California Governor Gavin Newsom recently signed into law two core bills of the state's “Climate Accountability Package, Senate Bill 253 (SB 253) and Senate Bill 261 (SB 261).

As they currently stand, these laws impose extensive new climate-related disclosure obligations on thousands of public and private U.S. companies with operations in California. In this alert, we summarize key provisions of SB 253 and SB 261 and highlight some key takeaways and open questions.

Key Provisions of SB 253: The Climate Corporate Data Accountability Act

SB 253 applies to reporting entities, which are defined as any U.S. company with total annual revenues in excess of $1 billion that does business in California. It directs them to publicly disclose greenhouse gas (GHG) emissions consistent with the Greenhouse Gas Protocol standards and guidance or an alternative standard. The bill estimated that more than 5,000 companies will be required to report their GHG emissions.

The reporting includes direct emissions (Scope 1 emissions), indirect emissions (Scope 2 emissions), and indirect upstream and downstream emissions from sources and partners within the company's value chain (Scope 3 emissions). Under SB 253, the California Air Resources Board (CARB) must develop and adopt regulations by January 1, 2025, that require reporting entities to annually disclose their Scope 1, Scope 2 and Scope 3 emissions.

As enacted, reporting on Scope 1 and Scope 2 emissions disclosures will begin in 2026 with Scope 3 emissions disclosures beginning in 2027. However, when he signed the bill, Governor Newsom conveyed to lawmakers that he believed the implementation deadlines were likely infeasible and his administration would work with legislators next year to address the timelines.

SB 253 also requires reporting entities to obtain an assurance engagement from an independent third-party provider on all of their reported emissions. The third-party assurance provider must have significant experience in measuring, analyzing, reporting or attesting to the emission of greenhouse gases, as well as the sufficient competence and capabilities necessary to perform engagements in accordance with professional standards and applicable legal and regulatory requirements. In addition, CARB must approve the third-party assurance provider.

As part of CARB’s obligations under SB 253, CARB will be required to engage with an emissions reporting organization to develop a reporting program to make the required disclosures publicly available on a digital platform. Starting in 2033 and every five years thereafter, CARB shall assess the global greenhouse gas accounting and reporting standards and adopt an alternative standard if it determines that using the alternative standard would be more effective.

Penalties for Noncompliance

CARB may seek administrative penalties for noncompliance and late filing that shall not exceed $500,000 in a reporting year. Considering the difficulty in measuring Scope 3 emissions, which involve assessing emissions from a company’s full value chain, CARB may offer some leniency with respect to administrative penalties. CARB will not seek penalties for misstatements on Scope 3 emission disclosures made in good faith and with a reasonable basis. In addition, penalties assessed on Scope 3 reporting between 2027 and 2030 apply only to non-filing.

Key Provisions of SB 261: The Climate-Related Financial Risk Act

Like SB 253, SB 261 also aims to increase transparency around the threats presented by climate change by requiring companies to prepare a risk report that publicly discloses a company’s climate-related financial risks and the measures it has taken to reduce and address those risks.

The law applies to “covered entities,” which are defined as (i) corporations, partnerships, limited liability companies or other business entities formed under the laws of any U.S. state, the District of Columbia, or under an act of the U.S. Congress, (ii) with total annual revenues in excess of $500 million, and (iii) that do business in California.

Required Disclosures

Covered entities must prepare a climate-related financial risk report that publicly discloses the following:

• The company’s climate-related financial risk in accordance with the recommended framework of the Task Force on Climate-Related Financial Disclosures (TFCD)
  • Governance: the organization’s governance around climate-related risks and opportunities
  • Strategy: the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning;
  • Risk Management: the processes used by the organization to identify, assess and manage climate-related risks
  • Metrics and Targets: the metrics and targets used to assess and manage relevant climate-related risks and opportunities
• Measures the company has taken to reduce and address the climate-related financial risks disclosed in the report
• To the extent a report contains a description of an entity’s GHG emissions or voluntary mitigation of those emissions, such claims must be verified by an independent third-party verifier

As enacted, the first report is due by January 1, 2026, and companies will be required to file biennially reports thereafter. All reports must be made available to the public on the covered entities’ website. As mentioned above, Governor Newsom has indicated that the implementation deadlines are likely infeasible and that his administration will work with legislators next year to address the timelines.

Penalties for Noncompliance

Covered entities that fail to publish the required report on their website or publish an inadequate or insufficient report will be subject to administrative penalties of up to $50,000.

Read the full text of SB 261 here.

Key Takeaways

Comparison of SB 253 to the SEC’s Proposed Rule on Climate Related Disclosures

SB 253 differs from the Securities and Exchange Commission’s (SEC) proposed rule on “The Enhancement and Standardization of Climate-Related Disclosures for Investors” (SEC Proposed Rule) on at least two key points. First, SB 253 will apply to both public and private companies operating in California with more than $1 billion in revenue, while the SEC Proposed Rule will apply only to public reporting companies. Second, SB 253 requires all reporting companies to report Scope 3 emissions, while the SEC Proposed Rule would currently require companies to disclose their Scope 3 emissions only if the company has (i) set Scope 3 emissions reduction targets or (ii) the Scope 3 emissions are material. In addition, the SEC Proposed Rule requires attestation for Scope 1 and 2 emissions while SB 253 requires a state-approved independent third party to provide assurance on the emissions reported.

Overlapping Climate-Related Disclosure Obligations

While the SEC has not released its final rule on climate-related disclosures and California’s Climate Accountability Package may undergo some revisions, companies may receive some relief from having to create duplicative emissions reports under SB 253 and SB 261. Both pieces of legislation allow for CARB to consider that a reporting entity under SB 253 and a covered entity under SB 261 may be able to satisfy its reporting obligations if the company is reporting in compliance with an equivalent reporting requirement or other mandatory reporting regimes. This may allow for a company that would be required to report under the SEC’s framework to satisfy its obligations under SB 253 and SB 261 without duplicating efforts. Similarly, a company that has a subsidiary subject to the reporting requirements of the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) may be able to satisfy its reporting obligations under the CSRD by complying with SB 253 and SB 261 if the EU considers the California legislation to be an equivalent reporting requirement.

Open Questions

SB 253 does not clearly define what it means for a company to be “doing business” in California. Presumably, CARB will clarify what it means to do business in California in its implementing regulations.

CARB will also likely need to provide further clarity on how SB 253’s $1 billion annual revenue threshold requirement for “reporting entities” and SB 261’s $500 million threshold requirement for “covered entities” is determined. (e.g., on a gross rather than net basis, on a consolidated basis for all affiliates of the entity, etc.)

Prepare for Climate Reporting

While California’s Climate Accountability Package is the first law in the U.S. requiring companies to disclose GHG emissions and climate-related risks, additional reporting requirements may soon be in place. In addition to the SEC’s proposed climate risk disclosure rule, New York, Oregon, Colorado and other states are considering emission reporting and climate risk disclosure bills.

In addition, approximately 3,000 U.S. companies are expected to be subject to the climate disclosure requirements of the EU’s CSRD. Since the reporting requirements include Scope 3 emissions, companies that are not directly subject to the new laws should expect to be indirectly affected. They may need to provide GHG emissions if they do business with companies that are subject to the laws.

Companies that have not started preparing for climate reporting should consider identifying a dedicated team, developing their reporting strategies, increasing their fluency in climate regulation and reporting. They will also need to reviewing and, if necessary, amend their agreements with supply and value chain partners to include information sharing and data validation obligations and rights.

Stay tuned for further developments on the Climate Accountability Package.

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