California Gets One Step Closer To Requiring Corporate Climate And Carbon Disclosures

California Gets One Step Closer To Requiring Corporate Climate And Carbon Disclosures

Earlier this month, the California Assembly passed two key components of the state’s Climate Accountability Package, which was first introduced to the State Senate in January 2023, California Senate Bills 253 (SB 253) and 261 (SB 261). Both bills would apply to firms that do business in California and meet annual revenue thresholds of $500 million (SB 261) or $1 billion (SB 253). The main features of the bills echo the SEC’s proposed climate-related disclosure rule but are more comprehensive and far-reaching.

SB 253, also known as the Climate Corporate Data Accountability Act, will require subject firms to report annually on their Scope 1, 2 and 3 emissions, starting in 2026 (Scopes 1 and 2) and 2027 (Scope 3). These disclosures would have to be verified by a state-established registry or a state-approved third-party auditor. SB 261, also known as the Climate-Related Financial Risk Act, would require subject firms to prepare and submit reports detailing their climate-related financial risk and measures to mitigate and adapt to these risks, consistent with recommendations from the Task Force on Climate-related Financial Disclosures (TCFD). Initial reports would be due by December 31, 2024.

One of the main differences between these bills and the SEC’s proposed climate-related disclosure rule is that the California-specific legislation will apply to both publicly traded and privately held firms, while the SEC’s proposed regulations will only apply to publicly traded firms. Additionally, SB 253 will require organizations to disclose their Scope 3 emissions, which is one the most criticized and hotly contested aspects of the SEC’s proposed rules. Because SB 253 would impact so many firms, the SEC could justify – or get out of – this requirement by deferring to the California legislation.

What comes next? Governor Newsom announced at the kickoff to NYC’s Climate Week that he intends to sign these bills into law, although he indicated that the bills will require “some modest cleanup on some little language”. The governor now has until October 14 to sign these bills into law, although we can expect these laws to be challenged and possibly delayed in court.

However, with initial reporting deadlines for SB 261 just over a year away and the timing of the SEC’s proposed regulations still unknown, corporates should not delay in preparing their carbon emission calculations and climate-related disclosures. For many firms, these requirements – such as developing climate-related strategies and evaluating their financial risk – will be too comprehensive for internal teams to manage. As such, corporates should look to service providers to help them navigate the regulatory landscape and develop an action plan. Additionally, organizations should consider investing in software to calculate their carbon footprint and provide traceability and transparency for required verification processes.