies doing business in California should not wait for CARB’s rulemakings to begin preparing for compliance with the Laws. Especially concerning are potential legal challenges against the Laws, which are extremely likely to be filed soon, and many unknowns remain concerning implementing regulations and timing of the Laws.
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