California Climate Laws Require Public Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risks

Morrison & Foerster LLP

Morrison & Foerster LLP

California Governor Gavin Newsom signed into law two key climate bills as part of the California legislature’s broader Climate Accountability Package. The two laws—Senate Bill No. 253 (SB 253) and Senate Bill No. 261 (SB 261)—require companies to publicly provide additional climate‑related disclosures in the coming years. Companies are required to comply with the disclosure requirements as early as 2024. European entities have taken similar steps, and the federal government has pushed related climate disclosures to the forefront with the much-discussed proposed rules from the SEC. However, adoption of California’s laws jumpstart climate reporting requirements for thousands of large companies operating in the world’s fifth-largest economy.

SB 253: Climate Corporate Data Accountability Act

At a high level, SB 253 requires applicable companies to disclose their greenhouse gas emissions. Although a similar bill failed in the legislature in 2022, this iteration of the law garnered strong support from legislators and many corporate interests, successfully pushing it through the California Senate and Assembly. The law applies to both public and private companies that do business in California and produce annual gross revenues over $1 billion. While the bill does not specify the exact factors that determine whether a company does business in California, other parts of California law indicate that the factors are likely similar to the factors reviewed when determining whether a company needs to register as a foreign business in California, including physical presence or repeated transactions in the state.

Under SB 253, disclosures of greenhouse gas emissions must be made in accordance with the standards set forth by the Greenhouse Gas Protocol, which are designed to provide businesses and governments with a standardized framework to measure and report greenhouse gas emissions and divides emissions into three “scopes.” SB 253 defines each type of emissions as follows:[1]

Scope 1: “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: “indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.”

Scope 3: “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.”

Typically, the largest source of greenhouse gas emissions associated with a company are scope 3 emissions, which are difficult to measure since the company needs to obtain such information from third parties that it does not own or control.

In order to demonstrate compliance with the reporting standards, a company first needs to engage a third-party assurance provider, which will work with the company to generate a report that measures, analyzes, and sufficiently attests to the emissions data of the company. Then that third-party provider will provide the emissions report to an emissions reporting organization and “assure” the report’s contents with different degrees of confidence—with either a weaker degree, “limited assurance,” or the stronger degree, “reasonable assurance.” The bill requires that companies first report on their scope 1 and 2 emissions and secure “limited assurance” of the report’s contents from a third-party provider starting in 2026 (looking backward at emissions from 2025), but companies have an additional year before being required to report their scope 3 emissions in 2027 (looking backward at emissions from 2026). The assurance threshold rises to a “reasonable” level in 2030 for scopes 1 and 2, but remains at a “limited” level for scope 3. During the first few years of the reporting requirements, companies have some leniency as long as they submit a report; however, in the years after, companies must report accurate enough data to allow the third-party provider to attest to the contents of the report with a greater degree of confidence.

Reported emissions data will become available on a digital platform viewable by the general public. In addition to administrative penalties for noncompliance in a given reporting year, companies also are required to pay an annual fee to sustain the newly created Climate Accountability and Emissions Disclosure Fund in California.

Read the full text of SB 253.

SB 261: Greenhouse Gases: Climate-Related Financial Risk

SB 261 requires applicable companies to biennially prepare a risk report that publicly discloses the companies’ climate-related financial risks alongside the measures that companies adopt to mitigate such risks. Like SB 253, the law applies to both public and private companies that do business in California, but the annual gross revenue threshold is lower—$500 million—increasing the number of companies covered by this law in contrast.

The required climate risk report must be prepared in accordance with the recommended framework and disclosures contained in the Recommendations of the Task Force on Climate-related Financial Disclosures.[2] This framework and its recommendations are structured around four key areas related to the operations of a company:

Governance: Disclose the organization’s governance around climate-related risks and opportunities. Recommended disclosures include descriptions of (i) the board’s oversight of climate-related risks and opportunities and (ii) management’s role in assessing and managing climate-related risks and opportunities.

Strategy: Disclose the actual and potential impacts of climate‑related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material. Recommended disclosures include descriptions of (i) the climate-related risks and opportunities that the organization has identified over the short, medium, and long term; (2) the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning; and (iii) the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.

Risk Management: Disclose how the organization identifies, assesses, and manages climate-related risks. Recommended disclosures include descriptions of (i) the organization’s processes for identifying and assessing climate-related risks; (ii) the organization’s processes for managing climate-related risks; and (iii) how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management.

Metrics and Targets: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material. Recommended disclosures include descriptions of (i) the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process; (ii) scope 1, scope 2, and, if appropriate, scope 3 greenhouse gas emissions and the related risks; and (iii) the targets used by the organization to manage climate-related risks and opportunities and performance against targets.

SB 261 defines climate-related financial risks as “material risks 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.”[3]

Reports made available by companies must be submitted to California’s Climate-Related Risk Disclosure Advisory Group, which is tasked with identifying inadequate submissions. Companies are permitted to provide explanations for any reporting gaps and descriptions of steps taken to address the gaps in the required disclosures. Companies are also able to comply with SB 261 by preparing a publicly accessible report that (1) voluntarily uses a framework that meets the Sustainability Disclosure Standards set forth by the International Financial Reporting Standards, as issued by the International Sustainability Standards Board, which includes reporting on an entity’s material sustainability risks, governance, resilience, and climate metrics; or (2) includes climate-related financial risk disclosures pursuant to a federal law incorporating the Sustainability Disclosure Standards discussed above.

The biennial reporting requirement begins in early 2026. Companies must make the reports publicly available on their websites. A subsidiary of a covered company is not required to generate its own report if the parent company makes available a consolidated report. Failure to comply with the reporting requirements set forth in SB 261 might result in administrative penalties.

Read the full text of SB 261.

[1] Sen. Bill 253, 2023–2024 Reg. Sess. (Cal. 2023).

[2] Final Report of Recommendations, The Task Force on Climate-related Financial Disclosures (June 2017).

[3] Sen. Bill 261, 2023–2024 Reg. Sess. (Cal. 2023).

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP | Attorney Advertising

Written by:

Morrison & Foerster LLP

Morrison & Foerster LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide