New climate reporting requirements to take effect in California

California has just enacted two climate-related reporting statutes. The first will require certain public and private entities doing business in California to make public disclosures of their scope 1, 2 and 3 greenhouse gas emissions. The second will require certain public and private entities doing business in California to publicly report their climate-related risks and efforts to address them. These statutes expand the scope of companies covered by their requirement beyond those covered by the current Securities and Exchange Commission (SEC) proposed disclosure standards. At least one estimate shows that more than 8,000 companies^[i] may need to comply.

The measures, in the form of Senate Bill 253^[ii]  (SB 253) and Senate Bill 261^[iii]  (SB 261), were signed into law by California Governor Gavin Newsom on October 7, 2023. Both laws impact public and private companies doing business in California.

As defined by SB 253, “reporting entities” include corporations, partnerships, limited liability companies or other business entities formed under the laws of California; under the laws of any other state of the United States or the District of Columbia; or under an act of the Congress of the United States with total annual revenues in excess of US$1 billion, and that do business in California.

As defined by SB 261, “reporting entities” include the same types of entities as above doing business in California with total annual revenues in excess of US$500 million. SB 261 does not include a business entity that is subject to regulation by the Department of Insurance in California or any other state.

Application of the revenue thresholds discussed above shall be determined based on the reporting entity’s revenue for the prior fiscal year. The statutes do not specify factors to determine whether a company is doing business in California. We would expect those factors to be the same as or similar to factors applied by the California Franchise Tax Board, which are generally: engaging in any transaction for the purpose of financial gain within California; being organized or commercially domiciled in California; or having California sales, property or payroll exceeding certain threshold amounts.  

The California Air Resources Board (CARB) must promulgate regulations implementing SB 253 by January 1, 2025. Reporting obligations under both statutes will begin in 2026, meaning that entities covered should prepare in 2025 to start tracking scope 1 and 2 greenhouse gas emissions under SB 253 and other climate-related risk information under SB 261, as discussed below.

The Climate Corporate Data Accountability Act, SB 253

This act provides Californians a right to know about the sources of carbon pollution. “Reporting entities” are businesses as outlined above that have a total revenue (in the prior fiscal year) of more than US$1 billion and that do business in California.

• On or before January 1, 2025, the California Air Resources Board shall develop and adopt implementing regulations.
• Beginning in 2026, reporting entities are required to annually report their scope 1 and scope 2 greenhouse gas emissions. Scope 1 emissions are defined as all direct greenhouse gas 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 defined as indirect greenhouse gas emissions from consumed electricity, steam, heating or cooling purchased or acquired by a reporting entity, regardless of location.
• Then, beginning in 2027, reporting entities must also report their annual scope 3 emissions, which are defined as indirect upstream and downstream greenhouse gas 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.
• Reporting entities will be required to obtain verification of these reports by an independent and experienced third-party provider.
• Reporting entities will pay an annual fee set by regulation for administering the reporting system.
• The regulations will include a scheme for imposing administrative penalties for failure to comply, in an amount of no more than US$500,000 in a reporting year per reporting entity, through a formal administrative hearing. The regulations must include consideration of all relevant factors, including past and present compliance, and good faith measures to comply. For scope 3 reporting, a reporting entity shall not be subject to an administrative penalty for misstatements made with a reasonable basis and disclosed in good faith, and between 2027 and 2030, penalties shall only occur for non-filing.
• The reports will be made publicly available on a CARB-managed website, to be developed.

Greenhouse Gases: Climate-Related Financial Risk, SB 261

This act requires companies with greater than US$500 million in annual revenues that do business in California to publicly report, annually, their climate-related financial risk, and to describe measures to mitigate that risk.

• On or before January 1, 2026, and biennially thereafter, a covered entity must prepare an annual report disclosing its climate-related financial risk and its measures adopted to reduce and adapt to such risk.
• Standards for reporting are in accordance with the recommended framework and disclosures contained in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017) published by the Task Force on Climate-related Financial Disclosures (TCFD), or any successor thereto, or by other law imposing requirements for the content of such reporting.
• The covered entity must make this report publicly on its own website and submit to the California Secretary of State a statement affirming compliance that the report discloses climate-related financial risk.
• “Climate-related financial risk” is defined to mean 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.
• The legislative findings supporting the act describe climate change-related impacts as including wildfires, sea level rise, extreme weather events, extreme droughts and associated impacts to the global economy.
• CARB is assigned to draft regulations subjecting non-compliance to administrative penalties of up to US$50,000 in a reporting year, again through a formal administrative hearing, and considering all relevant factors, including past and present compliance, and good faith measures to comply.

What do companies need to know?

• SB 253 and SB 261 cast a wide net. If you do business in California and meet the revenue thresholds noted above, you are likely impacted.
• If covered, prepare to start tracking your scope 1, 2 and 3 emissions and/or your climate-related risk and mitigation measure as early as 2025.
• As collecting such data becomes easier and more routine practice, we may see additional regulation, and revenue thresholds may drop, impacting more companies.
• Consumers of this data will likely use them for their own business and other decisions.
• Consider if you are subject to other climate reporting obligations in other jurisdictions. For example, the European Corporate Sustainability Reporting Directive impacts companies based outside of the EU that meet certain thresholds. Understanding the differences in reporting requirements is important.
• Understand your gaps and limitations in complying with these reporting requirements. Be prepared to address them.
• Build your internal and external support teams now to help you navigate the evolving regulatory landscape around sustainability planning, tracking and reporting, and to protect your organizations from risk.

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[i] https://www.crunchbase.com/hub/united-states-companies-more-than-500-in-revenue

[ii] https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB253

[iii] https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB261