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Environmental, social, and governance risks and opportunities

California Passes Groundbreaking Climate Disclosure Bills

First in the nation to impose Scope 3 GHG reporting
GHG

On October 7, 2023, Governor Gavin Newsom signed both SB 253 and SB 261, the two bills described in this post, issuing signing memoranda for each that are available from the links above.

In what has been characterized as a win for the planet but a challenge for businesses across the country, the California legislature passed two first-in-the-nation bills last week, manifesting its leadership in the battle against climate change. With those climate actions, the state that is the home to one out of eight Americans will impact far more people than that by mandating greenhouse gas disclosures by untold numbers of companies across the country that do business with a California corporation.

The California Corporate Data Accountability Act (SB 253) and Greenhouse Gases: Climate Related Financial Risk Law (SB 261) are groundbreaking pieces of legislation that, when signed into law by Governor Gavin Newsom, will establish California on the bleeding edge of climate disclosure and climate financial risk reporting. In this blog post, we’ll explore the significance of these two bills and their potential impact on corporate sustainability and climate resilience.

California Corporate Data Accountability Act (SB 253)

Scope 3 Greenhouse Gas Emissions Reporting Obligations

This bill is set to impose mandatory greenhouse gas emissions reporting obligations on public and private companies with annual revenues exceeding $1 billion that “do business in California.” Here’s why SB 253 (which failed last year falling one vote short in the legislature) is a game-changer:

1. Unprecedented Transparency: SB 253 will usher in a new era of corporate transparency. It requires companies beginning in 2026 to disclose their Scope 1 and Scope 2 GHG emissions from the prior year and then beginning in 2027 to disclose their Scope 3 GHG emissions from the prior year. Scope 3 emissions include “indirect upstream and downstream GHG emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control,” which may include “purchased goods and services, business travel, employee commutes, and process and use of sold products.” Today, few organizations have ever attempted to calculate Scope 3 emissions many describe this mandate as batshit crazy.

2. Supply Chain Accountability: Businesses must calculate emissions using the GHG Protocol and reporting must be third party verified. This law firm has provided similar services and expects to offer the required third party assurance audits. Different from bill that failed last year, this legislation now explicitly authorizes “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,” that is making those calculations significantly easier to perform. Failure to report can carry annual penalties of up to $500,000. And recognizing the huge uncertainty around Scope 3, business “shall not be subject to an administrative penalty under this section for any misstatements with regard to scope 3 emissions disclosures made with a reasonable basis and disclosed in good faith.”

3.  Climate Action Catalyst: SB 253 equips policymakers with Scope 3 emissions data (.. for most companies Scope 3 emissions represent between 65% and 95% of their broader GHG impact) to create effective climate action plans. It also paves the way for California to set ambitious emission reduction targets in line with global climate goals. This level of transparency will allow investors, stakeholders, and the public to understand a company’s true climate change impact. This law is expected to apply to as many as 5,000 businesses, but Scope 3 reporting will touch many thousands more.

Greenhouse Gases Climate Related Financial Risk Reporting Law (SB 261)

Biennial Reports on Climate Related Financial Risks

Alongside SB 253, SB 261 is another groundbreaking bill that seeks to address climate risks from a financial perspective. SB 261 mandates that public and private companies with annual revenues exceeding $500 million, that do business in California, publish biennial reports starting January 1, 2026, on climate related financial risks. Here’s why SB 261 is a vital step forward:

1. Enhanced Risk Management: SB 261 defines “climate-related financial risk” as “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.”

2. Citizen Protection: The legislature rationalized that the “failure of economic actors to adequately plan for and adapt to climate related risks to their businesses and to the economy will result in significant harm to California, residents, and investors, in particular to financially vulnerable Californians who are employed by, live in communities reliant on, or have invested in or obtained financing from these institutions.” SB 261 sets a state specific reporting model but also allows a company to use the International Financial Reporting Standards Sustainability Disclosure Standards. Penalties for failure to comply will be established by regulation in an amount of up to $50,000 per year. But the real jeopardy will be private claims and lawsuits brought by stakeholders.

3. Resilience Planning: Understanding climate related financial risks is not just about disclosure; it’s about building resilience. In its idealistic application SB 261 prompts businesses to assess vulnerabilities and develop strategies to adapt to a changing climate in a state already prone to flooding, fires, and earthquakes. This law is expected to touch more than 10,000 businesses.

Conclusion

The State Chamber of Commerce has urged a veto for risk of making the state uncompetitive, but more than a dozen of the largest Silicon Valley corporations signed a letter in support of the laws under the theory that they voluntarily calculate GHG emissions and face similar reporting requirements in the EU.

Governor Gavin Newsom who took no position on the legislation while it was pending announced today he will sign both bills into law whereupon California will become the first state in the nation to impose mandatory Scope 3 GHG emissions reporting and climate related financial risk disclosure obligations on nonpublic businesses.

It is suggested this mandatory reporting of Scope 3 GHG emissions by a state that is more than 14% of the entire U.S. economy will provide cover for the U.S. Securities and Exchange Commission to finalize its regulation of Scope 3 emissions. SB 253 generally goes further than the SEC proposed rule when it includes both public and private companies and has many smaller companies reporting Scope 3 emissions than the federal regulations.

This visionary legislation underscores California’s dedication to climate action and its commitment to making businesses responsible for their environmental impacts.

As the world grapples with the need to address climate change, these bills set a precedent for other states and countries to follow, demonstrating that the participation of businesses is a critical pillar of repairing the planet.

A live webinar “How to Count Your Greenhouse Gas Emissions” 30 talking points in 30 minutes, Tuesday, September 26 at 9 am EDT presented by Stuart Kaplow and Nancy Hudes on behalf of ESG Legal Solutions, LLC. The webinar is complimentary, but you must register here.

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