California Climate Bills – What businesses need to know

On Oct 7, 2023, California Governor Gavin Newsom signed into law two watershed climate bills, SB 253 and SB 261, that will require companies with significant revenue to make climate-related disclosures starting in 2026. Here's what you need to know.

The two new California laws are more comprehensive than any other climate disclosure laws in the U.S., surpassing even the anticipated SEC rule. They solidify the transition from voluntary to mandatory GHG emissions reporting, setting higher standards for corporate engagement in addressing climate change.

Who do the laws apply to?

The new laws apply to both public and private companies operating in California. "Doing business in California" is broadly defined, including engaging in transactions for financial gain, being organized or based in California, or having significant sales, property, or payroll in the state. This broad definition means even companies with minimal activity in California could be subject to these laws. Note that for each law, applicability is determined based on the business entity's revenue for the prior fiscal year.

SB 253 – Climate Corporate Data Accountability Act

SB 253 mandates that U.S. companies with total annual revenues of $1 billion or more, and operating in California must disclose their Scope 1 and Scope 2 GHG emissions by 2026, and their Scope 3 emissions by 2027, with no emission threshold required for reporting. The emissions data must adhere to Greenhouse Gas Protocol standards and be presented in a publicly accessible biennial report.

The required disclosures for the previous year include:

• Scope 1 – direct greenhouse gas (GHG) emissions from all owned/controlled assets regardless of location.
• Scope 2 – indirect GHG emissions from purchased power or heating.
• Scope 3 – indirect upstream and downstream greenhouse gas emissions from the entity’s value chain, such as purchased goods and services, travel, and product processing and use.

Reporting timeline for effect:

• Scope 1 and Scope 2 GHG emissions starting in 2026.
• Scope 3 emissions starting in 2027.

California Air Resources Board (CARB), the new emissions reporting organization, will establish regulations by 2025 for disclosing annual emissions, and companies must obtain thi rd-partyassurance for their reporting of greenhouse gases, starting with "limited assurance" in 2026 and moving to "reasonable assurance" by 2030. This is the first U.S. law broadly requiring assurance for Scope 1 and Scope 2 emissions, impacting about 5,000 companies.

For more information on the 3 emissions scopes, see our dedicated blog here, which includes an explanation of direct and indirect greenhouse gas emissions.

SB 261 – The Climate Related Financial Risk Act

SB 261 mandates that any U.S. business entity with total annual revenues exceeding $500 million and operating in California must submit reports detailing their climate related financial risks and aligning with Task Force on Climate-Related Financial Disclosures (TCFD) guidelines, detailing measures to mitigate identified risks. These reports, due by Jan. 1, 2026, and biennially thereafter, should address vulnerabilities across various aspects like employee safety, supply chains, and shareholder value, and must be published on the company's website.

With an expected scope of around 10,000 companies, SB 261 defines climate related risks as anything that causes potential harm to financial outcomes, encompassing operational, supply chain, and market-related risks.

What are the consequences of an inadequate or insufficient report?

• The bills differ in their level of enforcement, but in both cases, the state board is able to seek administrative penalties from a covered entity that fails to report in line with the disclosures.

• For SB 253, the University of California, or national libraries will be responsible to evaluate and disclose reports. Failure to report within compliance will carry a fee that is not to exceed $500,000. The amount of the penalty will take into account the businesses familiarity with emissions reporting.

• Failure to comply with SB 261 bill can cost your business up to $50,000. Monitoring is to be done by a third party entity familiar with the state climate investment framework of the TCFD.

How can your business prepare?

• Assess and adapt: Take a look at past reporting practices from the prior fiscal year and fill in gaps with the new requirements, pinpoint physical and transition risks of compliance.

• Set up a committee with expertise in the field of sustainability to ensure sustainable practices are taken into account at an executive level.

• Select a climate software provider to support you in collecting consistent and accurate emissions data across your value chain, as well as data on climate risks.

For support on choosing the right provider, take a look at our dedicated resource.