California Legislature Passes Landmark Climate Disclosure Laws

California’s state legislature has passed new laws – the Climate Corporate Data Accountability Act (“SB 253”) and Greenhouse Gases: Climate-Related Financial Risk (“SB 261”) – potentially shaping U.S. climate disclosure legislation before the U.S. Securities and Exchange Commission (the “SEC”) has finalized its climate disclosure rules. The California governor is expected to sign the laws shortly. 

The new legislation will require certain large public and private companies that conduct business in California to make public disclosures regarding their Scope 1, Scope 2 and Scope 3 greenhouse gas (“GHG”) emissions and their climate-related financial risks. 

Climate Corporate Data Accountability Act

Who is affected by the law?

The SB 253 GHG emissions disclosure requirements apply only to “reporting entities,” which are defined as:  

• partnerships, corporations, limited liability companies, or other business entities formed under the laws of California or any other U.S. state or District of Columbia, or under an act of the U.S. Congress,
• with total annual revenues in excess of $1 billion (based on revenue for the prior fiscal year),  
• that do business in California.

What must be disclosed?

Reporting entities must disclose publicly each year to an “emissions reporting organization” contracted by the California Air Resources Board (the “Board”) the Scope 1, Scope 2 and Scope 3 emissions that would be disclosed under the Greenhouse Gas Protocol standards and guidance (or an alternative standard, if one is adopted after 2033). 

Under SB 253: 

• Scope 1 emissions means all direct GHG emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities; 
• Scope 2 emissions means indirect GHG emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location; and 
• Scope 3 emissions means indirect upstream and downstream GHG emissions, other than Scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.

What are the requirements with respect to assurance?

A reporting entity must also obtain an assurance engagement, performed by an independent third-party assurance provider, on all of the reporting entity’s Scope 1, Scope 2 and Scope 3 emissions. 

The assurance engagement for Scope 1 and Scope 2 emissions must be performed at a “limited assurance” level (i.e., negative assurance) beginning in 2026 and at a “reasonable assurance” level (i.e., affirmative attestation) beginning in 2030. In 2026, the Board will review and evaluate trends in third-party assurance requirements for Scope 3 emissions, and on or before January 1, 2027, it may establish a requirement that the assurance engagement for Scope 3 emissions be performed at a limited assurance level beginning in 2030.

The third-party assurance provider must have significant experience in measuring, analyzing, reporting, or attesting to GHG emissions and sufficient competence and capabilities necessary to perform engagements in accordance with professional standards and applicable legal and regulatory requirements. The assurance provider must also be independent with respect to the reporting entity, and any of the reporting entity’s affiliates for which it is providing the assurance report. 

Does the law provide for substituted compliance?

SB 253 directs the Board to issue disclosure rules that are structured in a way to minimize duplication and allow reporting entities to submit to the emissions reporting organization reports that were prepared to meet other national and international reporting requirements, as long as those reports satisfy SB 253’s requirements.

When must companies begin making disclosures? 

SB 253 directs the Board to adopt regulations implementing the legislation on or before January 1, 2025. The regulations must require a reporting entity to publicly disclose to the emissions reporting organization: 

• beginning in 2026 (or by a date determined by the Board) and then annually, all its Scope 1 emissions and Scope 2 emissions for its prior fiscal year; 
• beginning in 2027, and then annually, its Scope 3 emissions no later than 180 days after its Scope 1 emissions and Scope 2 emissions are publicly disclosed for the prior fiscal year; 
• beginning in 2026, its GHG emissions in conformance with the Greenhouse Gas Protocol standards and guidance, including the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard developed by the World Resources Institute and the World Business Council for Sustainable Development, including guidance for Scope 3 emissions calculations that detail acceptable use of both primary and secondary data sources, including the use of industry average data, proxy data, and other generic data in its Scope 3 emissions calculations.

What are the penalties for noncompliance?

SB 253 directs the Board to adopt regulations authorizing it to seek administrative penalties for non-filing, late filing, or other failure to meet the law’s requirements. The administrative penalties imposed on a reporting entity may not exceed $500,000 in a reporting year. 

Reporting entities will not be subject to an administrative penalty for any misstatements regarding Scope 3 emissions disclosures made with a reasonable basis and disclosed in good faith. Further, any penalties assessed on Scope 3 reporting between 2027 and 2030 will only be for non-filing.

Greenhouse Gases: Climate-Related Financial Risk

Who is affected by the law?

SB 261’s climate-related financial risk disclosure requirements apply only to “covered entities,” which are defined as: 

• partnerships, corporations, limited liability companies, or other business entities formed under the laws of California or any other U.S. state or District of Columbia, or under an act of the U.S. Congress,
• with total annual revenues in excess of $500 million (based on revenue for the prior fiscal year),  
• that do business in California.

The requirements do not apply to business entities subject to regulation by California’s Department of Insurance, or that are in the business of insurance in any other U.S. state.

What must be disclosed? 

Under SB 261, a covered entity must publish on its website a climate-related financial risk report disclosing:

• its climate-related financial risk, in accordance with the recommended framework and disclosures contained in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017) published by the Task Force on Climate-related Financial Disclosures (“TCFD”) or pursuant to an equivalent reporting requirement; and 
• the measures it has adopted to reduce and adapt to the disclosed climate-related financial risk. 

“Climate-related financial risk” is defined as the “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.” 

If a covered entity does not complete a report consistent with all required disclosures, it must provide the recommended disclosures to the best of its ability, provide a detailed explanation for any reporting gaps, and describe steps the covered entity will take to prepare complete disclosures.

Climate-related financial risk reports may be consolidated at the parent company level. If a subsidiary of a parent company qualifies as a covered entity, the subsidiary is not required to prepare a separate climate-related financial risk report.

The Board will contract with a nonprofit climate reporting organization to biennially prepare a public report that (i) reviews the disclosure contained in a subset of publicly available climate-related financial risk reports by industry; (ii) analyzes the systemic and sector-wide climate-related financial risks facing the state based on the contents of climate-related financial risk reports; and (iii) identifies inadequate or insufficient reports.

What are the requirements with respect to verification?

To the extent a climate-related financial risk report contains a description of a covered entity’s GHG emissions or voluntary mitigation of GHG emissions, the Board may consider the covered entity’s mitigation claims if those claims are verified by a third-party independent verifier. The legislation does not provide any further details as to the qualifications for third-party independent verifiers. 

Does the law provide for substituted compliance?

SB 261 provides that a covered entity satisfies its climate-related financial risk reporting requirements if it prepares a publicly accessible biennial report that includes climate-related financial risk disclosure information either: 

• pursuant to existing laws, regulations or listing requirements issued by any regulated exchange, national government, or other governmental entity that incorporates SB 261’s disclosure requirements, including the International Financial Reporting Standards Sustainability Disclosure Standards, as issued by the International Sustainability Standards Board (“International Financial Reporting Standards Sustainability Disclosure Standards”); or 
• voluntarily using a framework that meets SB 261’s disclosure requirements or the International Financial Reporting Standards Sustainability Disclosure Standards.

When must companies begin making disclosures?

Covered entities must begin making their climate-related financial risk disclosures on or before January 1, 2026, and then once every two years afterwards. 

What are the penalties for noncompliance?

SB 261 directs the Board to adopt regulations authorizing it to seek administrative penalties from a covered entity that fails to publish the required climate-related financial risk report or publishes an inadequate or insufficient report. The administrative penalties imposed on a reporting entity may not exceed $50,000 in a reporting year.

Comparison to the SEC’s climate proposal

The new California laws differ in several significant ways from the SEC’s climate disclosure proposal: 

• Covered entities – The California laws apply to both public and private U.S. companies, depending on their annual revenues. By contrast, the SEC’s proposal would only apply to companies that are public or becoming public (i.e., companies that must file reports with the SEC or are filing a registration statement with the SEC). However, the SEC’s proposal would also apply to non-U.S. companies, while the California laws only apply to U.S. domestic entities. 
• Scope 3 emissions coverage – SB 253 requires all reporting entities to disclose Scope 3 emissions by 2027, while the SEC’s proposal would only require the disclosure of Scope 3 emissions if material, or if the company has set a GHG emissions target or goal that includes Scope 3 emissions. The SEC’s proposal also exempts smaller reporting companies from the Scope 3 emissions disclosure requirements.
• Climate risk disclosure – SB 261’s climate-related financial risk disclosure requirements are based entirely on the TCFD framework, while the SEC’s proposed climate risk disclosures are only based in part on the framework. For example, the SEC is not proposing to mandate scenario analysis, as recommended by the TCFD (although disclosure would be required under the proposal if the registrant voluntarily chooses to conduct a scenario analysis).
• Assurance/attestation requirement – The SEC’s proposal would require only certain categories of companies (accelerated filers and large accelerated filers) to obtain an attestation report covering the disclosure of their Scope 1 and Scope 2 emissions. By contrast, SB 253 requires all reporting entities to obtain an assurance report, which may have to cover Scope 3 emissions beginning in 2030.
• Liability/penalties – Under the SEC’s proposal, a company’s climate-related disclosures would be subject to the SEC’s antifraud disclosure rules, including Section 10(b) and Rule 10b-5 of the U.S. Securities Exchange Act of 1934 (and thus presumably exposed to SEC enforcement actions and private litigation). By contrast, the California laws will be enforced through administrative penalties, under regulations that the Board will adopt. 

The SEC’s proposal has not yet been adopted, however, and the final version of its rules may differ significantly from the proposal. The SEC’s most recent regulatory agenda indicates that the SEC may act on the climate disclosure rules in October 2023, but the agenda is not binding on the SEC, and notably, much of what is now scheduled for October 2023 was originally scheduled for October 2022. For further details regarding the SEC’s proposal, please see our earlier client publication. 

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We will continue to monitor developments in this area and welcome any queries you may have.