If you’re waiting with bated breath to find out what the SEC has in store for public companies in its final version of its climate disclosure regulations (see this PubCo post, this PubCo post and this PubCo post), you might also want to take a look at this California bill—the Climate Corporate Data Accountability Act (SB 253)—previously known as the Climate Corporate Accountability Act when it went belly up last year after sailing through one chamber of the legislature but coming up shy in the second (see this PubCo post). In fact, this year, the press release announces, the bill is part of California’s Climate Accountability Package, a “suite of bills that work together to improve transparency, standardize disclosures, align public investments with climate goals, and raise the bar on corporate action to address the climate crisis. At a time when rising anti-science sentiment is driving strong pushback against responsible business practices like risk disclosure and ESG investing,” the press release continues, “these bills leverage the power of California’s market to continue the state’s long tradition of setting the gold standard on environmental protection for the nation and the world.” If signed into law this time, the bill, which was introduced at the end of January and has a hearing scheduled in March, would mandate disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities with total annual revenues in excess of a billion dollars that “do business in California.” The bill’s mandate would exceed, in several key respects, the requirements in the current SEC climate proposal. Whether this new bill will face the same fate as its predecessor remains to be seen.
Why is the bill considered necessary? The legislative findings in the new bill provide that California has been a leader in the battle against climate change, but “Californians are already facing devastating wildfires, sea level rise, drought, and other impacts associated with climate change”; climate change also “poses a significant risk to the companies’ long-term economic success.” As a state that is on track to be the fourth largest economy in the world, California “is a highly desirable market for the globe’s most profitable companies” and U.S. companies that access California’s valuable consumer market by “exercising their corporate franchise in the state also share responsibility for disclosing their contributions to global greenhouse gas emissions.” Companies “can increase the state’s climate risk through emissions activities that include, but are not limited to, company operations, supply chain activities, employee and consumer transportation, goods production and movement, construction, land use, and natural resource extraction….Accurate, verified, and comprehensive data is required to determine a company’s direct and indirect GHG emissions, also known as its carbon footprint, and to effectively identify the sources of the emissions and develop means to reduce the same.”
According to the findings in the bill, currently, monitoring climate emissions relies on voluntary GHG reporting and “lacks the full transparency and consistency needed by residents and financial markets to fully understand these climate risks.” In the face of the threat of climate change, the people, communities and other stakeholders in California “have a right to know about the sources of carbon pollution, as measured by the comprehensive GHG emissions data of those companies benefiting from doing business in the state, in order to make informed decisions.” Mandating reporting and ensuring public access to the data “in a manner that is easily understandable and accessible will inform investors, empower consumers, and activate companies to improve risk management in order to move towards a net-zero economy and is a critical next step that California must take to protect the state and its residents.”
The bill, which is, in substance, largely the same as its predecessor, would require the California Air Resources Board, by January 1, 2025, to develop and adopt regulations requiring “reporting entities” to disclose annually their Scopes 1, 2 and 3 GHG emissions to a nonprofit “emissions registry” engaged by the state to develop a reporting and registry program to receive these disclosures and make them publicly available on a digital platform. A “reporting entity” is a “partnership, corporation, limited liability company, or other business entity formed under the laws of this state, the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the United States with total annual revenues in excess of [a billion dollars] and that does business in California.” Note that, in contrast to the SEC’s climate proposal, which would apply only to public companies, this mandate would apply even to private entities. It would also require all reporting entities to report Scope 3 emissions; the SEC’s proposal would exempt smaller reporting companies from Scope 3 disclosure and would require Scope 3 reporting only by non-SRCs with material Scope 3 emissions or where Scope 3 emissions are included within a GHG emissions reduction target or goal.
Under the bill, the regs must be developed by January 1, 2025, and would require annual reporting, commencing in 2026 (or by a date to be determined by the state board) for Scopes 1 and 2 emissions for the prior calendar year; an extra 180 days would be available for Scope 3 emissions. The reporting would be based on the GHG Protocol. In calculating Scope 3 emissions, companies could look to guidance from the GHG Protocol for Scope 3 emissions calculations that “detail acceptable use of both primary and secondary data sources, including the use of industry average data, proxy data, and other generic data in its scope 3 emissions calculations.”
Under the bill, and based on the GHG Protocol,
- Scope 1 emissions are “all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.”
- Scope 2 emissions are “indirect greenhouse gas emissions from electricity purchased and used by a reporting entity, regardless of location.”
- Scope 3 emissions are “indirect greenhouse gas emissions, other than scope 2 emissions, from activities of a reporting entity that stem from sources that the reporting entity does not own or directly control and may include, but are not limited to, emissions associated with the reporting entity’s supply chain, business travel, employee commutes, procurement, waste, and water usage, regardless of location.”
Reporting entities’ public disclosure must be “independently verified by the emissions registry or a third-party auditor, approved by the state board, with expertise in greenhouse gas emissions accounting.” Under the bill, the state board will establish auditor qualifications and a process for approval of auditors. The reporting entity must provide a copy of the complete, audited GHG emissions inventory, including the name of the approved third-party auditor, to the emissions registry in connection with GHG emissions report. As compared with the SEC proposal, the bill contains no limitation of the attestation requirement to Scopes 1 and 2 emissions data; all three scopes must be audited.
Under the bill, the state board would engage the University of California or another academic institution to prepare a report on the public disclosures made by reporting entities to the emissions registry. The report would be made public by the emissions registry on a digital platform, along with the individual disclosures by reporting entities.
Violation by a reporting entity would be subject to civil penalties under a civil action brought by the California Attorney General. Implementation of this bill would be contingent upon an appropriation by the Legislature.
According to the press release,
“[c]orporations play a critical role in any effort to make deep cuts to greenhouse gas emissions. Studies have found that as much as 71% of all historic greenhouse gas emissions are attributable to just 100 companies. Without corporate action to reduce these emissions, California would be unable to meet its climate goals. Many corporations have taken steps to disclose their climate impacts. As of 2020, 81% of S&P 500 companies voluntarily reported their direct (scope 1 and scope 2) emissions in corporate social responsibility reports. In recent years, many corporations that have attempted to take steps to improve transparency and lower emissions have faced serious pushback from governments in other states. Leaders in Texas, Florida, West Virginia, and elsewhere have bowed to anti-science activists and fossil fuel interests and threatened corporate leaders who have attempted to disclose and cut climate pollution. The chilling effects of these efforts extend far beyond the states in which they’ve been successful. If banks, pension funds, asset managers and multinational corporations fail to transparently and uniformly disclose and plan for climate impacts and related risks to their businesses, the result will be serious damage to Californians’ savings, economy, and environment.”
As reported by Politico Pro, the bill “would apply to about 5,400 companies doing business in the world’s fourth-largest economy. Advocates said action in California would serve as a model for other states. New York lawmakers are also proposing similar legislation this year after failing last year.” California State Senator Scott Wiener, who introduced the bill this year and last, told Politico that the sponsors “want to make sure that the public and investors and everyone else know which corporations are taking climate change seriously, and which aren’t.” In an interview, he indicated to Politico that he was more optimistic that the bill would pass this time because of “stronger business support earlier in the process and some legislative districts flipping in November’s election. ‘I can look around and see some districts that are now represented by Democrats instead of Republicans,’ he said. ‘Some districts where there are members who did not support it, or I look at the new members who are very strong on climate.’”
Support for the bill, according to the press release, comes from EnviroVoters, Ceres, the Greenlining Institute, Sunrise Bay Area, and Carbon Accountable. Ceres’ senior director of state policy observed that “[i]nformation about corporate climate emissions in California is currently fragmented, inconsistent, and incomplete, with a major disconnect between leading companies and those in the mid-market and their supply chains. SB 253 will help ensure that consumers, investors, policymakers, and other stakeholders across the state get a complete and thorough picture of the corporate emissions data they depend on. Ceres supports SB 253 to ensure California stays on its nation-leading path to build a just and inclusive net zero economy.”
Politico reports that, last session, the predecessor bill (SB 260) was opposed by several “national trade groups, including the American Chemistry Council, the American Bankers Association, the Bank Policy Institute and the Securities Industry and Financial Markets Association. The California Chamber of Commerce, which also opposed the bill last year, said it anticipated continuing opposition due to the bill’s Scope 3 requirements.” The legislative analysis for the predecessor bill reported on opposition from business groups, including the Chamber, which argued that Scope 3 data was not reliable and that California should not regulate out-of-state emissions:
“Because there is no objective criteria for assessing Scope 3 emissions data, two companies with similar actual Scope 3 emissions may report significantly different data depending on the company and/or methodology used…SB 260 requires ARB to ‘verify’ reporting entities’ emissions data. While this may be achievable for Scope 1 and Scope 2 data (which despite being duplicative to what ARB currently requires, are nonetheless within the reporting entities’ control), it will be nearly impossible for ARB to ‘verify’ emissions data that is, by its very nature, subjective, inaccurate, and often incomplete…California is not in the business of regulating out of state emissions, nor should it be. California should continue to implement and build upon existing programs and policies to regulate in-state emissions rather than seek to obtain emissions data throughout the international supply chain, especially seeing how it would have no authority to regulate emissions beyond the California border….”
The other bills included in the Climate Accountability Package are SB 261, Greenhouse gases: climate-related financial risk, which would lower the “reporting entity” threshold to $500 million (and exclude insurance companies), would require subject companies to prepare climate-related financial risk reports disclosing their climate-related financial risk, in accordance with TCFD framework, and describing their measures adopted to reduce and adapt to climate-related financial risk. Companies would then be required to submit their reports to the State Air Resources Board and make it available to the public on their own websites. SB 252, Public retirement systems: fossil fuels: divestment, would prohibit the boards of the Public Employees’ Retirement System and the State Teachers’ Retirement System from making new investments or renewing existing investments of public employee retirement funds in a fossil fuel company, as defined, and would require the boards to liquidate investments in a fossil fuel company on or before July 1, 2030. Boards would not be required to take any action unless they determined in good faith that the action was consistent with the boards’ fiduciary responsibilities.