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In a move towards greater transparency and accountability, California has enacted groundbreaking legislation aimed at compelling organizations to disclose their climate-related risks and actions. The Climate Accountability Package, consisting of Senate Bill 253 (SB 253) and Senate Bill 261 (SB 261), represents a significant shift from voluntary reporting towards mandatory reporting on climate issues. Signed into law by Governor Newsom in October 2023, these bills were introduced with the intention of enhancing transparency surrounding climate-related information. 

Senate Bill 253 (SB 253)

SB 253, also known as the Climate Corporate Data Accountability Act (CCDA), is the first law in the United States to mandate scope 1, 2, and 3 disclosures, covering both public and private companies. This approach is more aggressive than the SEC’s proposed climate disclosure rule, which focuses solely on public companies reporting to the SEC and would only require disclosure of scope 3 emissions if they are determined to be material, or if the regulated company has set scope 3 reduction targets.

One of the most significant aspects of SB 253 is its requirement for scope 3 disclosures. This is noteworthy because scope 3 emissions often constitute a significant portion, or the majority, of an organization’s carbon footprint, but are notoriously difficult to measure. As a result, impacted businesses will need to capture the greenhouse gas emissions data of their supply chain. This is powerful because while suppliers may not be directly regulated by SB 253, if they wish to continue doing business with customers that are subject to the law, it is likely they will have to start measuring and disclosing their organizational greenhouse gas emissions data as well. Capturing sustainability-related data on the value chain is a policy lever that has emerged in other global ESG regulations, such as the European Union’s Corporate Sustainability Reporting Directive, which is expected to cause a ripple effect of climate accountability throughout the global economy.  

SB 253 applies to US-based organizations doing business in California with annual gross revenues in excess of $1B and is expected to impact more than 5,000 businesses. Organizations subject to SB 253 will need to submit emissions inventories in alignment with the Greenhouse Gas Protocol guidelines, with limited and reasonable assurance provided by third-party auditors. 

Beginning in 2026, impacted businesses will be required to submit scope 1 and 2 data based on their 2025 emissions. Organizations will then need to report on their 2026 scope 3 emissions in 2027. Limited assurance for scopes 1 and 2 begins in 2026 and will graduate to reasonable assurance in 2030. The law also currently requires limited assurance for scope 3 starting in 2030, but that provision will be further reviewed by the California Air Resources Board (CARB) in 2027.

Companies who fail to file, file late, or violate the provisions could face fines of up to $500,000 per reporting year. However, it’s important to note that fines for scope 3 misstatements will not be issued should disclosures be made with a reasonable basis and in good faith. Penalties for scope 3 reporting, between 2027 and 2030 are for failure to file only.

Senate Bill 261 (SB 261)

SB 261, known as the Climate-Related Financial Risk Act (CRFRA), complements SB 253 by requiring disclosures be aligned with the Task Force on Climate-Related Financial Disclosures framework. Businesses will also be required to disclose measures taken to mitigate and adapt to climate risks.

SB 261 applies to US-based organizations doing business in California with annual gross revenues in excess of $500M to disclose their climate-related risks. The law is expected to impact over 10,000 companies and exempts companies subject to California Department of Insurance regulation, or are in the insurance business in any other state.

This legislation emphasizes the financial implications of climate risk, recognizing greenhouse gas emissions as a primary indicator of a company’s exposure to climate-related financial risks. With the data this law will make publicly accessible, investors and customers will be able to make more informed decisions on their investments and purchases.

The first report is required in January 2026 and disclosures will be due biennially thereafter. Covered entities who fail to make their SB 261 report available on their website, or publish an inadequate or insufficient report, could face penalties of up to $50,000 per reporting year.

Implementation Challenges

The California Air Resources Board (CARB) is tasked with implementation of these laws and has until January 1, 2025 to establish and adopt clarifying regulations. However, the implementation process faces challenges, with concerns raised over the tight timeline and potential financial burdens on businesses. 

In particular, there remains much to be fleshed out in the implementation regulations for SB 253 that CARB has to adopt, including: various definitions, whether franchisors under the $1B compliance threshold will be subject to the law if the franchisee network exceeds $1B, how companies will file with the California Air Resources Board, amongst others.

A primary topic of concern for clarity in the regulations is what actually constitutes “doing business in California” under the law? Many are currently interpreting the definition in alignment with the State of California Franchise Tax Board, which would mean meeting any of the following criteria:

  • “Engage in any transaction for the purpose of financial gain within California”
  • “Are organized or commercially domiciled in California”
  • “Your California sales, property or payroll exceed the following amounts:”
    • $711,538 in CA sales (either the threshold amount or 25% of total sales) in 2023
    • $71,154 in CA real and tangible personal property (either the threshold amount or 25% of total property) in 2023
    • $71,154 in CA payroll compensation (either the threshold amount or 25% of total payroll) in 2023

Governor Newsom himself has signaled concerns regarding the potential costs for businesses to comply with the laws, as well as the implementation timeline, and did not fund CARB’s rulemaking process in the recently released January 2024 budget. It’s estimated that CARB needs approximately $9M in implementation funds for the bills this year and it remains to be seen if the updated May 2024 budget will include this funding. Governor Newsom’s decision not to fund the rulemaking process for SB 253 underscores the complexities involved in regulatory implementation.

Pending Legal Fights

As of February 2024, legal challenges have already emerged for the two laws, indicating that they may have a bumpy road ahead of them. A lawsuit aimed at blocking implementation of the two laws was brought forward by a coalition of business organizations led by the US Chamber of Commerce and the American Farm Bureau Federation. The groups claim that the laws violate the First Amendment by forcing speech on a “controversial” issue and that California is assuming the role of a national emissions regulator. The groups are suggesting that because the laws mandate reporting of out of state emissions, the federal Clean Air Act preempts California’s ability to regulate emissions in other states. 

The sponsor of SB 253, Scott Weiner, stated that the reason the Chamber of Commerce is attempting to aggressively block basic transparency for the public is “…because many large corporations–particularly fossil fuel corporations and large banks–are absolutely terrified that if they have to tell the public how dramatically they’re fueling climate change, they’ll no longer be able to mislead the public and investors.”

Despite opposition, the bills have garnered support from major corporations from businesses that will be subject to the law, reflecting a growing recognition of the importance of corporate climate transparency. In 2023, companies including Salesforce, Adobe, Patagonia, Microsoft, IKEA, REI, Sierra Nevada Brewing, and Atlassian publicly advocated for these bills and submitted signed letters of support during their development.

The Time to Prepare is Now

For organizations subject to these laws, preparation is key. Gathering data and establishing robust reporting mechanisms will be essential for compliance. If you’re a company operating in California that’s subject to these laws, start gathering your data in 2025 in order to comply with the 2026 reporting requirements. This means if you’re not already reporting on your emissions or climate-related risks now, it will be critical to spend 2024 getting systems, processes, and controls in place. You can read our tips on how to prepare on our blog.

These new accountability laws will come with a degree of scrutiny from the public and assurance providers that has not previously been applied to sustainability reporting in the United States. As a result, it’s important for impacted businesses to consider, manage, and report  climate data with the same degree of rigor as financial data disclosures.

California’s Climate Accountability Package marks a pivotal moment in climate reporting and we at Climate Vault welcome mandates like SB 261 and SB 253 that strive for enhancing transparency and greater corporate accountability. By requiring organizations to disclose their climate-related risks and actions, these laws empower stakeholders to assess companies’ environmental performance and drive progress towards decarbonization.

If your business is new to measuring your scope 1, 2, or 3 emissions, Climate Vault is here to help you get started. Contact our team to learn how we can help you calculate your emissions and then reduce + remove them in the most verifiable, quantifiable, and transparent method, ensuring you implement tangible climate action strategies that you can disclose with confidence.