California Legislature Passes Landmark Climate Disclosure Laws

In October 2023, California Governor Gavin Newson signed into law two laws – the Climate Corporate Data Accountability Act (“SB 253”) and Greenhouse Gases: Climate-Related Financial Risk (“SB 261”) – which are shaping U.S. climate disclosure legislation while the future of the U.S. Securities and Exchange Commission (the “SEC”) climate disclosure rules remains uncertain. 

The new legislation requires 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 either to an “emissions reporting organization” contracted by the California Air Resources Board (the “Board”) or the Board itself, 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 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 initially directed the Board to adopt regulations implementing the legislation on or before January 1, 2025, but the legislation has subsequently been amended to extend this deadline to July 1, 2025 (described in more detail below). The regulations must require a reporting entity to publicly disclose: 

• 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 on a schedule to be specified by the Board; 
• 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 is authorized to contract with a nonprofit climate reporting organization (or assume this duty itself) 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 disclosure rules 

The California laws differ in several significant ways from the SEC’s final climate disclosure rules, which it adopted on 6 March 2024 but subsequently stayed pending various legal challenges: 

• Covered entities – The California laws apply to both public and private U.S. companies, depending on their annual revenues. By contrast, the SEC’s rules 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 rules also apply to non-U.S. companies, while the California laws only apply to U.S. domestic entities. 
• Scope 1, Scope 2, and Scope 3 emissions coverage – SB 253 requires all reporting entities to disclose Scope 1 and Scope 2 emissions by 2026 and Scope 3 emissions by 2027, while the SEC’s rules require disclosure of only Scope 1 and Scope 2 emissions (with exemptions for smaller reporting companies and emerging growth companies) and not Scope 3 emissions. 
• Climate risk disclosure – SB 261’s climate-related financial risk disclosure requirements are based entirely on the TCFD framework, while the SEC’s rules 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 rule if the registrant voluntarily chooses to conduct a scenario analysis).
• Assurance/attestation requirement – The SEC’s rules 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 rules, 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. 

For further details regarding the SEC rules, please see our earlier client publication. 

November 2024 Update

On 27 September 2024, California Governor Newsom signed into law Senate Bill 219 (SB219) which modifies the state’s recent climate disclosure laws (SB253 – the Climate Corporate Data Accountability Act – and SB261 – Climate-Related Financial Risk Reporting). These laws require that U.S. public and private companies doing business in California make unprecedented climate disclosures regarding scope 1, 2, and 3 emissions in the coming years. While the amendments do not substantively change the climate disclosure requirements in the laws, they do provide for additional flexibility for both the Board and the companies to which the laws apply (the “Covered Entities”) in the following key ways: 

California Air Resources Board:

• Extending the deadline for the Board to publish regulations for scope emissions disclosures by six months, from 1 January 2025 to 1 July 2025; 
• Allowing the Board to prepare a schedule for disclosure of Scope 3 emissions (removing the previous timeline requiring Scope 3 emissions disclosure within 180 days of Scope 1 and Scope 2 emissions disclosure); 
• Authorizing, rather than requiring, the Board to contract with an emissions reporting organization to develop a reporting program to receive and publicize disclosures, among other actions – which gives the Board the option of assuming these duties itself.

Covered Entities:

• Clarifying that consolidated reporting of Scope 1, Scope 2, and Scope 3 emissions at the parent level will be acceptable under both SB253 and SB261 (whereas previously, only SB261 provided for parent-level reporting, leaving an open question as to whether SB253 would require subsidiaries to generate separate reports); 
• Eliminating the requirement that Covered Entities pay their annual filing fee at the time of filing their disclosures (meaning it must still be paid, but does not have to be paid upon filing);
• Allowing Covered Entities to make disclosures either to an organization approved by the Board or directly to the Board.

Of note, the original laws continue to be challenged in court, and the amendments in SB219 are unlikely to affect that litigation, as they do not change the substantive reporting requirements that are under challenge. 

Most recently, on 5 November 2024, a U.S. federal district court denied a motion for summary judgment filed by the U.S. Chamber of Commerce and other business groups seeking to overturn the laws on the basis that they violate the First Amendment of the U.S. Constitution by compelling speech. The court decided that summary judgment is not appropriate at this juncture because discovery is necessary to develop a factual record to evaluate whether the laws violate the First Amendment. 

The groups are also challenging the laws on the bases that they (1) violate the Constitution’s Supremacy Clause by regulating GHG emissions when the U.S. Clean Air Act and federalism principles grant that authority to the federal government and (ii) violate the limitations on extraterritorial regulation, such as the Dormant Commerce Clause, by imposing significant burdens on interstate and foreign commerce. The court’s 5 November decision allows the lawsuit to go forward to discovery on all three of the plaintiff group’s claims, after which they will have the opportunity to move again for summary judgment. 

Enforcement of the climate disclosure laws can continue as planned for now, and the litigation continues. 

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