On October 7, 2023, California Governor Gavin Newsom signed two new climate disclosure bills that require large companies to disclose their value chain emissions and report climate-related financial risks. The accepted laws will mandate large companies to disclose their value chain emissions and report climate-related financial risks. However, it has been noted that the timelines for enforcement will be extended, and the financial impacts on businesses will be addressed before the laws are implemented.

The two laws, SB 253, known as the “Climate Corporate Data Accountability Act,” and SB 261, “Greenhouse gases: climate-related financial risk,” were both passed in the California Assembly in September. Governor Newsom aimed to enact these laws within a week, but he announced that certain terms required further adjustments.

SB 253 requires companies operating in California with revenues exceeding $1 billion to annually report emissions across all scopes, including direct emissions (Scope 1), emissions from purchased electricity and use (Scope 2), and indirect emissions encompassing the supply chain, business travel, employee commutes, supply, waste, and water use.

Will the $1 billion threshold apply to U.S. revenue only or globally?

The law defines the “reporting entity” as a U.S.-based entity with an annual total revenue of $1 billion or more, including both domestic and global revenue. Further details on the interpretation of the reporting entity and other definitions within the law are expected to be specified in the implementing regulations to be adopted by the California Air Resources Board (CARB).

If a parent company is located outside California but has subsidiaries in California, will it be required to report?

Under the current legal text, the reporting obligation for a parent company will be triggered if the thresholds defined by the law are met. Additionally, there is some uncertainty for franchisees with less than $1 billion in revenue but with a total revenue exceeding $1 billion in their franchise network. CARB’s implementing regulations are expected to provide clarification on such matters.

As passed by the legislature, SB 253’s disclosure requirements:

For Scope 1 and 2 emissions will begin in 2026.

For Scope 3 emissions will commence in 2027, and measurement and reporting will follow the Greenhouse Gas Protocol Standards.

The law also requires companies to obtain third-party assurance for their emission reports. For Scope 1 and 2 emissions, limited assurance will begin in 2026 and escalate to reasonable assurance by 2030. For Scope 3 emissions, limited assurance will be required by 2030.

Governor Newsom, in his announcement, expressed concerns that the implementation dates for SB 253 might be “impractical” and that the new rules might lead to “inconsistent reporting across businesses.” He stated that his administration would work with the authors of the bill to address these issues.

The Governor’s office has also raised concerns about the overall financial impact on businesses and requested that CARB, which is responsible for developing and adopting reporting regulations under this law, monitor the financial impact and offer suggestions to streamline the program.

This announcement coincides with the U.S. Securities and Exchange Commission (SEC) finalizing its own climate-related disclosure rules for U.S. companies. While the SEC’s initial proposal was published in March 2022, the California law goes further in some aspects and applies to all major companies, whereas the SEC’s initial proposal applies only to publicly traded companies and includes all Scope 3 emissions. SEC Chairman Gary Gensler indicated that they are considering changes to their rules following feedback expressing concerns over high costs and the ability to provide accurate information.

The SEC’s rules will face opposition, including from Republican lawmakers who are against mandatory reporting on climate impact. However, even if the SEC fails to establish mandatory reporting, the proposed California law may still enable comprehensive emissions disclosure within the California market. When the bill was introduced in February, it was noted that the new reporting rules would apply to most major U.S. companies as long as they operate in the California market.

Companies are encouraged to take action under the enacted laws, and their compliance processes may vary depending on their preparedness levels, organizational structure, value chain, and climate risk exposure.