New California Bills Require Companies to Disclose GHG Emissions & Climate-Related Financial Risks

This blog was originally posted on 17th October, 2023. Further regulatory developments may have occurred after publication. To keep up-to-date with the latest compliance news, sign up to our newsletter.

AUTHORED BY HANNAH JANKNECHT, REGULATORY ANALYST, COMPLIANCE & RISKS

On 7 October 2023, Gavin Newsom, Senator of California, signed two groundbreaking Bills on Climate Disclosure. Senate Bill 253 and its companion SB 261 will require large companies doing business in California to disclose their greenhouse gas emissions and report on their climate-related financial risks. A similar Bill on Climate Disclosure was proposed in a previous legislative session but failed to gain sufficient support. 

The Bills are expected to impact and potentially set a new baseline for a similar proposal at the federal level made by the Security Exchange Commission (SEC proposal), which is likely to be finalized in the coming weeks. 

SB 253: Climate Corporate Data Accountability Act

SB 253 requires companies with a revenue greater than 1 billion dollars doing business in California to disclose their scope 1, 2 and 3 greenhouse gas emissions. Unlike the proposal made by the SEC, the Californian requirements apply equally to public and private companies.

The reporting obligations as well as further details must be implemented in a regulation by California Air Resources Board (CARB) before 1 January 2025. 

Both SB 253 and SB 261 do not define the term ‘doing business in California’. In order to identify the scope of this term, companies will have to look into other relevant Californian legislation such as the Corporations Code, the Revenue Taxation Code and applicable case law. Considering these, ‘doing business in California’ will most likely be interpreted broadly and include businesses without a physical presence in California that enter into repeated and successive business transactions in the state (Corporations Code). 

The most notable element of SB 253 is the requirement to disclose scope 3 greenhouse gas emissions, which the Bill defines 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’. 

Regarding the format and content of their reports, companies are required to follow the guidance and standards issued by the Greenhouse Gas Protocol (GHG Protocol), a framework that many companies already use on a voluntary basis. The GHG Protocol Standards are currently under review and the final revised standards/ guidance will be published in 2025. 

The reporting obligations as well as the requirement to provide independent third-party verification will be phased in between 2026 and 2030. Beginning in 2026, companies will have to disclose their scope 1 and 2 emissions for the prior fiscal year and provide ‘limited’ assurance for this information. ‘Reasonable’ assurance will be required for these emissions from 2030 onwards. Reporting of scope 3 emissions will begin in 2027, and limited assurance for scope 3 emission reporting will most likely be required from 2030 on, depending on a decision to be made by the California Air Resources Board (CARB). 

SB 261: Greenhouse Gases: Climate-Related Financial Risk

The newly adopted SB 261 requires public and private companies with a revenue greater than 500 million dollars that are doing business in California to prepare a report on their climate-related financial risks every two years.

In their report, companies must disclose:

1. Their climate-related financial risk in accordance with the final Task Force on Climate-Related Financial Disclosures recommendations or their successor (taken over by the ISSB in June 2023),
2. Measures adopted to reduce and adapt to the disclosed climate-related financial risk.

A ‘Climate-related financial risk’ is defined as a ‘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 Bill aims to use synergies with other mandatory or voluntary reporting frameworks. Therefore, companies that prepare a risk-report in accordance with other recognized voluntary or mandatory national or international frameworks can use this report to comply with the requirements under SB 261.

Companies are obliged to create their first risk report on or before 1 January 2026 and publish the report on their own website. Companies that are not able to provide the required information must instead provide information to their best knowledge and describe detailed steps on how to fill the existing gaps. A recognized climate reporting organization commissioned by the state board will review the published reports, create a summary and sector analysis and identify insufficient reports. Failure to publish a report or submission of inadequate reports can lead to an administrative penalty of up to 50,000 dollars per reporting year. The reporting system will be financed through an annual fee to be paid by all companies in scope of the Bill. 

What Happens Next?

Considering the looming deadlines of the two Californian Bills, companies are advised to start gathering emissions data as soon as possible. Those already using reporting and risk assessment frameworks on a voluntary basis will be at an advantage.

Although Governor Newsom welcomed the two Bills on Climate Disclosure, he voiced concerns over the incurring costs and deadlines for their implementation. In a letter published on 7 October, Governor Newsom noted that whilst the Bill “demonstrates California’s continued leadership with bold responses to the climate crisis, turning information transparency into climate action”, the “implementation deadlines are likely infeasible, and the reporting protocol specified could result in inconsistent reporting across businesses subject to the measure.”  He directed that both of these issues be addressed by the Legislature next year. Companies in scope of the Bills are therefore strongly advised to monitor for potentially changing deadlines. 

The adoption of SB 253 is furthermore expected to influence the SEC proposal, especially regarding the uncertainty around the final version of the scope 3 emissions disclosure requirement. Under the current proposal, scope 3 emissions disclosure is only mandatory if it’s ‘material’ or if the filer has set scope 3 targets. The public consultation on the SEC proposal raised further concerns regarding the costs and potential prematurity of scope 3 emission reporting as well as its effect on smaller companies that are not directly in scope of the proposal. 

In view of the Californian Bills, SEC Chair Gensler however noted that these would make scope 3 emission reporting at the Federal level effectively less costly, since a high number of companies will have to gather this type of information under California SB 253 anyway. The SEC, who initially planned to finalize the rules last year, is currently reviewing the public comments and will most likely finalize the rules this fall.

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