Ambitious Climate Disclosure Legislation Transforming Corporate Accountability

California is making waves in climate action with the recent passage of the Climate Corporate Data Accountability Act. Consisting of two key bills, this legislation mandates large companies to disclose carbon emissions, setting new standards for corporate transparency and environmental responsibility.

California's latest laws, SB 253 and SB 261, introduce comprehensive disclosure requirements for businesses operating within the state. The bills, signed into law by Governor Gavin Newsom on October 7th, 2023, bring forth a new era of corporate reporting, potentially influencing practices beyond California's borders. SB 253, known as the Climate Corporate Data Accountability Act, specifically targets companies with annual revenues exceeding $1 billion. This legislation imposes a robust disclosure framework covering direct (Scope 1), indirect (Scope 2), and value chain (Scope 3) greenhouse gas (GHG) emissions. Compliance with SB 253 requires companies to make disclosures to an "emissions reporting organization," providing various examples of such bodies.

“The impact of this legislation is expected to be widespread, affecting over 5,000 and 10,000 companies, including privately held entities.”

On the other hand, SB 261, termed the Climate-Related Financial Risk Act, is applicable to companies with annual revenues surpassing $500 million. It focuses on disclosure requirements related to climate-related business risks, such as the potential for increasing operating costs or for decreasing demand.

Both bills introduce phased timelines for implementation. SB 253 mandates the disclosure of Scope 1 and 2 emissions by 2026, with Scope 3 emissions disclosure becoming mandatory by 2027. SB 261 requires companies to disclose climate-related financial risks starting in 2026, with subsequent disclosures every two years thereafter. Non-compliance with these legislations may result in fines of up to $500,000 for companies operating in California. Additionally, assurance requirements, especially for Scope 3 emissions, are set to evolve from limited to reasonable assurance by 2030.

The impact of this legislation is expected to be widespread, affecting over 5,000 and 10,000 companies, including privately held entities. The challenge of Scope 3 emissions reporting is particularly emphasized, creating an additional burden for smaller businesses. Companies are advised to proactively establish cross-functional teams to manage the climate reporting process effectively. It is crucial to identify external advisers, including emissions accounting firms, to ensure audit-ready disclosures. Furthermore, building internal systems for data governance and disclosure controls is highlighted as a key step in compliance.

As California moves forward with these regulations, there are unresolved issues that need attention. Key among these is the definition of "doing business in California" and the treatment of affiliated corporate entities. The resolution of these issues will be pivotal in shaping the practical implications of the legislation for businesses.

The impact of California's climate disclosure legislation is not limited to its borders. Following California, other states, including New York, may follow suit in enacting similar climate-related disclosure laws. This trend signifies a broader paradigm shift towards heightened corporate accountability and environmental responsibility.

California's climate disclosure legislation signifies a transformative shift in corporate reporting responsibilities. It underscores the state's commitment to climate action and positions businesses, regardless of their size, to prepare for the challenges posed by these regulations. This legislative move contributes to the global momentum for standardized and comprehensive climate-related disclosures. The evolving landscape of climate reporting indicates a broader societal push towards corporate sustainability and environmental accountability. As businesses navigate this evolving regulatory landscape, proactive measures and strategic planning will be crucial for ensuring compliance and meeting the heightened expectations for environmental stewardship.