As US Waits for SEC's Final Climate Risk Disclosure Rule, California Legislature Approves Two Landmark Bills with National and Global Implications for Businesses and Supply Chains

Last week, the California Legislature passed two bills, together the "Climate Accountability Package," that would mandate the public disclosure of greenhouse gas emissions (GHG) and climate-related financial risk by companies doing business in California that meet different revenue thresholds. California Governor Gavin Newsom has indicated he will sign the bills into law, subject to "some cleanup on some little language," the details of which remain undisclosed.¹California is the first governmental actor in the United States to mandate corporate climate-related disclosures, essentially front-running the long-anticipated climate disclosure rules under consideration by the US Securities and Exchange Commission (SEC). 

Under the new laws, any corporate entity doing business in California with total annual revenues over $500 million will be required to comply with Senate Bill 261's (SB 261) climate‑related financial risk disclosure requirements, and any business with total annual revenues in excess of $1 billion would be required to comply with Senate Bill 253's (SB 253) GHG disclosure requirements. This broad scope means that companies meeting these revenue thresholds will face new climate reporting obligations beginning in 2026, regardless of where they are headquartered, whether they are public or private, or the size of their operations (or sales) within California.

Affected companies will face significant costs for compliance, including establishing complex monitoring and compliance practices (including across their supply chains) and paying new fees to the California agencies administering the relevant programs. Companies will also be subject to potential administrative penalties and liability under the new laws, as well as other securities laws, and regulatory frameworks. 

Senate Bill 253: The Climate Corporate Data Accountability Act

• Covered Entities: SB 253, which passed the California Assembly on September 11 and the Senate on September 12, 2023, will impose expansive new GHG emissions related public disclosure requirements on companies that do business in California and have total annual revenues in excess of $1 billion (estimated to include approximately 5,000 businesses²).
• Required Disclosures and Disclosure Framework: Beginning in 2026, covered entities must publicly disclose their Scope 1 and Scope 2 greenhouse gas emissions for the prior fiscal year on an annual basis. Scope 3 emissions will be required to be included in such reports beginning in 2027. Final details will be announced by January 1, 2025—the deadline for the California Air Resources Board (CARB) to announce its implementation regulations. Notably, SB 253 contemplates opportunities for industry participation and requires CARB to consult various stakeholders (including covered entities) while developing these rules. To comply with the reporting requirements, covered entities must measure their Scope 1, 2, and 3 emissions in conformance with the Greenhouse Gas Protocol standards and related guidance published by the World Resources Institute and World Business Council for Sustainable Development. This framework may be altered or adapted starting in 2033, and at five-year intervals thereafter.
• Independent Third-Party Assurance: Beginning in 2026 (exact date to be announced by CARB), covered entities must obtain an assurance engagement of their Scope 1 and 2 emissions reports, to be performed by a qualified and experienced independent third-party assurance provider. The assurance engagement must be provided at a limited assurance level for 2026-2029, and at a reasonable assurance level beginning in 2030, and could also be expanded to include Scope 3 emissions in 2030.
• Fees & Penalties: Covered entities will be required to pay an annual fee to the CARB in connection with filing their disclosures. CARB may only use the fees to fulfill its own administrative duties pursuant to SB 253, including the requirement that CARB publish (in conjunction with a state or national academic institution) a public report summarizing the corporate disclosures and related implementation regulations. A company’s non-compliance (including failure to timely file, misstatements, or other failures to adhere to disclosure frameworks) would risk severe penalties—CARB may seek administrative penalties of up to $500,000 per year. Notably, CARB retains significant discretion over the final penalty amount and may consider circumstances like past and present history of compliance and efforts made in good faith.

Senate Bill 261: The Climate-related Financial Risk Act

• Covered Entities: SB 261 will impact even more companies than SB 253 and will impose biennial climate-related financial risk reporting obligations on companies with annual revenues in excess of $500 million that do business in California. Insurance companies, however, are expressly exempted. The California legislature indicates that approximately 10,000 companies would be subject to SB 261.³
• Definition of "Climate-Related Financial Risk": SB 261's reporting requirements apply broadly, and will extend to any "material risk of harm to immediate and long‑term financial outcomes due to physical and transition risks," including risks to the company’s operations (including products or services, supply chain issues, and even employee health and safety), financial status (including capital and institutional investments, loan recipients and borrowers), and broad factors like shareholder value, consumer demand, and overall markets and economic health.
• Required Disclosures and Reporting Framework: By January 1, 2026, and biennially thereafter, covered entities must make publicly available on their websites a climate-related financial risk report. The risk report will need to disclose each company's climate-related financial risk, in accordance with the Task Force on Climate-related Financial Disclosure's framework (as published in its June 2017 Final Report of Recommendations), or an equivalent reporting regime. The bill identifies the International Sustainability Standards Board's (ISSB) IFRS Sustainability Disclosure Standards (issued in June 2023 with additional updates forthcoming) as an equivalent reporting regime. Other climate-related risk disclosure frameworks that a covered entity is required to report pursuant to a law or regulation will also qualify as an equivalent reporting regime. Regardless of the reporting framework used, the covered entity must also disclose its measures adopted to reduce and adapt to climate-related financial risk. Reporting may be consolidated at the parent-company level.
• Fees & Penalties: SB 261, like SB 253, will require covered entities to pay a fee to CARB to file SB 261's mandatory reports. Similarly, non-compliance, or inadequate performance, may subject companies to administrative penalties of up to $50,000. Notably, SB 261 will also require CARB to contract with a qualified climate reporting organization to publish, on a biennial basis, a summary review and analysis of systemic and sector-wide climate-related financial risks faced by the state.

Open Questions and Interactions with Related Legislation

California’s Climate Accountability Package makes it the first state and first US government entity to require such large-scale climate-related risk and GHG emissions reporting. Prior to these bills, attempts in the US to mandate corporate climate disclosures have been limited to the federal government, including efforts by Congress and the SEC. Indeed, the SEC is actively considering its March 2022 proposal on the Enhancement and Standardization of Climate-Related Disclosures for Investors (see Steptoe’s analysis here), which has generated significant public comment and controversy.  

The SEC’s proposal would apply only to public companies, and would impose similar, but not identical, disclosure obligations concerning a host of climate-related information. The California bills, by contrast, apply to any public or private company doing business in the state that meets the relevant revenue thresholds. Substantively, the California bills both implicitly acknowledge the forthcoming SEC rules and attempt to minimize burdens on any SEC reporting companies that may also be subject to the California legislation. SB 261, for example, appears to permit a climate-related financial risk report issued pursuant to an SEC rule to satisfy the public disclosure requirement, while SB 253 instructs CARB to write rules in a manner that "minimizes duplication of effort" for covered entities subject to an SEC rule. The SEC is expected to adopt a final version of its climate rule by the end of 2023. 

It is also unclear how SB 253 and SB 261 will interplay with the EU's Corporate Sustainability Reporting Directive (CSRD) (analyzed further here), which also requires the reporting of scope 1, 2 and, 3 emissions and climate-related financial risks, in addition to a much broader array of sustainability-related information. While SB 261 expressly notes the ISSB's IFRS Sustainability Disclosure Standards as an equivalent reporting regime, it does not mention the CSRD. Companies that will be subject to the CSRD and the California bills will have to carefully consider the extent to which they will need to develop multiple reporting frameworks to satisfy obligations in each jurisdiction.  

Conclusion

Companies should be prepared to comply with these extensive and first-in-kind US requirements and, if applicable, to evaluate existing reporting processes and procedures being developed for compliance with CSRD or the SEC's forthcoming climate disclosure rule. Any adjustments and improvements to monitoring and reporting efforts would need to be implemented supply chain-wide and could require diligencing one's supply chains, reviewing supplier contracts, conducting audits, and providing training. Furthermore, companies should closely monitor and consider participating in the rulemaking process to help shape relevant implementation rules and related guidelines. While the laws could pose implementation challenges for many companies, they could also present opportunities for companies to distinguish themselves from their competitors in the marketplace.     

Endnotes

¹ Coral Davenport, California Governor to Sign Landmark Climate Disclosure Bill, NY Times (Sept. 17, 2023), https://www.nytimes.com/2023/09/17/climate/california-climate-disclosure-law.html?smid=nytcore-ios-share&referringSource=articleShare.

² See, e.g., Jordan Wolman, California Bill Would Mandate Corporate Emissions Disclosures, Politico Pro (Jan. 30, 2023, 6:01 AM), https://www.politicopro.com/premium-news/pro-news-california-bill-would-mandate-corporate-emissions-disclosures/.

³ Andrew Oxford, California Emissions Reporting Bill Would Go Further than SEC, Bloomberg Law (July 13, 2023, 5:00 AM), https://news.bloomberglaw.com/ip-law/california-emissions-reporting-bill-would-go-further-than-sec. Press Release, Ceres, Companies Call for Climate Disclosure Legislation as California Lawmakers Return to Session, Bloomberg (Aug. 14, 2023, 12:22 PM), https://www.bloomberg.com/press-releases/2023-08-14/companies-call-for-climate-disclosure-legislation-as-california-lawmakers-return-to-session.