At a Glance
- On October 7, 2023, Governor Gavin Newsom signed the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261) into law.
- Both SB 253 and SB 261 require significant climate-related disclosures, in some cases beyond the SEC’s climate-disclosure rule proposal introduced in March 2022.
Governor Gavin Newsom has signed the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261) into law, which means the California Air Resources Board (CARB) is now tasked with adopting regulations that will require a host of companies doing business in California to meet additional — and potentially challenging — reporting requirements with deliverables due as soon as 2026. Whether these bills were on your radar, this heralds a new chapter in California legislation that will expand to businesses and operations beyond in-state activities. The bills may draw challenges to CARB’s authority to regulate out-of-state entities. Whether such challenges will succeed is an open question. Past challenges to California’s GHG regulatory efforts on similar grounds have not met with success (e.g., Rocky Mountain Farmers Union v. Corey) and recently, in NPPC v. Ross, the U.S. Supreme Court declined to restrict California regulations having the practical effect of controlling out-of-state activities producing products for sale in California. Based on this development, here are five key topics to analyze and track:
#1: Each Bill Requires Swift Action by CARB
Under SB 253, CARB will be required to do the following:
- Before January 1, 2025, adopt regulations requiring the reporting and verification of statewide GHG emissions (explained further below).
- Monitor and enforce compliance with reporting requirements (including surveying and assessing GHG accounting and reporting standards).
- Publish GHG emissions, criteria pollutants and toxic air contaminants for each “covered entity” (defined below) that reports to CARB on its website, and update such information at least annually.
Under SB 261, CARB will be required to do the following:
- Create regulations mandating reporting and verification of statewide greenhouse gas (GHG) emissions.
- Host the reported emissions of GHGs, criteria pollutants, and toxic air contaminants for each covered entity on its website.
- Contract with a climate-reporting nonprofit organization to issue a public report every other year that includes: (i) an overview of reports submitted by “reporting entities” (defined below); (ii) an analysis of climate-related financial risks derived from the reporting entities’ reports (including potential impacts on economically vulnerable communities); and (iii) the identification of inadequate or insufficient reports.
#2: Each Bill’s Revenue Thresholds Capture a Broad Range of Business Entities
- SB 253 applies to “reporting entities” (i.e., a partnership, corporation, LLC or other business entity), both public and private, with annual revenues exceeding $1 billion and doing business in California. Generally, “doing business” means meeting one of the following criteria: (i) being organized or commercially domiciled in California or (ii) exceeding certain threshold amounts of sales, property holdings or payroll in California, which generally can mean exceeding $610,000 in annual sales and/or $61,000 in property value or payroll.1
- SB 261 applies to “covered entities” (i.e., a partnership, corporation, LLC or other business entity) both public and private with annual revenues exceeding $500 million and doing business in California.
- There is no indication in either bill that threshold revenues must be generated in California, only that a company exceed the applicable revenue threshold and does business in the state.
- Based on the bills’ broad scope, entities like the California Chamber of Commerce (CCOC) are not embracing either bill and fear that if non-California companies successfully challenge CARB’s authority to regulate out-of-state entities, California-based companies (especially smaller businesses) would shoulder an undue burden that could create perverse incentives for businesses to leave California.
#3: Each Bill’s Disclosure Requirements Are Broad and Effective Soon
- Requires annual public disclosure of Scope 1 and Scope 2 greenhouse gas (GHG) emissions starting in 2026 — and, notably, disclosure of Scope 3 GHG emissions starting in 2027.2However, Scope 3 disclosures will be afforded “safe harbor” protection from penalties if made with a reasonable basis and disclosed in good faith. How “reasonable” and “good faith” are defined remains to be determined.
- All GHG emissions will have to be measured and reported in compliance with the GHG Protocol (including its associated accounting and reporting standards).
- Disclosures will have to be “easily understandable” and accessible to residents, investors and other stakeholders in California. Translation into multiple languages may be mandated.
- Disclosures will have to account for and include acquisitions, divestments, mergers and other corporate/structural changes that can impact GHG emissions accounting and reporting.
- Public disclosures of Scope 1 and Scope 2 GHG emissions will have to be independently verified by a third-party auditor at a “limited assurance level” in 2026 and at a “reasonable assurance level” starting in 2030. For Scope 3, limited assurance will be required starting in 2030.
- Requires covered entities to prepare and publish a biennial climate-related financial risk report on their company website — due on or before January 1, 2026 — that discloses the entity’s climate-related financial risk and outlines the measures adopted to reduce and adapt to climate-related risk. Think of this as a transition plan based on gap analysis and/or scenario analysis.
- Financial risk reports will have to comply with the Task Force on Climate-Related Financial Disclosure (TCFD) June 2017 Financial Disclosures framework.
#4: Compliance Enforcement Measures Include Penalties and Attorney General Oversight
- Each bill provides for administrative penalties up to, but not exceeding, $500,000 per reporting year for failing to meet applicable disclosure requirements.
- SB 253 specifically provides for Attorney General oversight and enforcement, which could subject entities alleged to be in violation to time-consuming and expensive investigation and litigation.
#5: Climate Disclosure Trends Like This Are Here to Stay
- Lawmakers, regulators, investors, customers and other stakeholders will continue to grapple with climate-related issues, increasing demand for GHG accounting.
- This is true even in the face of “anti-sustainability” pushback and backlash, which is increasingly forcing companies to focus their overall efforts, including enhancing enterprise-wide functions, internal data collection processes and reporting systems.
- In light of these developments, proactivity (at least internally), precision and staying well informed will provide critical value for companies, especially those desiring to manage avoidable surprises.
- This is true regardless of whether a company engages in voluntary reporting under existing standards. Each bill references certain voluntary standards (e.g., TCFD, International Financial Reporting Standards and International Sustainability Standards Board). However, it is unknown what details and nuance CARB will inject to animate either bill’s contours — and close attention will be needed from a regulatory compliance perspective.
- Further, this is true regardless of whether a company faces compliance reporting under existing disclosure frameworks, such as the EPA GHG Reporting Program and the CARB Mandatory Reporting Regulation, or emerging ones such as the SEC’s proposed Climate Risk-Related Financial Disclosure Rule.
- We are entering a period where many companies will face multiple overlapping federal and state compliance GHG reporting and disclosure frameworks of varying rigor. Further, companies will need to harmonize and/or transition their voluntary reporting efforts as they prepare to travel the complex, emerging compliance reporting landscape.
The authors will continue to follow the evolution of climate-related disclosure requirements, intersectionality with existing voluntary and compliance regimes, nuanced applicability across industries and “ripple effects” across -geographical boundaries — and we look forward to helping address the complex issues arising in this space.