California Mandates Corporate Environmental & Financial Transparency
On October 7, 2023, California Governor Gavin Newsom made a significant move in the fight against climate change by signing into law two landmark bills - SB-253, the "Climate Corporate Data Accountability Act," and SB-261, "Greenhouse Gases: Climate-Related Financial Risk." These laws represent the first industry-agnostic climate regulations in the United States, and they mandate the disclosure of greenhouse gas emissions and climate-related financial risks by large public and private companies operating in California. This development is crucial, given that California boasts the nation's largest population and gross domestic product, ranking it as the fifth-largest global economy if it were a standalone country.
What is SB-253?
SB-253 targets companies with annual revenues exceeding $1 billion that conduct business in California. The bill requires these businesses to report their greenhouse gas emissions comprehensively, across all three scopes of emissions:
Scope 1: direct emissions from sources under a company's ownership or control
Scope 2: indirect emissions resulting from purchased electricity, steam, heating, or cooling
Scope 3: indirect upstream and downstream emissions, including those associated with supply chains, business travel, employee commuting, procurement, waste, and water usage
To ensure accuracy and accountability, the reporting must adhere to Greenhouse Gas Protocol standards and receive third-party assurance. In 2026, the bill will only require limited assurance (the independent auditor must obtain “sufficient and appropriate evidence”) for Scope 1 and 2 emissions. By 2030, this requirement will advance to reasonable assurance (the independent auditor must provide additional evidence to show that the sustainability report does not contain significant errors) and include Scope 3 emissions.
What is SB-261?
SB-261 targets companies with annual revenues exceeding $500 million that conduct business in California. This law mandates these companies to produce biennial reports that detail their climate-related financial risks, adhering to the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). These reports should include measures taken to mitigate these risks and must be available on company websites.
Timeline for SB-253 & SB-261
By Deloitte
Challenges & Complications in SB-253 & SB-261
While the bills seek to foster environmental responsibility, Governor Newsom acknowledged that the implementation timelines could be challenging and that the financial impact on businesses should be carefully considered. The following challenges are expected to further complicate matters:
Although the bills exclude non-U.S. companies from the "reporting entity" definition, emission and climate risk disclosure requirements may still apply to foreign companies with U.S. legal entities that meet revenue thresholds and operate in California.
The legislation does not offer a clear definition of "doing business in California," which is expected to be clarified later.
These bills go beyond what the U.S. Securities and Exchange Commission (SEC) has proposed for public companies, adding yet another disclosure requirement for in-scope companies. Still, the bills share a common foundation with existing global climate disclosure frameworks, such as the GHG Protocol and TCFD recommendations, which could streamline reporting for companies subject to multiple disclosure requirements.
The California Air Resources Board (CARB) has been tasked with developing and implementing regulations to enforce these bills, as well as monitoring and ensuring compliance. The bills come with an annual fee requirement for in-scope companies, to cover the costs of implementation and administration.
Implications of SB-253 & SB-261
Companies now face the pressing need to adopt compliance strategies and leverage auditable data to adhere to these new climate reporting requirements. The implementation of SB-253 & SB-261 in California is likely to set a precedent for other regions, with the potential for other states to follow California's lead. As the battle against climate change intensifies, California's new legislation brings corporate emissions accountability to the forefront, setting a trajectory for the future of climate reporting in the United States.
