Not one to be a wallflower and wait for the Securities and Exchange Commission’s (SEC) proposed climate-related disclosure rules to be finalized, California recently enacted three climate-related disclosure laws of its own:
- Senate Bill No. 253: Climate Corporate Data Accountability Act (SB 253)
- Senate Bill No. 261: Greenhouse Gases: Climate-Related Financial Risk (SB 261)
- Assembly Bill No. 1305: Voluntary Carbon Market Disclosures Act (AB 1305)
These laws are first-in-the-nation measures that will require impacted companies, both public and private, to be more transparent about their greenhouse gas (GHG) emissions, use of carbon offsets, and climate-related financial risks. While SB 253 and SB 261 will generally require disclosure beginning in 2026, AB 1305 is effective January 1, 2024, which places significant pressure on impacted companies and their respective management teams to prepare compliant disclosure.
This article will:
- Provide a brief background on some of the motivations behind California’s new climate-related disclosure laws
- Describe the more salient aspects of SB 253, SB 261, and AB 1305
- Suggest next steps and considerations
California’s Evolving Climate-Related Regulatory and Litigation Environment
The origins of the new climate-related disclosure laws can be traced back to the California Global Warming Solutions Act of 2006 (Act). The Act was a watershed moment in California’s history. In particular, it required the California Air Resources Board (CARB) to develop regulations to limit California GHG emissions. Since the Act was signed into law in 2006, California climate-related regulations, laws, policies, and programs have boomed. For more information, see this dashboard from the Berkeley School of Law.
So why does California need all this climate-related information? For all the great surfing and sunshine in California, there is also the increasing risk and/or frequency of wildfires, flooding, extreme weather events, and extreme droughts, as well as the associated negative impacts on health and human safety, communities, and the economy. Like the Act, SB 253 and SB 261 explain how climate change poses a significant risk to companies’ long-term economic success and disrupts the value chains on which they rely. In that spirit, and as noted in SB 253 and SB 261, the Act requires CARB to adopt regulations to require the reporting and verification of statewide GHG emissions and to monitor and enforce compliance with the Act. Further, the Act requires CARB to make data—including GHG emissions, criteria pollutants, and toxic air contaminants for each facility that reports to CARB—available on its website and update it at least annually. This information will then be shared with investors, consumers, and other stakeholders to help inform their decision-making.
More Data, More Risk of Litigation
More informed decision-making will not be the only result, however. The reported information will likely lead to heightened litigation risk from private plaintiffs, states, and municipalities. However, it’s not like companies have been navigating through calm waters until now.
In September 2023, California Governor Gavin Newsom and California Attorney General Rob Bonta announced the filing of a lawsuit against five of the largest oil and gas companies in the world—Exxon Mobil, Shell, Chevron, ConocoPhillips, and BP—and the American Petroleum Institute for allegedly engaging in a decades-long campaign of deception and creating statewide climate-change-related harms in California. Other states and municipalities have filed similar suits in the past, including the state of Minnesota; the City of Honolulu; and the City of Oakland, California.
In California’s case, the complaint alleges a variety of statutory claims under California law, including creating and/or contributing to a public nuisance; false advertising; misleading environmental marketing; and unlawful, unfair, and fraudulent business practices. If you are getting what feels like greenwashing allegations, you wouldn’t be alone. Interestingly, a class action lawsuit brought against Delta evokes a similar feeling.
The Case Against Delta
In May 2023, a class action lawsuit was filed in the US District Court for the Central District of California against Delta alleging that its carbon neutrality claims are based on its reliance on the carbon offset market, which plaintiffs allege is replete with well-documented problems. Specifically, the plaintiffs state they brought the action against “[Delta] for grossly misrepresenting the total environmental impact of its business operations in its advertisements, corporate announcements, and promotional materials and thereby attaining underserved market share and extracting higher prices from consumers.” The complaint asserts claims under California’s Consumers Legal Remedies Act, False Advertising Law, and Unfair Competition Law. Companies that market themselves as “carbon-neutral” or “green” should keep an eye on this case and remain mindful of AB 1305, which is covered in more detail below. For more information regarding this case, see this article from Foley & Lardner.
With that as a segue, onto California’s new climate-related disclosure laws.
SB 253: Climate Corporate Data Accountability Act
SB 253 requires CARB to develop and adopt regulations requiring any business entity with total annual revenues in excess of $1 billion and that “does business” in California (Reporting Entities) to publicly disclose to their emissions. CARB’s deadline to do this is January 1, 2025. Reporting Entities will need to disclose their scope 1 and scope 2 GHG emissions on an annual basis starting in 2026 and their scope 3 GHG emissions starting in 2027 and annually thereafter.
Defining Entities and Requirements
SB 253 states that a Reporting Entity could include a partnership, corporation, limited liability company, or other business entity formed under the laws of California, the laws of any other state of the US or the District of Columbia, or under an act of US Congress. Translation: The net cast by SB 253 is a large one. Separately, “doing business” isn’t defined in SB 253, but Senate floor analysis viewed “doing business” through the same lens that the California Franchise Tax Board views “doing business.” Unless and until specific guidance is provided by CARB, the California Franchise Tax Board’s definition of “doing business” is likely the best starting point when conducting your own analysis.
SB 253 defines scope 1, scope 2, and scope 3 emissions as follows, which is in line with the SEC’s proposed climate-related disclosure rules and the Greenhouse Gas Protocol:
“Scope 1 emissions” means all direct greenhouse gas 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 greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a [Reporting Entity], regardless of location.
“Scope 3 emissions” means indirect upstream and downstream greenhouse gas 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.
SB 253 also requires Reporting Entities to obtain an assurance engagement, performed by an independent third-party assurance provider, of the entity’s public disclosure. The assurance engagement for scope 1 emissions and scope 2 emissions will need to be performed at a limited assurance level beginning in 2026 and at a reasonable assurance level beginning in 2030. The assurance engagement for scope 3 emissions will need to be performed at a limited assurance level beginning in 2030. See this article from BDO for a general discussion regarding these different level of assurances.
Penalties for Non-Compliance
Potential penalties associated with not filing, late filing, or other failure to meet the requirements SB 253 may be up to $500,000 per year. Penalties assessed on scope 3 reporting, through 2030, shall only be levied on companies that fail to file. After 2030, a Reporting Entity would not be subject to a penalty under SB 253 for any misstatements regarding scope 3 emissions disclosures that were made with a reasonable basis and disclosed in good faith.
SB 261: Greenhouse Gasses: Climate-Related Financial Risk
SB 261 applies to any business entity with total annual revenues in excess of $500 million and that “does business” in California (Covered Entities). On or before January 1, 2026, and biennially thereafter, Covered Entities must prepare a climate-related financial risk report disclosing its climate-related financial risk and measures adopted to reduce and adapt to climate-related financial risk. Covered Entities will be required to make a copy of the report available to the public on their own websites.
Like SB 253, SB 261 doesn’t define “doing business.” Similarly, unless and until specific guidance is provided by CARB, the California Franchise Tax Board’s definition of “doing business” is likely the best starting point when conducting your own analysis.
Provisions for Subsidiaries and Companies Complying with Other Reporting Requirements
For organizations operating through multiple subsidiaries, SB 261 states that climate-related financial risk reports may be consolidated at the parent company level. That is, if a subsidiary of a parent company qualifies as a Covered Entity, the subsidiary wouldn’t be required to prepare its own climate-related financial risk report.
Additionally, and perhaps to mitigate the impact of SB 261 on Covered Entities that may already have to disclose similar information pursuant to another regime (e.g., the SEC’s proposed climate-related disclosure rules once finalized), SB 261 provides that a Covered Entity may satisfy SB 261’s reporting requirements through certain alternative methods, including pursuant to another law, regulation, or listing requirement.
Penalties for Non-Compliance
Covered Entities failing to make the report publicly available or publishing an inadequate or insufficient report may be penalized up to $50,000 per year.
AB 1305: Voluntary Carbon Market Disclosures Act
AB 1305 generally applies to any business entity that is making net zero, carbon neutral, or similar claims in California and doing so by purchasing or using “voluntary carbon offsets.” These requirements wouldn’t apply to entities that either do not operate within California, or that do not make these types of claims in California. AB 1305 is effective January 1, 2024.
AB 1305 defines “voluntary carbon offset” as:
[A]ny product sold or marketed in the state that claims to be a “greenhouse gas emissions offset,” a “voluntary emissions reduction,” a “retail offset,” or any like term, that connotes that the product represents or corresponds to a reduction in the amount of greenhouse gases present in the atmosphere or that prevents the emission of greenhouse gases into the atmosphere that would have otherwise been emitted.
What Entities Must Disclose
Impacted entities will need to disclose on their respective websites, no less than annually, all the following information pertaining to all GHG emissions associated with its claims:
a. All information documenting how, if at all, a “carbon neutral,” “net zero emission,” or other similar claim was determined to be accurate or actually accomplished, and how interim progress toward that goal is being measured. This information may include, but not be limited to, disclosure of independent third-party verification of all of the entity’s greenhouse gas emissions, identification of the entity’s science-based targets for its emissions reduction pathway, and disclosure of the relevant sector methodology and third-party verification used for the entity’s science-based targets and emissions reduction pathway.
b. Whether there is independent third-party verification of the company data and claims listed.
Specific to an impacted entity’s purchase or use of voluntary carbon offsets in California, each entity would also need to disclose the following information on its website pertaining to each project or program:
a. The name of the business entity selling the offset and the offset registry or program.
b. The project identification number, if applicable.
c. The project name as listed in the registry or program, if applicable.
d. The offset project type, including whether the offsets purchased were derived from a carbon removal, an avoided emission, or a combination of both, and site location.
e. The specific protocol used to estimate emissions reductions or removal benefits.
f. Whether there is independent third-party verification of company data and claims listed.
Penalties for Non-Compliance
Potential penalties for failing to comply with AB 1305 could be up to $2,500 per day for failing to disclose the required information on the website or disclosing inaccurate information, not to exceed a total of $500,000.
Next Steps and Strategic Considerations
California’s new climate-related disclosure laws add another layer of complexity to an already fraught legal and regulatory landscape for publicly traded companies, as well as what are likely to be many unsuspecting private companies. To help navigate these new disclosure laws, here are some next steps and strategic considerations for companies, management teams, and board of directors.
1. Gauge the Applicability of California’s New Climate-Related Disclosure Laws
As discussed above, the new disclosure laws apply to several types of business entities, both public and private.
Turning first to AB 1305, given that it’s effective January 1, 2024, there isn’t much runway for companies to familiarize themselves with the applicability of this law’s disclosure requirements. Along those lines, we recommend engaging outside counsel, as well as accounting firms that have expertise in this area, including in collecting the type of data that may need to be disclosed.
Specific to SB 253 and SB 261, the applicability issue will turn significantly on the respective financial thresholds. While the financial thresholds in SB 253 (annual revenues in excess of $1 billion) and SB 261 (annual revenues in excess of $500 million) are prescribed, there remain a few questions regarding what revenue should be counted. For example, for a multinational entity, should total revenue include global revenues or is it just revenue from the company’s California operations? Then there is the question regarding what “doing business” in California means for purposes of SB 253 and SB 261. For SB 253 and SB 261, the best course of action may be to view potential applicability in a conservative light. Notably, a recent study that took a conservative view on applicability estimated that 73% of Fortune 1000 companies would be subject to SB 253 and SB 261.
2. Leverage Existing Work
For public companies that may be subject to California’s new climate-related disclosure laws, there is some good news. Many public companies have already been preparing to comply with the SEC’s proposed climate-related disclosure rules. Since California’s new climate-related disclosure laws overlap with many aspects of the SEC’s proposed climate-related disclosure rules, these public companies may not have that heavy of a compliance lift. However, see this article from Ernst & Young for some of the key differences between California’s new climate-related disclosure laws and the SEC’s proposed climate-related disclosure rules. Understanding what work the company has done around climate-related record keeping, accounting, and disclosures with an eye on California’s new climate-related disclosure laws may help to set expectations around how much additional work will need to be done to comply with California’s new rules.
For private companies, the starting line is likely set a few yards back in comparison to their public company counterparts, which is why it’s imperative to engage outside experts as soon as possible.
3. Inform the Board of Directors and Broader Management Team
For public companies that have already been evaluating the SEC’s proposed climate-related disclosure rules, California’s new climate-related disclosure laws can and should be incorporated into those existing processes. This includes informing the board and educating relevant members of the management team, as well as your risk management, compliance, and marketing teams.
Risk management and compliance may seem obvious, but why marketing? AB 1305 is laser-focused on ferreting out corporate greenwashing, so to the extent that your company makes or is considering making net zero, carbon neutral, or similar claims in California, it’s best to ensure everyone is aware of what disclosure requirements, as well as potential penalties, you may now be subject to for making those claims.
For companies, public or private, that may potentially be subject to California’s new climate-related disclosure laws and don’t already have a climate-related governance framework in place, it would be prudent to establish a management-level committee to manage through these new disclosure requirements.
4. Monitor Developments
As discussed above, CARB is tasked with developing and adopting the regulations to implement SB 253 and SB 261. As with most rulemaking processes, this will take time and may impact when these disclosure requirements kick in. Then there is the fact California Governor Newsom, upon signing SB 253, indicated that the reporting deadlines included in SB 253 “are likely infeasible, and the reporting protocol specified could result in inconsistent reporting across businesses subject to the measure.” Lastly, we can’t forget about the possibility that the new climate-related disclosure laws will get challenged in court. All to say, best to stay tuned and remain nimble.
Parting Thoughts
California’s new climate-related disclosure laws will undoubtedly add to company compliance costs. To what degree is unclear, but for context, the SEC estimated that the first-year compliance costs associated with its proposed climate-related disclosure rules ranged between $490,000 and $640,000, depending on the type of public company. Granted, those estimates are for public companies, but California’s new climate-related disclosure laws require, in some instances, more disclosure than the SEC’s proposed climate-related disclosure rules. Bottom line: Companies should be prepared to allocate real attention and resources to compliance with these new laws, with an eye to the potential for being subjected to fines and/or litigation.
