In January 2023, California Senators Scott Wiener and Henry Stern introduced SB 253, the Climate Corporate Data Accountability Act, and SB 261, the Climate-Related Financial Risk Act, to the California legislature as a part of the Climate Accountability Package. The bills passed in both the State Assembly and Senate with strong support. On October 7, 2023, Governor Gavin Newsom signed both bills into law.
The quick momentum of these bills reinforces California’s ambition to move forward with implementing climate disclosure rules while progress towards finalizing the SEC’s proposed climate-related disclosure rule has stalled. These bills will have major implications for thousands of companies doing business in California. Companies should begin preparing now for the implementation of these rules in the near future.
California SB 253: Climate Corporate Data Accountability Act
What are the reporting requirements for SB 253?
SB 253 will require reporting entities to report all scope 1, 2, and 3 emissions from the prior fiscal year. Reports must comply with the Greenhouse Gas Protocol standards and guidance. These emissions are defined as follows:
- Scope 1 emissions: 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: indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.
- Scope 3 emissions: 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.
Reports must be assured by an independent, experienced third-party assurance provider. For scope 1 and 2 emissions, limited assurance will be required beginning in 2026 and reasonable assurance will be required beginning in 2030. For scope 3 emissions, limited assurance will be required beginning in 2030. The California Air Resources Board (CARB), the body tasked with overseeing this legislation, may establish an earlier assurance requirement for scope 3 emissions before 2027.
Which companies will be impacted by SB 253?
The reporting requirements of SB 253 will apply to any company (including partnerships, corporations, LLCs, or any other business entity formed in the US) that:
- Had total annual revenues of more than $1 billion in the prior fiscal year, and
- Does business in California.
These criteria remain somewhat ambiguous—it is not clear whether the revenue threshold will include revenues of affiliates or how “doing business in California” will be determined. It is estimated that over 5,000 businesses will be impacted by SB 253.
When do SB 253’s requirements begin?
Companies will be required to report scope 1 and 2 emissions beginning in 2026 based on data collected in the prior fiscal year. They will be required to report scope 3 emissions beginning in 2027 based on data collected in the prior fiscal year.
In Governor Newsom’s signing message, he observed that “the implementation deadlines in this bill are likely infeasible” and the current reporting protocols may lead to inconsistent reporting. His Administration will be working with the Legislature to address these issues in the coming year, which will likely lead to some revisions in the implementation timeline and reporting requirements.
How will SB 253 be enforced?
By 2026, CARB will create a public digital platform to access reports provided by reporting entities. Reporting entities must pay a fee in connection with implementation of SB 253. The fees will be deposited in a Climate Accountability and Emissions Disclosure Fund.
In addition to maintaining the disclosure platform, CARB will also verify data provided by reporting entities through a registry or experienced third-party auditor. If a reporting entity fails to file, files late, or otherwise violates reporting requirements, CARB is authorized to impose administrative penalties of up to $500,000 per year. However, penalties may only be imposed after a formal administrative hearing process.
For reporting of scope 3 emissions, reporting entities are only subject to administrative penalties if they fail to file scope 3 emissions disclosures altogether through 2030. After 2030, reporting entities are only subject to penalties with regard to scope 3 disclosures if they were not made in good faith and with a reasonable basis. CARB will have substantial discretion to adjust oversight and penalties as scope 3 reporting practices develop.
How doees SB 253 compare with the SEC climate disclosure rule?
Both SB 253 and the SEC’s proposed climate-related disclosure rule are based on GHG Protocol standards, but SB 253 is notably more stringent.
First, the SEC rule contains a scope 3 safe harbor that SB 253 does not. Under the SEC rule, reporting entities will only be required to report scope 3 emissions if they had previously set scope 3 emissions targets or if scope 3 emissions are material. In comparison, SB 253 will require disclosure of scope 3 emissions for all reporting entities. This is a substantial difference, since scope 3 emissions comprise up to 90% of total emissions for some companies.
Second, the SEC rule would apply only to publicly traded companies, while SB 253 would apply to all companies (public or private) that do business in California and meet the annual revenue threshold.
California SB 261: Climate-Related Financial Risk Act
What are the reporting requirements for SB 261?
SB 261 will require reporting entities to publish biennial (once every two years) public reports disclosing:
- Climate-related financial risks in accordance with the TCFD recommendations, and
- Measures adopted to reduce and adapt to these risks.
“Climate-related financial risks” are defined quite broadly – they include any “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks.” This may apply 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.”
Reports that contain a description of an entity’s greenhouse gas emissions or voluntary mitigation of those emissions must be verified by an independent third-party provider.
Which companies will be impacted by SB 261?
The reporting requirements of SB 261 will apply to any company (including partnerships, corporations, LLCs, or any other business entity formed in the US) that:
- Had total annual revenues of more than $500 million in the prior fiscal year, and
- Does business in California.
The wording of these criteria is the same as in SB 253, and remains similarly ambiguous. It is estimated that over 10,000 businesses will be impacted by SB 261.
When do SB 261’s requirements begin?
The first report will be due by January 1, 2026.
Similar to SB 253, Governor Newsom indicated in his signing message that the implementation deadlines for SB 261 are too soon for CARB to properly carry out its responsibilities under the bill. The implementation timeline for SB 261 may therefore also be revised in the coming year.
How will SB 261 be enforced?
CARB will contract with a non-profit climate reporting organization to prepare a biennial public report on the climate-related financial risk disclosures made during that period. It will also identify any inadequate or insufficient reports.
Any reports found to be in violation of the reporting requirements will be subject to administrative penalties of up to $50,000 per year.
With that said, reporting entities that prepare public reports either voluntarily or as a result of a separate legal requirement will be deemed to have satisfied SB 261 as long as the reporting requirements are consistent with those in SB 261. For example, a reporting entity that voluntarily discloses information in compliance with other approved frameworks, including the ISSB standards, will be considered to be in compliance with SB 261. This is intended to avoid duplicative reporting requirements.
How does SB 261 compare with the SEC climate disclosure rule?
The reporting requirements of SB 261 are largely similar to those under the SEC proposed climate-related disclosure rule, as both are modeled off of the TCFD disclosure framework. However, like SB 253, the scope of SB 261 is much broader—it encompasses all companies doing business in California that have annual revenues greater than $500 million. On the other hand, the SEC rule applies only to public companies.
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