Two far-reaching California climate bills, together the “Climate Accountability Package,” have passed in the California legislature and are headed to Governor Gavin Newsom for a final decision. If signed into law, Senate Bill 253, the Climate Corporate Data Accountability Act, would mandate disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities (public or private) with total annual revenues in excess of a billion dollars that “do business in California.” SB 253 has been estimated to apply to about 5,300 companies. Final amendments to the companion bill, SB261, Greenhouse gases: climate-related financial risk, passed in the California legislature yesterday. SB 261, with a lower reporting threshold of total annual revenues in excess of $500 million, would require subject companies to prepare reports disclosing their climate-related financial risk, in accordance with TCFD framework, and describing their measures adopted to reduce and adapt to that risk. SB 261 has been estimated to apply to over 10,000 companies. While there has been substantial opposition to these bills, Bloomberg has reported that “[c]orporate support for the legislation has been growing this year. More than a dozen companies have submitted a letter to lawmakers in support of SB 253” and another dozen wrote in support of SB 261, including, in both cases, some very familiar names. Will the Governor sign these bills into law? Newsom has not yet weighed in. According to the NYT, historically, Newsom “has championed aggressive new climate measures,” but, on SB 253, he has been “uncharacteristically quiet,” perhaps given that his “administration’s finance department issued an analysis in July that opposed the emissions reporting legislation.” Newsom has until October 14 to sign or veto the bills. If he does neither, the measures will become law automatically.
You might remember that, in 2021, a California State Senator introduced the Climate Corporate Accountability Act, which failed last year after sailing through one chamber of the legislature but coming up one vote shy in the second (see this PubCo post). But that bill was re-introduced this year as the Climate Corporate Data Accountability Act (SB 253) and packaged with other bills, notably SB 261, into California’s Climate Accountability Package, a “suite of bills,” according to the press release, “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 continued, “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.” (See this PubCo post.)
The author of SB 253, Bloomberg reports, said that the “goal is to create transparency around corporate carbon emissions….It’ll create a strong incentive for businesses to reduce their carbon footprint.” Opponents contend that the bill’s requirements are “too costly, onerous and complicated”; a policy advocate at the California Chamber of Commerce told Bloomberg that the bill “isn’t going to reduce emissions….We have a lot of companies that really are trying to do the right thing. This is going to distract them from actually dedicating resources and energy towards accomplishing their own net zero goals.”
Will passage of SB 253 affect the SEC’s views on whether to require Scope 3 disclosure in its own still pending climate disclosure proposal? Former SEC Commissioner Allison Herren Lee suggested that “California ‘could end up being the tail wagging the dog’ for corporate climate disclosures in the US.” Not according to SEC Chair Gary Gensler, who, Bloomberg reported, in an interview Tuesday, dismissed the idea that the California bill would “change the SEC’s thinking on whether to include scope 3 in its rule.” Rather, he said, they were “‘continuing to look at the public comments’ and agency staff will make recommendations for the final contours of the rule based on that.’”
SB 253 would require the California Air Resources Board, referred to as CARB, by January 1, 2025, to develop and adopt regulations requiring “reporting entities” to publicly disclose annually their Scopes 1, 2 and 3 GHG emissions, in conformance with the Greenhouse Gas Protocol, to a nonprofit “emissions reporting organization” engaged by the state to develop a reporting 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.” Total revenues would be determined based on the reporting entity’s revenues for the prior fiscal year. The Senate floor analysis explained that, under existing law, “doing business” in California is defined as “engaging in any transaction for the purpose of financial gain within California, being organized or commercially domiciled in California, or having California sales, property or payroll exceed specified amounts: as of 2020 being $610,395, $61,040, and $61,040, respectively.”
The annual disclosure was originally scheduled to commence for all Scopes in 2026; however, that provision has been amended to require disclosure regarding Scopes 1 and 2 GHG emissions beginning in 2026, now pushing Scope 3 (upstream and downstream emissions in a company’s value chain) out to 2027. In addition, under the bill, the reporting entity would be required, upon filing its disclosure, to pay to the state board an annual fee to be set by the state board.
The revised bill also adds confirmation that reporting of GHG emissions will not exceed the GHG Protocol standards and guidance (or an alternative standard, if one is adopted after 2033, as permitted under the revised rule). In a change from the bill that failed last year, this bill now explicitly permits the use of guidance under 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.” According to the Senate Environmental Quality Committee’s analysis, relative to the earlier version of the bill, these changes to the calculation methodology allowing indirect calculation methods will simplify the reporting requirement. The revised bill also makes clear that emissions reporting should be structured to minimize duplication of effort and allow reporting entities to submit “to the emissions reporting organization reports prepared to meet other national and international reporting requirements, including any reports required by the federal government, as long as those reports satisfy all of the requirements” of the bill.
Under the bill, a reporting entity would be required to obtain assurance, performed by an independent third-party assurance provider, of the entity’s public disclosure and provide a copy of the assurance report to the emissions reporting organization as part of its public disclosure. Assurance engagements would be required at only a limited assurance level for Scopes 1 and 2 GHG emissions beginning in 2026 and at a reasonable assurance level beginning in 2030. Whether to require assurance for Scope 3 will be subject to state board review and evaluation in 2026, with potential for the state board to establish a Scope 3 limited assurance requirement that would begin in 2030. The assurance provider must have “significant experience in measuring, analyzing, reporting, or attesting to the emission of greenhouse gasses and sufficient competence and capabilities necessary to perform engagements in accordance with professional standards and applicable legal and regulatory requirements” and to issue appropriate, independent reports.
The state board would be required to adopt regulations that authorize it to seek administrative penalties for violations of these provisions not to exceed $500,000 per year, taking into account all relevant circumstances, including the violator’s past and present compliance and whether and when the violator took good faith measures to comply with these requirements. A Scope 3 safe harbor has also been added: the bill now provides that a reporting entity would not be subject to an administrative penalty for any misstatements in disclosures regarding Scope 3 GHG emissions “made with a reasonable basis and disclosed in good faith.” In addition, the bill now provides that, between 2027 and 2030, penalties on Scope 3 reporting may be assessed only for non-filing.
The bill would require the state board, on or before July 1, 2027, to contract with the University of California (or another equivalent academic institution) to prepare a report on the public disclosures made by reporting entities and submit the report to the emissions reporting organization to be made publicly available on the new digital platform to be created that will feature the emissions data of reporting entities.
The bill goes beyond proposed SEC rules in several key respects. (See this PubCo post, this PubCo post and this PubCo post.) In contrast to the SEC’s climate proposal, which would apply only to public companies, this mandate would apply to private entities as well. Nor is there currently any threshold related to the materiality of Scope 3 emissions, while the SEC proposal required reporting only on Scope 3 emissions that were material or where Scope 3 emissions were included within a GHG emissions reduction target or goal. The bill would also require all reporting entities to report Scope 3 emissions; the SEC’s proposal would generally exempt smaller reporting companies from Scope 3 disclosure. In addition, the California requirements for assurance are more extensive, for example, potentially covering Scope 3 and applying to all reporting entities. (See this PubCo post.) However, the SEC’s proposal was more extensive in at least one respect: it would require disclosure of climate-related financial statement metrics and related disclosures in a note to the audited financial statements, provisions that were subject to substantial criticism in the public commentary.
SB 261, as revised, would require that, on or before January 1, 2026, and biennially thereafter, a “covered entity” must prepare a report disclosing both its “climate-related financial risk,” in accordance with the TCFD framework (see this PubCo post)—which also guided much of the SEC’s climate disclosure proposal—and the measures the covered entity has adopted to reduce and adapt to the disclosed climate-related financial risk. (Note that the revised bill pushed out the compliance date from the end of 2024 to the beginning of 2026.) The covered entity would then be required, on or before January 1, 2026 and biennially thereafter, to make the report publicly available on its own internet website. Under the revised bill, a covered entity would no longer be required, as earlier proposed, to submit a statement to the Secretary of State affirming that the report discloses climate-related financial risk in accordance with requirements of the bill. However, it will now be required to pay an annual fee.
A “covered entity,” as defined in the bill, would be a corporation, partnership, limited liability company, or other business entity formed under the laws of any other state or D.C. (or under an act of the Congress) with total annual revenues in excess of $500 million and that does business in California (excluding insurance companies, which report under their own rules). The Senate floor analysis observes that, of the over 10,000 companies that do business in California and exceed the $500 million revenue threshold, only 20% of them are publicly traded and would be covered by any climate reporting adopted by the SEC.
As defined in the bill, “climate-related financial risk” means “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.”
An important change was recently added to the bill to avoid imposing a double reporting requirement that might have unreasonably burdened companies or resulted in conflicts with federal or other governmental requirements. As an alternative, a covered entity could satisfy the biennial report requirements by preparing a “publicly accessible biennial report that includes climate-related financial risk disclosure information” under other frameworks requiring comparable disclosure of “climate-related financial risk” as may be required under other laws, regulations or listing requirements issued by an exchange, national government or governmental entity, including the ISSB framework. A covered entity may also do so voluntarily. (See this PubCo post.)
Under the revised bill, if a covered entity doesn’t provide a complete report disclosing its “climate-related financial risk” as required, the covered entity must provide the recommended disclosures to the best of its ability, including a “detailed explanation for any reporting gaps, and describe steps the covered entity will take to prepare complete disclosures.” In addition, the revised bill makes clear that climate-related financial risk reports may be consolidated at the parent company level, so that a consolidated subsidiary need not separately report, even if it otherwise qualifies as a covered entity.
Under the bill, the CARB would contract with a climate reporting organization to prepare a biennial public report on the climate-risk disclosures required by the bill and ensure the climate-risk disclosures keep up with changes in the TCFD guidance. The organization would collect and review climate-related financial risk reports, and prepare public reports that review subsets of publicly available climate-related financial risk reports by industry, analyze systemic and sector-wide climate-related financial risks facing the state (including potential impact on economically vulnerable communities) and identify inadequate or insufficient reports. The organization would also regularly convene groups of industry and labor union representatives, state agencies, sustainability organizations, standard-setting organizations, academics and other stakeholders to offer input on current best practices, and monitor federal actions.
Under a recent modification of the bill, the state board would be required to adopt regulations authorizing it to seek administrative penalties, up to $50,000 per year—a substantial cut from the original $500,000—from a covered entity that “fails to make the report required by this section publicly available on its internet website or publishes an inadequate or insufficient report,” taking into consideration all relevant circumstances, including the violator’s past and present compliance and whether “the violator took good faith measures to comply with this section and when those measures were taken.”