On October 7, 2023, Governor Gavin Newsom signed into law a trio of climate-related bills that will impact what companies doing business in California must (or can) say about their greenhouse gas (GHG) emissions and the climate-related financial risks to their businesses. Two of the laws, SB 253 and SB 261, which require annual GHG emission reporting and biannual climate-related risk disclosures respectively, received the most press, but these laws only apply to very large businesses. The third law, AB 1305, which concerns carbon offset and GHG emission reduction claims, was enacted with much less fanfare but is more broadly applicable – potentially affecting almost every company doing business in California that has a website discussing the company’s carbon reduction goals. Below is a 35,000-foot overview of each of these laws and what they may mean for your company.

SB 253 – The Climate Corporate Data Accountability Act

SB 253 requires U.S. based companies that do business in California and have annual revenues of more than $1 billion to publicly disclose their annual GHG emissions (Scopes 1, 2, and 3) to the State and pay an annual fee starting in 2026 for Scopes 1 and 2 emissions and 2027 for Scope 3 emissions.¹ Specifics regarding implementation of this program, including reporting deadlines and annual fees, will be included in state regulations.

Under SB 253, the California Air Resources Board (CARB) is required to issue implementing rules before January 1, 2025. In addition to establishing reporting deadlines and fees, these regulations must address the following key items.

• The Greenhouse Gas Protocol standards and guidance must be used to calculate emissions for at least the 2026-2033 reports. Starting in 2033 and every five years thereafter, CARB is required to assess reporting methodologies.
• Emission reporting should be structured to minimize duplicative efforts, and CARB regulations must allow reporting companies to submit reports that are prepared to meet other federal or international requirements, provided they meet the requirements of the California law.
• For Scope 1 and 2 emissions, reporting companies will be required to engage a third-party to review and provide assurance for their reports starting in the 2026 reporting year. For the years 2026-2029, limited assurance is required, but commencing in 2030, reasonable assurance for Scope 1 and 2 emissions is required under the law. For Scope 3 emissions, an assurance engagement is not required until the 2030 report. At that time, Scope 3 emissions will be subject to limited assurance.

Under the law, emission reports will be submitted to an “emission reporting organization” under contract to CARB, which will make the reports public.

SB 261 - The Climate-Related Financial Risk Act

SB 261 requires U.S. based companies that do business in California and have annual revenues of more than $500 million to prepare a climate-related financial risk report detailing the physical and transition threats they face as a result of climate change, as well as the measures they are taking to mitigate and adapt to those risks. The first report must be prepared before January 1, 2026 and every two years thereafter. The report must be published on the reporting company’s website and filed with the state. Payment of an annual fee (to be determined through CARB rulemaking) will also be required.

SB 261 generally requires climate-related financial risk to be disclosed in accordance with the framework and disclosures in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), dated June 2017, or “pursuant to an equivalent reporting requirement.” Per the bill, an “equivalent reporting requirement” may include other voluntary or legally/exchange required disclosures that are consistent with the above-referenced disclosure requirements or the International Financial Reporting Standards Sustainability Disclosure Standards, as issued by the International Sustainability Standards Board.

As with SB 253, pursuant to SB 261, CARB is required to contract with a climate reporting organization to, among other things, prepare a biennial report on the climate-financial risks disclosed in industry reports, including an analysis of the systemic and sector-wide climate-related financial risks faced by the state.

AB 1305 - Voluntary Carbon Market Disclosures Act

Unlike SB 253 and SB 261, AB 1305 does not impose reporting requirements on companies, but it does require entities doing business in California to improve the quality of any voluntary claims that they make in the state related to carbon emission offsets and/or significant carbon reductions.

AB 1305 also differs from SB 253 and SB 261 in that it applies to any entity making covered claims in California regardless of annual revenues. AB 1305 applies to:

• Business entities that are marketing or selling voluntary carbon offsets in California;
• Entities operating in California that are purchasing or using voluntary carbon offsets sold within the state and that are making claims regarding achievement of “net zero emissions,” “carbon neutrality,” or other claims related to “significant reductions” in GHG emissions; and
• Entities operating in California that while not purchasing or using voluntary carbon offsets sold in the state, are “making claims within the state” regarding achievement of “net zero emissions,” “carbon neutrality,” or other claims related to achievement of “significant reductions” in GHG emissions.

Business entities marketing or selling voluntary carbon offsets in California must disclose detailed information regarding their marketable offsets on their website, including the location of the offset project, the nature of the project, the durability and amount of offsets, and whether the offsets have been verified by a third-party.

Covered offset purchasers, similarly, must disclose information regarding the offsets sold in California that are used in their claims, including the entity that sold the offsets, the specific project name and identification number for the offset source, the nature of the project, and the protocol used to estimate the claimed emission reductions.

Entities operating in California who are not purchasing or using voluntary carbon offsets but are making claims regarding achievement of “net zero emissions,” “carbon neutrality”, or “significant reductions” in GHG emissions are subject to broader, less clear-cut disclosure requirements. Under AB 1305, these entities are required to disclose on their website:

• “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;” and
• Whether there is independent third-party verification of the company data and claims listed.

See California Health and Safety Code § 444752(a), (b).

AB 1305 has received less attention than its counterparts but will likely impact more business entities. The law does not define key terms, including “operate in the state;” “make claims within the state” or “significant reductions” of GHG emissions. If broadly interpreted, it could apply to any company that transacts business in California or with Californians that has included its carbon reduction goals on its website or in a sustainability report. Covered entities could be subject to statutory penalties for non-compliance up to a maximum of $500,000.

For potentially subject companies, there are real questions about the amount of information that they are required to disclose because what constitutes “all information documenting how” achievement or progress toward GHG claims is not specified. Additionally, the compliance date for the law, which became effective on January 1, 2024, is not express. One of the bill’s sponsors obtained unanimous consent of the California Assembly to have a letter published in the California Assembly Daily Journal clarifying that the intended “applicability date” for AB 1305 is January 1, 2025. This letter, however, does not amend the law.

What is Next?

All three of these laws became effective on January 1, 2024.

To prepare for compliance with AB 1305, companies making covered claims in California may want to review any claims or information provided on their websites regarding their carbon reduction goals for consistency with the law’s requirements.

For SB 253 and SB 261, covered companies doing business in California may want to consider the information that they need to collect in order to meet applicable statutory requirements. Covered companies should also monitor the status of these laws for any potential changes in compliance requirements and deadlines.

Implementation of both SB 253 and SB 261 require CARB to issue regulations on an aggressive timeframe, and it is not clear whether CARB will be able to do so. Indeed, when signing SB 253 and SB 261 into law, Governor Newsom questioned the implementation deadlines for both laws and directed his administration to work with the legislature in 2024 to address these concerns. Additionally, the Governor’s initial proposed budget for fiscal years 2024-2025 paused funding for CARB to implement SB 253 and SB 261 due to an estimated budget shortfall. Given the potential lack of funding and the already short timeframe to develop regulations from scratch, the timely implementation of these laws is questionable.

Adding to the uncertainty, on January 30, 2024, the U.S. Chamber of Commerce, along with the California Chamber of Commerce, the American Farm Bureau Federation, the California Central Valley Business Federation, the Los Angeles County Business Federation, and the Western Growers Association filed a lawsuit challenging both laws in federal district court in California. The lawsuit alleges that these laws violate the First Amendment of the U.S. Constitution by compelling a substantial amount of speech on the controversial subject of climate change and are preempted by the Clean Air Act because they regulate GHG emissions in states other than California.

Quarles continues to monitor and share developments in environmental and energy laws and regulations.

END NOTES

¹ Scope 1 emissions are direct GHG emissions from the reporting company, and Scope 2 emissions are GHG emissions from the energy used by the company. Scope 3 emissions are GHG emissions associated with the company’s value chain, which includes the company's supply chain and emissions from customer use of the company’s product.