Climate-related disclosure rules are changing rapidly. It can be difficult for business leaders to keep up with the requirements and ensure regulatory compliance. In the upcoming months, two new changes are poised to reshape the climate regulatory landscape. First, the SEC has signaled its intent to finalize its rules around climate disclosures by year-end. Second, Governor Gavin Newsom has signed into law the California Climate Accountability Package.
The California Climate Accountability Package will mandate climate disclosures for companies. While California will be the first state to do so, it almost certainly will not be the last. Prepare for the climate accountability act now by bringing your business into line with these regulatory changes.
SB 253: The Climate Corporate Data Accountability Act (CCDAA) Requirements
SB 253 requirements dictate that companies that do business in California will be required to disclose greenhouse gas emissions (GHG). Eligible companies that must adhere to this law:
- Are either public or private
- Have annual revenue over $1 billion
The proposed bill does not yet define what it means to 'do business in California.' However, it is fair to assume the definition set forth by the California Franchise Tax Board will be applicable. In this definition, companies are considered to do business with California if they engage in any transaction with a profit motive within the state.
GHG emissions will be disclosed following existing Greenhouse Gas Protocol standards for three different tiers: Scope 1, Scope 2 and Scope 3. Let's define those terms with examples:
- Scope 1 reflects GHG emissions that come from a source the company directly controls, located in California or outside the state, such as emissions from a company-owned manufacturing plant.
- Scope 2 reflects indirect GHG emissions for heating and cooling sources bought by the company, such as the GHG emissions used to produce electricity within the manufacturing plant. What is the source of the electricity and its emissions?
- Scope 3 includes upstream and downstream GHG emissions. These are emissions that reflect the cost to manufacture and acquire items and run the business. Scope 3 emissions include everything from worker commutes and business travel to emissions associated with purchasing and supply chain.
Companies must begin reporting their GHG Scope 1 and 2 data in 2026. Scope 3 emissions data will be reported beginning in 2027.
SB 261: The Climate-Related Financial Risk Act
Like SB 253, SB 261 requirements will apply to both private and public companies. SB 261 will require companies that do business in the state of California and have an annual revenue over $500 million to disclose climate-related financial risks and any mitigation measured adopted on a biannual basis.
“Climate-related financial risk” means both short- and long-term financial harm stemming from the climate-related risks. For example, what are the financial risks related to supply chains, business operations, and employee health and safety as impacted by climate-related matters?
Many businesses voluntarily release climate risk reports. To minimize the burden, the bill will allow companies to substitute in a comparable framework for the report mandated by SB 261, rather than duplicate their efforts.
Analysts expect additional clarification around SB 261 and the type of disclosure that will be required. For now, stay tuned to see how the requirements take shape.
5 Things Companies Should Do to Prepare
Companies that anticipate the future and prepare for the reporting requirements of these laws will be in better shape than those that delay. We recommend five action steps to prepare for the climate-related disclosures that will soon be required.
1. Build an internal system for climate reporting and disclosure.
Companies must track and measure climate-related data before it can be reported. Companies that do not yet have an internal system equipped to handle climate reporting must prioritize this step.
2. Understand your carbon footprint and GHG emissions data.
While Scope 3 implementation is a long way off, companies need to understand the full scope of their GHG emissions — the sooner, the better.
3. Find the right provider to gather and analyze data and prepare GHG emissions disclosures.
Climate reporting involves time-consuming data gathering and analytics. Not all providers are up to the logistical task of gathering and reporting on something like full value chain emissions.
4. Work with your chosen provider to select an ESG reporting platform and conduct preliminary reports.
Starting before such reporting becomes mandatory gives extra time to adjust workflows and roles to support the process.
5. Consolidate reports at the parent company level.
Since the California bills will not require subsidiaries to file their own report, companies should consider the best ways to consolidate reporting of subsidiaries within a parent company.
These climate risk disclosures call for forward-thinking companies to do their best to understand the reporting requirements and take a proactive stance on identifying, measuring and reporting both their GHG emissions and financial risks that relate to climate.
Our team of ESG experts is tracking the latest developments in California, with the SEC and with other regulatory bodies when it comes to climate disclosures. Reach out to discuss the impacts of these laws on your business, or how to implement the preparatory steps before compliance becomes mandatory.
