Climate action in California has repercussions around the globe; the state has the fifth-largest economy in the world and is forecasted to become the fourth sometime this year. That’s why the state’s expected passage of the “California Climate Accountability Package” is making global news.
Two main bills are bundled into the Climate Accountability Package: SB 253 and SB 261. They share common goals: improving corporate transparency and standardizing corporate disclosures regarding carbon emissions; aligning public investments with climate goals; and raising the bar on corporate action to address the climate crisis. These bills will require thousands of companies doing business in California to disclose their scope 1, 2, and 3 greenhouse gas emissions and climate-related financial risk information. The first disclosures will be due in 2026.
Though these bills focus on US companies that do business in California, they are part of a global movement towards legislation that requires robust climate reporting from companies, including the SEC’s proposed climate disclosure rule in the US, and the Corporate Sustainability Reporting Directive (CSRD) in the EU. And, like the EU, California took an expansive approach to capturing companies; instead of focusing on companies with headquarters or the majority of their business in California, the state will require disclosures from any company with business there.
The Climate Accountability Package will make California the first state in the US to require climate transparency at this level. It will curb greenwashing by providing communities and consumers with access to transparent and accurate data on how much companies are contributing to climate change. Businesses will be forced to carefully evaluate their vulnerability to climate risks and disclose that information to investors.
SB 253: Climate Corporate Data Accountability Act (relating to emissions disclosure)
1. Who would be covered by the law?
The law would require the California Air Resources Board to adopt regulations by 2025 that would apply to all U.S. companies – public or private – with over $1 billion in annual revenue that are “doing business” in California, regardless of where in the U.S. such companies are headquartered. It applies to US-based partnerships, corporations, limited liability companies, and other entities.
More than 5,000 companies are expected to be subject to these new requirements. Unlike similar EU legislation, the law does not have extraterritorial effect.
2. What emissions would need to be disclosed?
Companies would need to disclose their GHG emissions from Scope 1, 2, and 3 sources – with reporting for Scope 1 and 2 emissions to begin in 2026, and reporting for Scope 3 emissions to begin in 2027.
- Scope 1 emissions are direct emissions from owned or controlled sources.
- Scope 2 emissions are indirect emissions from the generation of purchased or acquired electricity, steam, heat, or cooling.
- Scope 3 emissions, also sometimes referred to as value chain emissions, are all other indirect upstream and downstream emissions from a company’s supply chain.
Especially the requirement to report Scope 3 emissions is pivotal, as these often account for more than 90% of an organization’s climate impact and they are notoriously difficult to measure.
Starting in 2026, enterprises will need to report on their 2025 direct emissions (Scope 1) and their 2026 indirect emissions (Scopes 2 and 3) starting in 2027.
3. What disclosure standards would a company need to comply with?
Companies would need to disclose their emissions in accordance with standards and guidance of the Greenhouse Gas Protocol, which is a global standard for GHG emissions accounting and reporting, including the GHG Protocol Corporate Accounting and Reporting Standard and the Greenhouse Gas Protocol Corporate Value Chain (Scope 3).
The emissions must be disclosed annually in a publicly accessible website. Disclosures must be easily comprehensible to residents, investors, and other stakeholders. Companies would also need to obtain an assurance engagement of their emissions disclosures from an independent third party.
4. What are the penalties for failure to comply?
If a company is required to disclose its emissions but fails to file, makes a late filing, or otherwise fails to meet the requirements of the law, it would be subject to administrative penalties not to exceed $500,000 per report year. However, businesses are not subject to an administrative penalty for misstatements about scope 3 emissions made with a reasonable basis.
SB 261: The Climate-Related Financial Risk Act
The second bill in the package, the Climate-Related Financial Risk Act, would require large corporations to prepare and submit an annual climate-related financial risk report, publicly disclosing their climate-related financial risks and the measures they’re taking to mitigate these risks.
1. What does the Climate-Related Financial Risk Act (SB 261) require?
The Climate-Related Financial Risk Act, or SB 261, requires certain entities doing business in California to prepare and submit climate-related financial risk reports that cover climate-related financial risks consistent with recommendations from the Task Force on Climate-Related Financial Disclosure (TCFD) framework. For example, businesses would have to disclose whether they’ve budgeted for increased compliance and insurance costs and quantified potential opportunities and strategic priorities. The first report is required to be prepared by December 31, 2026, with reporting then taking place biennially.
In the climate-related financial risk report, businesses would need to disclose their (i) climate-related financial risk, based on the recommendations of the Task Force on Climate-Related Financial Disclosures, and (ii) the measures adopted to mitigate and adapt to the disclosed climate-related financial risk.
SB 261 is modelled after existing climate disclosure rules used by the state’s teachers’ retirement fund (CALSTRS) and hundreds of major financial institutions. It aims to safeguard consumers and investors from losses resulting from climate-related disruptions to supply chains, workforces, and infrastructure, which are increasing due to the effects of climate change.
The bill also addresses the financial risks businesses could face if they are unprepared for the transition toward a low-carbon economy. For instance, automobile manufacturers who fail to prepare for the shift towards electric vehicles will likely experience a decline in market share, resulting in revenue losses.
2. Who is impacted by SB 261?
SB 261 requires US entities that do business in California with total annual revenue of at least $500M to prepare and submit climate-related financial reports as outlined above.
3. What are the liability implications of SB 261?
In addition to submitting these climate-related financial reports risk reports to the California State Air Resources Board, subject companies will need to make the reports available on their websites. Companies subject to regulation by the California Department of Insurance or that are in the business of insurance in any other state would be excluded.
A Comparison to the SEC’s Proposed Climate Disclosure Rules
While California’s SB253 shares common ground with the SEC’s climate proposal, it departs from the federal rule on two critical fronts: the type of emissions reported, and the type of company required to report them. The SEC proposal requires all public companies to disclose scope 1 (direct emissions from their owned operations) and scope 2 (indirect emissions from purchasing electricity, steam, heating, and cooling) emissions. Businesses would only report on scope 3 emissions if they have set scope 3 reduction targets or if scope 3 emissions are material. Moreover, smaller companies would not have to report their scope 3 emissions. California goes further. Its new policy calls for disclosure of all three types of emissions for any US company operating in the state with annual revenue over $1B USD. This is significant, as scope 3 emissions often make up the lion’s share of corporate carbon inventory.
Conclusion
In summary, California’s Climate Accountability Package, comprising SB 253 and SB 261, is an initiative with global implications. It demands transparency and action from corporations in the state, setting a high standard for climate reporting and financial risk disclosure. By requiring comprehensive emissions reporting and risk assessment, California is taking a bold step towards combatting climate change and inspiring similar measures worldwide. This package is a milestone in corporate accountability and environmental responsibility that will shape the future of sustainable business practices.
