CA to Require GHG and Climate-Risk Reporting for Companies Nationwide
- Public and private companies operating in California that generate at least $1 billion in annual revenue are required to report their Scope 1 and Scope 2 greenhouse gas emissions beginning in 2026, and their Scope 3 greenhouse gas emissions beginning in 2027.
- Public and private companies operating in California that generate at least $500 million in annual revenue are required to disclose climate risks beginning in 2026.
- Governor Newsom’s signing statements portend “cleanup” legislation that could ease compliance burdens.
The Bottom Line
California Governor Gavin Newsom (D), signed two groundbreaking bills into law in the last week that will require thousands of companies to publicly report their greenhouse gas emissions and/or their global climate-related financial risks. Although the mandated reporting will almost certainly create cost for impacted companies, many view enactment of these laws as a critical step in managing planet-warming pollution. How the new laws compare with the Securities and Exchange Commission’s (SEC) forthcoming climate disclosure rule remains to be seen, though speculation abounds.
The Climate Corporate Data Accountability Act (SB253)
The Climate Corporate Data Accountability Act (SB253) requires all companies conducting business in California that have more than $1 billion in annual revenue to report their Scope 1, Scope 2, and Scope 3 greenhouse gas emissions. Scope 1 are direct GHG emissions from sources owned or controlled by the company. Scope 2 are GHG emissions from the generation of purchased electricity consumed by the company. Scope 3 emissions are those that occur from sources upstream and downstream of the company’s operations (e.g., business travel; purchased goods and services; transport of capital goods; operational waste; and processing, use, and disposal of sold products). An estimated 5,400 companies - both public and private - will be affected.
SB253 requires the California Air Resources Board (CARB) to develop regulations implementing the reporting requirements on or before January 1, 2025. Though the exact reporting deadlines are yet to be set by CARB, SB253 requires reporting of Scope 1 and Scope 2 emissions beginning in 2026, and reporting of Scope 3 emissions beginning in 2027. SB253 requires varying levels of assurance by an independent third-party assurance provider.
Most companies agree that since mandatory climate-related disclosures seem inevitable, the easiest course is the adoption of one predictable standard by all governments. To that end, SB253 instructs CARB to ensure that its emissions reporting regulations are structured in a way that “minimizes duplication of effort” and allows companies to “meet other national and international reporting requirements.” Companies interested in influencing CARB’s implementing regulations will want to participate in the rulemaking process by submitting comments on the proposed regulation and taking advantage of other opportunities for stakeholder engagement.
Scope 3 emissions are notoriously challenging to calculate. Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its value chain (e.g., business travel; purchased goods and services; transport of capital goods; operational waste; and processing, use, and disposal of sold products). Compounding the challenge is that Scope 3 emissions almost always comprise the vast majority of a company’s total GHG emissions. SB253 mandates reporting in conformance with the Greenhouse Gas Protocol standards and guidance, including the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard. Companies already using the Greenhouse Gas Protocol for voluntary purposes will have an easier time complying with the new law.
In signing SB253 into law, Governor Newsom issued a statement expressing concern with the bill’s implementation deadlines, overall financial impact on businesses, and the possibility of inconsistent reporting across businesses. He directed his administration to work with the Legislature next year to address these issues. The signing statement portends “clean up” legislation that could ease compliance burdens.
The Climate-Related Financial Risk Act (SB261)
The Climate-Related Financial Risk Act (SB261) requires companies (except insurance firms) doing business in California that have gross annual revenues exceeding $500 million to report on their climate-related financial risks by January 1, 2026, and biennially thereafter. The disclosures must be made in accordance with the recommended framework developed by the Task Force on Climate-related Financial Disclosures or an equivalent reporting requirement. More than 10,000 public and private companies will be affected.
The bill defines “climate-related financial risks” 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.”
But the monetary penalty for non-compliance may be small for some companies relative to the cost to comply; failure to comply with SB261 can result in an administrative penalty of no more than $50,000 in a reporting year.
In signing SB261 into law, Governor Newsom issued a statement expressing concern that the bill does not allow CARB sufficient time to carry out its mandate. In contrast to CARB’s more significant role to implement SB253, here, the board’s tasks are relatively simple: CARB must contract with an organization to analyze the disclosures, and must develop regulations to administer penalties for violations. Still, perhaps as a tool to extend the initial 2026 reporting deadline, Governor Newsom directed its administration to work with the Legislature next year to address this issue.
The SEC’s Climate Disclosure Rule
The SEC proposed a climate disclosure rule in March 2022 that would require public companies to disclose their Scope 1, Scope 2, and in some instances, their Scope 3 emissions. The proposal would require disclosure of Scope 3 emissions if they are material to an average investor, or if the company has set a GHG emissions target or goal that includes Scope 3 emissions. The rule would also mandate a narrative discussion of the company’s climate-related financial risks and a note addressing the financial impacts of climate change.
At a September 27, 2023, hearing of the House Financial Services Committee, SEC Chairman Gary Gensler would not say whether the SEC’s final rule would be released in October 2023 as previously planned. If it is released with an effective date no later than December 31, 2023, it is likely that larger companies will begin reporting pursuant to the rule in their Form 10-K for the year ending December 31, 2024, due in 2025.
In some ways, California’s laws go further than the SEC proposal, and in other ways they do not go as far. The implementation timeline of California’s laws may be less aggressive than the SEC’s climate disclosure rule, but California’s laws pull in private companies as well as public, and require disclosure of Scope 3 emissions regardless of other considerations. In other ways, the California laws and the SEC’s proposal are compatible; both are generally aligned with the Greenhouse Gas Protocol standards and the Task Force on Climate-related Financial Disclosures’ recommendations.
California’s new laws and their implementation are certain to face legal challenges. If you believe your company may be impacted by these laws, please do not hesitate to reach out to us to answer your questions. The lawyers in Ballard Spahr’s Environment and Natural Resources Group are able to assist clients in determining whether they must comply with the legislation, in fulfilling their obligations, and in preparing public comments for CARB’s rulemaking process.
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