Two California bills, SB-253 and SB-261, have become the first mandatory climate disclosure rules in the U.S. after being signed into law by Governor Newsom on October 7.1
The new laws apply to any firm that conducts business in California and meets specified revenue requirements. The Climate Corporate Data Accountability Act (SB-253) requires firms with annual revenue greater than $1 billion to report Greenhouse Gas (GHG) Scope 1 and Scope 2 emissions by 2026, and Scope 3 emissions by 2027.
Greenhouse Gases: Climate-Related Financial Risk (SB-261) requires firms with revenue greater than $500 million to disclose their climate-related financial risks and mitigation efforts, in accordance with the Task Force on Climate-related Financial Disclosures (TCFD) framework, by 2026 and biennially thereafter.
California paves the path for climate reporting in the U.S.
The impact of these laws transcends California’s borders—any company doing substantial business in the state must disclose their global carbon footprint, including large financial institutions such as Global Systemically Important Banks (GSIBs) and Super Regional banks. Requiring companies with a California presence to comply with these requirements is groundbreaking, especially in advance of the finalization of the SEC’s expected climate disclosure rule.
The California laws also stipulate penalties for non-compliance, ensuring that these disclosures are binding and enforceable. This extraterritorial legislation could be a precursor for future proposals in other states, such as the Senate Bill S897A currently being considered in New York.2
California vs. the Securities and Exchange Commission
The Securities and Exchange Commission (SEC) is anticipated to release their climate-related disclosures rule by the end of 2023. The California laws have broader reach than the SEC rule in two ways. First, both laws extend to private companies which are beyond the purview of the SEC. Second, specific to SB-253, regardless of the SEC’s pending decision of whether to include Scope 3 GHG emissions in their rule, this legislation ensures that Scope 3 GHG emissions are a requirement for most firms’ disclosures. As a result, even if the SEC chooses to not require Scope 3 emissions reporting, companies may benefit from including Scope 3 in order to consolidate their climate reporting compliance processes.3
What can you do now to prepare?
Build comprehensive structures. Embed sustainability into the organization. Organize internal teams and assign ownerships. For optimal reporting, expand the responsibilities for this law beyond the sustainability teams, sourcing the right people to access data at the most granular levels.
Ensure ESG data integrity. Investigate internally where the relevant data sits and lives. Understand how it is going to get cleansed and verified. What is needed for the verification, and what will be required by internal and, ultimately, external auditors? Good ESG data underpins good ESG. No need to ‘over-science’ reporting in the initial stages, but getting data warehouses into order is an essential first step.
Onboard trusted advisors. Source your trusted advisors to support you on this journey. The right advisors can be invaluable in helping you to stay abreast of the rapidly evolving legislative and regulatory landscape, helping you to cut through the noise and focus on what is relevant to your organization, ensuring you respond prudently and with the appropriate amount of focus.
The diagram below outlines the inputs and outputs that are important considerations for firms preparing for this climate reporting legislation.
Compliance with this new legislation, as well as expected future rules and regulations, will fundamentally alter operations within organizations. It will shift priorities and change the way data is collected and reported across the enterprise.
Evolution on this scale necessitates board involvement, and not just as supporters—they must be the leaders of these initiatives. Board members need to understand climate risk, agree on objectives, and make it clear throughout the organization that climate risk is a priority. For more information about what next steps should be, see our previous piece titled How To Mitigate Climate Risk: Setting The Tone From The Top.
California opened a new chapter when it signed the first U.S. climate disclosure legislations for companies operating in the state. These laws will undoubtedly have a ripple effect, setting the stage for, and influencing, future climate-related disclosures at both the state and national levels.
References
1 California Governor Commits to Sign Climate Disclosure Bills into Law - ESG Today
2 NY State Senate Bill 2023-S897A (nysenate.gov)
3 SEC’s Climate Disclosure Rules: GHG Emissions Disclosure Requirements (harvard.edu)
