UPDATE (October 9, 2023): On October 7, California Governor Gavin Newsom signed the Climate Corporate Data Accountability Act, which requires private and public businesses with revenues over $1 billion that are operating in California to disclose their greenhouse gas emissions, including their Scope 3 value chain emissions.
Newsom signed a related bill—Greenhouse Gases: Climate-Related Financial Risk—also known as SB 261 on the same day. That bill, which will apply to an estimated 10,000 companies, requires companies to document the climate-related financial risks they face and the measures they are taking to reduce those risks and adapt to them. Companies must use the TCFD framework for their reports, which must be made available to the public on their websites.
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Around the world, companies are keeping watch on regional and national regulatory developments that require climate-related reporting. The EU’s Corporate Sustainability Reporting Directive (CSRD) and the upcoming climate-related disclosure rules from the U.S. Securities and Exchange Commission (SEC) are examples. But businesses may also fall within the scope of rules passed in smaller jurisdictions. Case in point: California’s Climate Corporate Data Accountability Act.
What Is the Climate Corporate Data Accountability Act?
The bill, also referred to as Senate Bill (SB) 253, requires companies—both public and private—with over $1B in annual revenues operating in California to disclose their greenhouse gas (GHG) emissions. Most notably, the act calls for businesses to report their Scope 3 emissions—the emissions that occur along a company’s value chain—in addition to their Scope 1 and Scope 2 emissions.
The inclusion of Scope 3 signals the state’s more ambitious approach to climate reporting, as it forces companies to account for the emissions tied to the entire life cycles of their products and services. Taking products as an example, this means that reporting companies must look at how their products’ materials are sourced, as well as how the products are manufactured, packaged, distributed, sold, used and disposed of. That’s a lot of ground to cover and calculations to make—and the Scope 3 requirement will compel businesses to consider the full climate and environmental impacts linked to their products and services.
It’s important to note that Scope 3 emissions typically represent the largest share of a company’s combined Scope 1, Scope 2 and Scope 3 emissions. In the food manufacturing industry, for example, Scope 3 emissions can constitute 90-95% of a manufacturer’s total GHG emissions.
The bill passed in the California State Assembly on September 11 and in the California Senate on September 12 and now goes to the state’s governor, who has one month to act on the bill.
Public and Private Companies Fall Within the Scope of California’s SB 253 Bill
California’s Climate Corporate Data Accountability Act departs from several other climate-related regulations by including private companies in its scope. Companies with more than $1 billion in revenue that operate in the state will be expected to disclose their emissions under the law.
According to the bill’s text, “…specified partnerships, corporations, limited liability companies, and other business entities with total annual revenues in excess of $1,000,000,000 and that do business in California” will need to publicly disclose their Scope 1 and Scope 2 emissions on an annual basis, starting in 2026. The bill requires annual disclosures of Scope 3 emissions from 2027 onward.
This gives the reporting entities roughly one year to put their reporting practice in place for their Scope 1 and 2 emissions. They have more time to prepare for Scope 3 reporting.
An Assurance Requirement
California’s SB 253 includes an assurance requirement and the assurance must be conducted by an independent third-party assurance provider. However, the bill taps the California Air Resources Board (CARB) to ensure that the state has enough assurance provider capacity to accommodate the needs of reporting entities. CARB will also have to see to it that the assurance process limits the need for businesses to rely on several assurance providers to fulfill the assurance component.
The Impact of California’s SB 253
According to estimates, the bill will apply to roughly 5,400 companies that are operating in California. Assuming that the bill is signed into law, it will represent the first of its kind in the U.S. to require GHG emissions disclosures from businesses. The bill will likely serve as a model for legislative action in other U.S. states, including New York, where a climate corporate accountability act—New York Assembly Bill A4123—was proposed.
SB 261: Another Climate-Related Reporting Requirement on the Horizon
While businesses operating in California get ready for the emissions disclosure requirements of SB 253, they should also be aware of SB 261 – The Climate-Related Financial Risk Act. This regulation will call on businesses to provide a report on the climate-related financial risks they face, as well as the measures they are taking to mitigate that risk. Stay tuned for our coverage of this development in a separate blog.
California Climate Corporate Data Accountability Act: Key Points
Here are the key points to know about California’s Climate Corporate Data Accountability Act:
- The act applies to private and public companies operating in California with more than $1 billion in annual revenues.
- Reporting entities will need to disclose their Scope 1 and Scope 2 emissions starting in 2026.
- Businesses will need to report their Scope 3 emissions beginning in 2027.
- Third-party assurance is required.
Assuming that SB 253 is signed into law, public and private companies operating in California will need to quickly ensure their reporting capabilities or risk non-compliance. Many reporting entities may also fall within the broad scope of the CSRD, which applies to over 50,000 companies, including 10,000 non-EU companies, and includes a Scope 3 component. These regulations, along with others worldwide, make clear that regulators, investors and other stakeholders now expect companies to be transparent about their impact on climate change and the environment. Companies that aren’t preparing for this need to begin now.
The information provided in this blog is for general information purposes only, may not be updated in real time and does not constitute legal advice. Please consult with your legal and other advisors to discuss your particular needs and circumstances.
