California recently enacted two landmark climate disclosure laws that will require companies doing business in the State above specified revenue thresholds to report their Scope 1-3 greenhouse gas (“GHG”) emissions and climate-related financial risk information. Notably, the laws do not define what constitutes doing business in California. While the California Air Resources Board (“CARB”), the agency charged with implementing the laws, may provide further details on their reach in future rulemakings, companies engaged in business transactions in the State (even if they are not located in California) should familiarize themselves with these requirements and be prepared to comply. In this blog, we unpack both laws and contextualize them with pending federal rulemakings.
SB 253 – The Climate Corporate Data Accountability Act
The Climate Corporate Data Accountability Act will require companies with annual revenues above $1 billion that do business in California to annually measure and report their Scope 1-3 GHG emissions in conformance with Greenhouse Gas Protocol standards and guidance. There are over 5,000 companies that may be impacted by this law, with penalties rising to $500,000 per year for noncompliance.
Starting in 2026, companies will be required to annually report their Scope 1 and 2 emissions, and starting in 2027, those companies will be required to annually report their Scope 3 emissions. Scope 1 and 2 emissions are emissions that are either directly under the company’s control (e.g., fuel combustion activities) or indirectly attributed to the company’s operations (e.g., consumed electricity, heating and cooling). Scope 3 emissions, on the other hand, are those emissions attributed to upstream and downstream actors that the company does not own or directly control (e.g., consumer emissions, employee travel). Companies will also be required to obtain a third-party “assurance engagement” to assure the accuracy of their emissions reporting, with varying requirements based on type of emissions and date.
One of the biggest difficulties for companies will be accounting for upstream and downstream emissions from entities that may not have any reporting requirements of their own. While collecting upstream information from suppliers may be more straightforward as a term of doing business, the process becomes more complicated for downstream users that otherwise have no incentive to collect this data. Recognizing these difficulties, the law provides that companies will not be penalized for any misstatements with regard to Scope 3 disclosures “made with a reasonable basis and disclosed in good faith.” Moreover, between 2027 and 2030, companies will only be penalized on their scope 3 reporting for non-filing.
Finally, recognizing that companies may be subject to similar non-California reporting requirements, the law specifies that companies will be able use reports prepared to meet national and international reporting requirements as long as the reports satisfy the law’s requirements.
CARB is expected to unveil regulations by January 1, 2025, detailing how companies will have to disclose their emissions, but the law currently requires that this disclosure be publicly available in a manner that is accessible and easily understandable.
SB 261 – The Climate-Related Financial Risk Act
The Climate-Related Financial Risk Act will require companies with annual revenues above $500 million that do business in California to, starting in 2026 and biannually thereafter, prepare a report that discloses their “climate-related financial risk” and measures adopted to reduce and adapt to that risk. Companies will be required to make the report available on their websites. There are currently around 10,000 companies that may be impacted by this law, with penalties rising to $50,000 per year for noncompliance.
“Climate-related financial risk” is defined as “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks.” The law provides as examples “risks to corporate operations, provisions 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.”
Companies will have to evaluate their “climate-related financial risk” in accordance with recommendations by the Task Force on Climate-related Financial Disclosures or specified equivalents.
Pending Federal Rulemakings
Although limited to companies that do business in California, the California laws discussed above are expansive in comparison to the requirements in the proposed climate disclosure rules issued by the U.S. Securities and Exchange Commission (“SEC”) and Federal Acquisition Regulatory Council (“FAR Council”).
For example, the SEC’s proposed climate disclosure rule only applies to public companies and only requires the disclosure of Scope 3 emissions if material or if a company has set an emissions reduction target or goal that includes its Scope 3 emissions. Moreover, the FAR Council’s proposed climate-disclosure rule only applies to federal contractors, and only “major” federal contractors must inventory and disclose their Scope 3 emissions. In contrast and as explained above, the California laws apply to all companies (both public and private) doing business in the State above specified revenue thresholds, and SB 253 requires that all companies subject to the law disclose their Scope 3 emissions.
Extensions of the reporting deadlines are anticipated as reporting requirements are developed and scrutinized. For example, in Governor Newsom’s signing of SB 253, he indicated that “the implementation deadlines in this bill are likely infeasible, and the reporting protocol specified could result in inconsistent reporting.”
Regardless, companies will be well served to use these California developments as an opportunity to assess their GHG emissions, particularly areas with data gaps (such as with respect to their Scope 3 emissions) that will need to be addressed prior to the laws’ requirements taking effect. Particular attention should be given to ensuring consistency in reporting and planning for the most cost-effective way to comply with not only California’s climate disclosure laws, but also future federal requirements and bills pending in other states. Finally, history has shown that increased publicly available information leads to increased scrutiny, opening companies to additional liability and potential litigation.
We will continue to monitor climate disclosure requirements on the Corporate Environmental Lawyer.