The California State Senate and State Assembly recently approved two bills, Senate Bill 253 and Senate Bill 261, that could require thousands of companies doing business in California to disclose greenhouse gas ("GHG") emissions and climate-related financial risks, with reporting beginning in 2026. California's governor is expected to sign both bills into law.

Requirement to Publicly Disclose GHG Emissions

Senate Bill 253, or the "Climate Corporate Data Accountability Act" ("SB 253"), would require the California Air Resources Board to adopt regulations before January 1, 2025, that will require public and private companies that exceed $1 billion in annual revenue and that do business in California to begin publicly disclosing their GHG emissions. Public and private companies to which SB 253 would apply will be required to report Scopes 1 and 2 GHG emissions annually starting in 2026 for emissions in the prior fiscal year, and Scope 3 GHG emissions will be required to be reported annually starting in 2027 for the prior fiscal year.¹ Scope 1 emissions typically include a company's direct emissions associated with its onsite fuel combustion to produce energy. Scope 2 emissions typically include a company's indirect emissions associated with energy produced offsite and consumed by the company. Scope 3 emissions typically include a company's indirect emissions not accounted for in Scope 2, such as GHG emissions from the use of a company's products by customers or emissions within a company's broader value chain.

SB 253 may apply to a large number of public and private companies because California defines any of the following as "doing business" in California:

• engaging in any transaction for the purpose of financial gain within California;
• being organized or commercially domiciled in California; or
• having California sales, property or payroll exceeding certain amounts found here.²

Emissions under SB 253 must be reported in accordance with the Greenhouse Gas Protocol standards and guidance, a widely-used set of guidance materials for accounting and reporting of GHG inventories. Non-compliance could lead to penalties of up to $500,000 per reporting year. However, there are safe harbors with respect to reporting of Scope 3 emissions. Disclosing entities will not be subject to penalties for misstatements with regard to Scope 3 emissions made with a reasonable basis and in good faith and penalties assessed for Scope 3 reporting between 2027 and 2030 shall only be for non-filing.

SB 253 aims to provide transparency to the public and stakeholders on the amount and sources of GHG emissions within companies' value chains. It would require a reporting entity to obtain a verification or "assurance" by an independent third-party auditor of the entity's disclosure. The bill also includes certain measures aiming to ensure public access to the data in a manner that is "easily understandable and accessible."

Even without SB 253, California is one of about 17 states that requires owners and operators of certain stationary sources of GHG emissions to disclose Scope 1 and Scope 2 GHG emissions, including through California's Cap-and-Trade program.³ However, SB 253 goes a step further and also requires disclosure of Scope 3 emissions—and the bill's requirements apply to companies based on their revenue, not on the amount of their GHGs emissions.

Requirement to Publicly Disclose Climate-Related Financial Risks

Senate Bill 261, or the "Climate-Related Financial Risk Act" ("SB 261"), would require companies doing business in California and earning revenue exceeding $500 million to report on their climate-related financial risks. This bill would require, on or before January 1, 2026, and biennially thereafter, a report disclosing (i) the entity's climate-related financial risks and (ii) measures adopted to reduce and adapt to climate-related financial risks. The bill requires disclosures in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures ("TCFD"). The bill requires companies to make a copy of their report available to the public on its own internet website and pay an annual fee. There are some safe harbors. For instance, if a covered entity does not complete a report consistent with the requirements, penalties may not be issued if the covered entity provided disclosures "to the best of its ability" and provides a detailed explanation for any reporting gaps and a description of steps the entity will take to prepare completed disclosures.⁴

The bill defines "climate-related financial risk" as "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."⁵

California Sets a High Bar

SB 253 and SB 261 are part of a larger trend pushing for public disclosures on climate-related financial risks and data.⁶ On March 21, 2022, the United States Securities and Exchange Commission (SEC) issued proposed rules (the "SEC Proposed Climate Rules") that would require publicly traded US companies to include climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The SEC Proposed Climate Rules would also require disclosure of a registrant's GHG emissions, which are a commonly used metric to assess a company's exposure to climate-related financial risks. The SEC Proposed Climate Rules are also modeled in part on the recommendations of the TCFD.

SB 253 requires Scope 3 disclosures from all companies that fall within the scope of the bill, while the SEC Proposed Climate Rules would only require Scope 3 data if such is "material" to the reporting company or the company has set a GHG emissions target or goal that includes Scope 3 emissions. Furthermore, while the SEC Proposed Climate Rules require disclosure from public companies, the California bills require disclosures from both private and public companies doing business in the state.

Next Steps

California's governor has until October 14, 2023, to sign or veto the bills, and if he does neither the bills will automatically become law. The governor has publicly stated that he plans to sign the bills into law.⁷

Some companies support the bills, while others oppose them stating that they are overly burdensome, e.g., dissenters note that it is not feasible to account for all of the mandated Scope 3 emissions, that many companies don't have enough resources or expertise to accurately report emissions, and that the legislation could lead to higher prices for products and services. Dissenting companies may challenge the bills in court, and there will be a public comment process for both bills.

1 See SB 253 here.
2 See Doing business in California | FTB.ca.gov.
3 See California lawmakers approve the nation's most sweeping emissions disclosure rules for big business | AP News.
4 See SB 261 here.
5 See SB 261 Section (2)(a)(2).
6 On May 20, 2021, President Biden signed Executive Order 14030, Climate-Related Financial Risk, which directs federal agencies to develop a comprehensive strategy regarding the assessment, mitigation, and disclosure of climate-related financial risk to federal government programs, assets, and liabilities, in order to increase the long-term stability of federal operations. On April 8, 2022, the National Association of Insurance Commissioners, which includes California's Insurance Commissioner, adopted a new standard for insurance companies to report their climate-related risks in alignment with the recommendations of the TCFD. California already requires state public pension funds to analyze and report material climate-related financial risks.
7 See Climate change: Newsom will sign California's first-in-nation law requiring big companies to report all emissions | Morningstar and Newsom says he'll sign major corporate climate disclosure bill - POLITICO.