While all eyes are on proposed federal and European climate
disclosure rules, the California legislature passed two
climate-related bills that overlap somewhat with the Securities and
Exchange Commission (SEC)’s proposed climate rules (see our client alert on the proposal). Senate Bill
253, the Climate Corporate Data Accountability Act, requires
California’s State Air Resources Board (CARB) to adopt
regulations requiring U.S. companies that do business in California
to publicly disclose and verify their Scope 1, Scope 2 and Scope 3
greenhouse gas emissions. Senate Bill 261, Greenhouse Gases:
Climate-Related Financial Risk, requires companies to publicly
disclose a climate-related financial risk report regarding their
climate-related financial risks and any risk mitigation and
adaptation measures for such risks. These bills, if adopted, would
apply to private and public companies with specified revenue levels
that also do business in California—and impose significant
burdens in terms of compliance efforts and related expenses.
Notably, SB 253 was introduced and failed in a prior legislative
session, but there seems to be a larger amount of support this time
around, including from companies like Apple. The California
Assembly and Senate passed and sent the bills to Governor Gavin
Newsom, who has until October 14 to sign or veto them.
Climate Corporate Data Accountability Act
Authored by Senator Scott Wiener, SB 253 would, if adopted,
require annual disclosure of companies’ direct, indirect and
supply chain–related greenhouse gas (GHG) emissions. The
proposed bill is especially notable for requiring Scope 3 emissions
data—an aspect of the SEC’s proposed climate rules that
was highly controversial due to the difficulty in calculating Scope
3 emissions, which are also often the largest piece of the total
corporate carbon emissions pie.
Covered Companies
Corporations, limited liability companies and certain other
business entities (1) with total annual revenues in excess of $1
billion dollars (based on the company’s revenue for the prior
fiscal year) and (2) that do business in California are subject to
these disclosure and assurance obligations.
The bill doesn’t define what it means to “do
business” in California. However, it may not require companies
to have a physical presence in California. Companies may need to
look beyond this bill and into different parts of California law,
including the California Corporations Code and caselaw, to assess
whether they fall in scope. For example, under the California
Corporations Code §§ 191 and 2105(a), transacting
intrastate business is defined as “entering into repeated and
successive transactions of its business in [California], other than
interstate or foreign commerce.” Certain activities may not be
considered doing business in California, including simply
maintaining a bank account in California or conducting an isolated
transaction completed within a 180-day period. See also,
for example, Hurst v. Buczek Enterprises, LLC, for
a discussion on what constitutes doing business under the
California Corporations Code. Similarly, under the California
Revenue Taxation Code §23101, doing business is defined as
“actively engaging in any transaction for the purpose of
financial or pecuniary gain or profit,” including if the
company is commercially domiciled in California.
The bill does not have any exemptions for private companies.
Required GHG Disclosures and Verification
Companies will start reporting, in an easily understandable and
accessible manner, their Scope 1 and Scope 2 GHG emissions starting
in 2026, and Scope 3 GHG emissions starting in 2027.
- Scope 1 emissions are defined as “all direct
greenhouse gas emissions that stem from sources that a [company]
owns or directly controls, regardless of location, including, but
not limited to, fuel combustion activities.” - Scope 2 emissions are defined as “indirect
greenhouse gas emissions from consumed electricity, steam, heating,
or cooling purchased or acquired by a [company], regardless of
location.” - Scope 3 emissions are defined as “indirect
upstream and downstream greenhouse gas emissions, other than scope
2 emissions, from sources that the [company] 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.”
The GHG emissions will be reported using the standards and
guidance promulgated by the Greenhouse Gas Protocol (GHG Protocol).
The GHG Protocol is an emissions accounting standard many companies
are already familiar with, as various climate reporting frameworks
and regulations, including the SEC’s proposed rules, already
refer to the GHG Protocol to account for and report GHG emissions.
Note that the GHG Protocol is in the middle of its standards update
process, and final versions of updated standards and guidance may
be expected in 2025. The CARB will also conduct a review process
starting in 2033 and every five years thereafter to potentially
adopt an alternative accounting and reporting standard.
Companies will need to obtain an assurance engagement for the
GHG emission disclosures and provide to an emissions reporting
organization a copy of the assurance provider’s report,
including the name of such assurance provider. The third-party
assurance provider will need to have “significant experience
in measuring, analyzing, reporting, or attesting to the emission of
greenhouse [gases] and sufficient competence and capabilities
necessary to perform engagements in accordance with professional
standards and applicable legal and regulatory
requirements.”
Starting in 2026, Scopes 1 and 2 emissions will be assured at a
“limited assurance” level, and at a “reasonable
assurance” level starting in 2030. For Scope 3 emissions,
companies will need “limited assurance” starting in
2030.
Companies will also need to pay an annual fee that will be
contributed to a newly created Climate Accountability and Emissions
Disclosure Fund to help maintain this program. The fee has yet to
be determined, but the total amount collected shall not exceed the
CARB’s actual and reasonable costs for administration. The fee
may also be adjusted in any year to reflect changes in the
California Consumer Price Index.
This emissions data will be available on a digital platform
created by the emissions reporting organization, and consumers will
be able to view this data as aggregated in a variety of ways
(including multi-year data). Combined with the bill’s aim in
making the disclosure “easily understandable and
accessible,” the sponsors believe that consumers will be able
to assess whether companies touting their sustainability efforts
are truly walking the walk.
Compliance Timeline
The CARB is required to develop these disclosure regulations on
or prior to January 1, 2025.
Starting in 2026 (on or by a date to be determined by the CARB),
companies will need to publicly disclose and verify their Scopes 1
and 2 emissions for their prior fiscal year.
Starting in 2027, companies will need to publicly disclose their
Scope 3 emissions for the prior fiscal year no later than 180 days
after the disclosure of their Scopes 1 and 2 emissions. This
180-day gap may change by January 1, 2030, depending on any later
updates by the CARB.
While these deadlines are coming quickly and companies will need
to ramp up, it may also lead to opportunities for companies that
want to attract consumers who purchase from more sustainable
brands.
Penalties for Noncompliance
Companies that fail to comply with this bill will receive an
administrative penalty not to exceed $500,000 in a reporting year.
The penalty amount will depend on the company’s facts and
circumstances, including past and present compliance with the bill
and any good faith measures taken. Companies shall not be subject
to an administrative penalty under this section for any
misstatements with regard to Scope 3 emissions disclosures made
with a reasonable basis and disclosed in good faith, and between
2027 and 2030, only penalties for failure to file will be assessed
on Scope 3 emissions reporting.
Greenhouse Gases: Climate-Related Financial Risk
Authored by Senator Henry Stern, SB 261 would, if adopted,
require biennial disclosure of climate-related financial risks and
risk mitigation measures.
Covered Companies
Corporations, limited liability companies and certain other
business entities (1) with total annual revenues in excess of $500
million dollars (based on the company’s revenue for the prior
fiscal year) and (2) that do business in California are subject to
these disclosure obligations. Even if a company’s subsidiary
meets these scoping requirements, it will not need to provide a
separate report if the parent company submits a consolidated
report. As discussed above, there is some ambiguity as to what it
means to “do business” in California as this bill also
does not define the term.
This bill similarly does not have any exemptions for private
companies.
Required Risk Disclosures
Companies will need to biennially prepare a climate-related
financial risk report disclosing:
- Climate-related financial risks, in accordance with Final
Report of Recommendations of the Task Force on Climate-related
Financial Disclosures (the TCFD), as published by the TCFD or any
successor thereto; and - Measures adopted by the company to reduce and adapt to the
disclosed climate-related financial risks.
The bill defines “climate-related financial risks” as
“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.”
A company that cannot provide all the required disclosures must
provide what it can to the best of its ability, provide a detailed
explanation for any reporting gaps, and describe steps the company
will take to provide all required disclosures.
A company may satisfy its requirement under SB 261 if it
prepares a publicly accessible biennial report that includes
climate-related financial risk disclosure information (1) under a
law, regulation or listing requirement issued by a regulated
exchange, national government or other governmental entity
incorporating similar disclosure requirements, likely including the
proposed SEC climate disclosure rules and/or (2) voluntarily using
a framework that provides for similar disclosure.
The bill specifically notes that compliance with the
International Financial Reporting Standards (IFRS) Sustainability
Disclosure Standards, as issued by the International Sustainability
Standards Board (the ISSB Standards) would meet a company’s
reporting obligations. In June 2023, the ISSB, which will be the
successor to the TCFD’s monitoring responsibilities going
forward, published its initial sustainability disclosure standards,
IFRS S1 and IFRS S2, which build on the TCFD framework and
consolidate various sustainability-related frameworks and
standards.
To the extent the company discloses a description of its GHG
emissions or voluntary mitigation thereof in its report, the CARB
may consider such claims if they are verified by an independent
third-party verifier. The bill does not specify any minimum
requirements for the third-party independent verifier.
A subject company must make the report publicly available on its
corporate website. A climate reporting organization will review a
subset of these reports by industry and identify inadequate
reports. This organization will also propose any additional changes
and best practices for disclosure.
On or before January 1, 2026, subject companies will also be
required to pay an annual fee to the CARB upon filing their
disclosures for the administration and implementation of the bill.
The fee has yet to be determined, but the total amount collected
shall not exceed CARB’s actual and reasonable costs for
administration.
Compliance Timeline
Companies will need to disclose the climate-related financial
risk reports starting on or before January 1, 2026.
Penalties for Noncompliance
Companies that fail to comply with this bill will receive an
administrative penalty not to exceed $50,000 in a reporting year.
The penalty amount will depend on the company’s facts and
circumstances, including past and present compliance with the bill
and any good faith measures taken.
Comparison Against SEC’s Proposed Climate Disclosure
Rules
In March 2022, the SEC proposed climate disclosure rules would
require public companies to disclose certain climate-related
information in their annual reports and registration statements.
These proposed rules require, among others, disclosure regarding
(1) climate-related risks that are reasonably likely to have a
material impact on a company’s business, results of operations
or financial condition, (2) GHG emissions, (3) board oversight of
climate-related risks, and (4) certain climate-related financial
metrics in the company’s audited financial statements.
Below are two key differences between two sets of
regulations:
- California’s bills also reach large private
companies. While the SEC’s proposed climate rules are
limited to public companies, California’s bills reach further
to large private companies. Under SB 253, companies with annual
revenue over $1 billion that do business in California would have
to disclose Scope 1, Scope 2 and Scope 3 emissions, regardless of
whether they are private or public. Under SB 261, companies with
annual revenue over $500,000 that do business in California would
have to provide climate-related financial risk reports. - California’s SB 253 requires mandatory Scope 3 GHG
emissions disclosure. Under the SEC’s proposed climate
rules, companies must disclose their total Scope 3 emissions if
material, or if they set a GHG emissions reduction target or goal
that includes their Scope 3 emissions. Additionally, smaller
reporting companies are exempt from the Scope 3 GHG emissions
requirement. However, California’s SB 253 will require subject
companies to disclose their Scope 3 GHG emissions starting in
2027.
Considerations and Takeaways
- Companies should prepare to beef up their
climate-related disclosure controls. Companies that have
not previously conducted GHG inventories or assessed their exposure
to climate-related risks will need to develop internal reporting
structures and establish processes and procedures to gather, verify
and report such information. These bills also do not constrain the
scope of disclosures solely to GHG emissions data or
climate-related financial risks located within California, so these
controls must be developed across the organization’s
geographies. Unlike the SEC’s proposed rules, the California
bills do not distinguish between private or public companies;
therefore, private companies subject to these bills may also need
to develop disclosure controls and procedures similar to those of
public companies to report the required information. Even if
companies are not subject to either of these sets of regulations,
they may need to provide emissions data if they are part of another
company’s Scope 3 GHG emissions. Further, funding sources may
start to require representations with respect to these disclosures.
For guidance on developing such disclosure controls, see our general guidance and our previous client alert for private
companies. - Companies should start educating their board and
management teams regarding climate-related risks and
disclosures. Sustainability-related regulations are being
adopted not just in the U.S., but internationally, including in the
European Union (EU). As a result, it is critical to educate boards
and senior management of material sustainability-related risks and
whether the company’s business model and strategy account for
those climate-related risks. Even without mandatory climate
disclosure rules in place, companies’ lack of climate-related
disclosures have started to impact the boardroom in recent years,
for example, with CalSTRS voting against directors at 2,035 global
companies without adequate climate risk disclosures in 2023.
Moreover, to the extent that a company makes any
sustainability-related claims without proper oversight and
disclosure controls, a public company may not only face
greenwashing-related litigations but also draw the attention of the
SEC’s Climate and ESG Task Force in the SEC’s Division of
Enforcement. Finally, to the extent the company is materially
impacted by any climate catastrophe (i.e., hurricanes, wildfires),
shareholders may potentially sue the board for inadequate oversight
of material climate-related risks. - Companies should ensure that their various
climate-related disclosures are consistent. A company may
be subject to additional climate-related reporting requirements
under international and federal laws, such as the EU’s
Corporate Sustainability Reporting Directive, the SEC’s
proposed rules or the proposed federal supplier disclosure rules
(see our client alert here). In addition, a company may
face demands from stakeholders to report to a voluntary framework
such as the TCFD or the ISSB Standards. SB 253 acknowledges that
there may be other national and international GHG emissions
reporting requirements, and companies may submit reports meeting
such other requirements, as long as such reports also satisfy the
requirements of SB 253. - Public companies covered under SB 253 should consider
disclosing Scope 3 emissions in SEC filings. As discussed
above, under the SEC’s proposed climate rules, certain
companies may not be required to disclose their Scope 3 GHG
emissions. However, the SEC—as well as company
stakeholders—may question a company’s materiality
assessment if the Scope 3 emissions disclosed under the California
bills are large in comparison to its Scopes 1 and 2 emissions and
the company fails to disclose Scope 3 emissions in its SEC
filings.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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