California GHG Emissions and Climate Risk Bills Enacted into Law
Policy Update (October 2023):
On October 7th, Governor Gavin Newsom signed Senate Bill 253 and Senate Bill 261 into law, marking a significant development in California's commitment to environmental responsibility.
To ensure full transparency through the bills' implementation, Governor Newsom has directed the California Air Resources Board(CARB) to closely monitor the situation. CARB will play a crucial role in (i)investigating concerns related to the financial impact of GHG disclosure and(ii) streamlining program guidelines to enhance effectiveness. After signing into law, Governor Newsom acknowledged in a policy memo the need for a closer examination of the reporting deadlines, recognizing that they may be adjusted to ensure they are fully reasonable for businesses to meet. Additionally, he emphasized the potential for companies already aligning with varied climate reporting protocols to result in inconsistencies in corporate disclosure. As further information on bill structure and implementation comes out of Newsom's office, we will continue to keep you updated on further developments and their potential implications. If you have any questions about starting or streamlining your carbon emissions reporting, please don't hesitate to contact our team.
Breakthrough Legislation Passes California State Senate (September 2023):
The California Legislature passed two groundbreaking climate disclosure bills on September 12th, SB253 (Climate Corporate Data Accountability Act - CCDAA) and SB 261 (Climate-Related Financial Risk Act - CRFRA). Collectively known as the California Climate Accountability Package. Corporate climate reporting is here to stay and it's imperative for organizations to grasp the urgency of these legislations, which carry extensive consequences for both public and private companies conducting business in California.
Table 1.1: California Climate Accounting Package – In Summary
I. SB 253: An Unprecedented Scope of GHG Emissions Disclosure
Under SB 253, any entity "doing business in California" with global annual revenues exceeding $1 billion must disclose and assure all global greenhouse gas (GHG) emissions, covering Scopes 1, 2, and 3. This requirement extends to both public and private companies and provides a broad definition of "doing business in California", with anticipation that California will interpret it expansively.
Immediate Action Required: Affected companies need to start reporting their Scope 1 and 2 GHG emissions by 2026, with Scope 3 emissions reporting beginning in 2027. Given the complexity of GHG emissions reporting, your preparations should begin immediately to ensure compliance. Particularly for Scope 3 emissions, which encompass value chain emissions, affected companies will have to engage with, and often up-skill, other organizations in their business ecosystem—suppliers, subsidiaries, and portfolio companies—to achieve compliance.
Verification Mandatory: SB 253 mandates third-party assurance for emissions reporting, adding an additional layer of urgency as companies must engage qualified auditors for verification. Limited assurance on all annual GHG disclosures will be mandated by 2026, with reasonable assurance enforcement requiring third-party audit by 2030.
II. SB 261: Addressing Climate-Related Financial Risks
SB261 applies to both public and private companies with annual revenues exceeding$500 million that are "doing business in California." These companies are required to publish biannual climate-related financial risk reports. The scope of "climate-related financial risk" is comprehensive, covering various aspects that could impact financial outcomes.
Immediate Action Required: Companies subject to SB 261 must publish their initial climate-related financial risk report by January 1, 2026. Given the complexities involved in assessing and mitigating such risks, preparation is paramount.
III. Penalties for Non-compliance
Failure to comply with these bills could result in substantial administrative penalties, up to $500,000 for SB 253 and up to $50,000 for SB 261. Compounded by the reputational risk of public non-disclosure, these penalties underscore the urgency of ensuring compliance. This package sits under California’s broader vision of Net Zero statewide emissions by 2045, leading to speculation that these bills could later expand in scope to mandate corporate GHG reductions.
IV. Comparison to SEC Climate Ruling Proposal and EU Reporting Standards
The California Climate Accountability Package goes further than the SEC's proposed climate rule by encompassing both public and private companies and providing more expansive financial cut-offs for inclusion. While the SEC is still finalizing the finer details of its landmark climate proposal and working on reaching bipartisan alignment by end of year (despite a March 2022 initial release), California’s legislation comes as a positive tailwind to mandate corporate climate disclosure requirements in the U.S. and stimulate concerted national action.
Furthermore, any companies with a global presence should consider preparation for California regulations as the foundational work to meet emerging regulation in foreign jurisdictions. EU reporting standards, such as the Corporate Sustainability Reporting Directive (CSRD), will apply to over 50,000 EU-operating companies, including over 10,000 companies domiciled outside the EU with significant revenue or presence therein.
V. GHG Disclosure Requirements in Detail:
Companies are required to annually disclose their greenhouse gas(GHG) emissions falling into Scopes 1, 2, and 3 for the preceding fiscal year, following the guidelines provided by the Greenhouse Gas Protocol.
· Scope 1 emissions encompass all direct GHG emissions originating from sources a company owns or controls directly, regardless of their location. This category includes activities such as fuel combustion in company-owned facilities and vehicles.
· Scope 2 emissions refer to indirect GHG emissions resulting from purchased or acquired electricity, steam, heating, or cooling consumption, regardless of where the energy comes from.
· Scope 3 emissions, also known as full value chain emissions, include both upstream and downstream indirect GHG emissions. These emissions arise from sources not under a company's direct ownership or control but related to activities in support of the business’ operations. They include categories such as all purchased goods and services, business-related travel, employee commuting, and the processing and use of their sold products. The specific disclosure requirements for Scope 3 emissions are likely to be a key focus of the California Air Resources Board's regulations.
As SB 253 finalizes, there is strong anticipation in a rise in requests for emissions data from larger companies to their suppliers and vendors. Companies with annual revenues well below $1 billion, although not directly obligated to report emissions, should prepare for increased pressure from their B2B purchasers to calculate and provide GHG emissions data.
VI. Immediate Steps for Companies
To meet the emerging reporting deadlines, we at Green Project advise organizations to prioritize the following actions to develop a flexible and proactive ESG data strategy:
1. Internal Organization: Assign responsibility for climate reporting and establish a cross-functional committee.
2. Identify Advisors: Engage emissions accounting firms and other advisors promptly.
3. Data Collection: Understand your carbon footprint, especially Scope 3emissions.
4. Gap Analysis: Assess existing reporting against the new rules.
5. Enhance Controls: Improve data quality, refine methodological approaches, and ensure compliance.
California’s groundbreaking corporate climate requirements demand immediate attention and action. The consequences of non-compliance, including significant penalties, make it imperative for affected companies to prioritize compliance efforts now.
Stay tuned for our ongoing coverage of the California Climate Accountability Package finalization and implementation. Subscribe to our newsletter and contacting Green Project’s ESG advisory team for assistance in navigating this evolving reporting framework.