California Climate Legislation Business Guide

California Climate Legislation Business Guide

October 11, 2023

California SB 253 and SB 261, collectively known as the "California Climate Accountability Package" (CCAP), was signed into law law on October 7, 2023 by California Governor Gavin Newsom. Lawmakers in the state are following global initiatives like the SEC Climate Disclosure proposal and the European Union's Corporate Sustainability Reporting Directive to mandate climate accountability in what has been a voluntary effort to date.

Given California's economic and cultural influence, these bills will likely set a benchmark for corporate environmental accountability, affecting companies in the U.S. and globally. The CCAP requires companies with significant revenue to disclose their carbon emissions, aiming to foster informed decision-making and enable the transition to a low-emissions economy.

Table of Contents

What Is SB 253, the Climate Corporate Data Accountability Act?

SB253 is the first state law in the nation to require large organizations to report their carbon impact on a tiered level beginning in 2026. If the law is not challenged or overturned, companies will be required to start reporting on the first two "scopes" ( direct and indirect greenhouse emissions) on January 1, 2026. The reporting on the third scope (upstream and downstream greenhouse emissions) begins in 2027.

The law defines a "reporting entity" as a partnership, corporation, limited liability corporation or other business entity formed in any U.S. state or the District of Columbia with $1 billion in annual revenue that does business in California. Reporting entities will be required to disclose their greenhouse emissions biennially.

3 Scopes of the California Climate Corporate Data Accountability Act

SB 253 has three scopes related to what companies must report for their greenhouse emissions:

  • Scope 1 emissions: All direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location. Reporting is expected to be required starting in 2026.
  • Scope 2 emissions: All indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity. Reporting is expected to be required starting in 2026.
  • Scope 3 emissions: All indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources the entity does not own or directly control. Examples include purchased goods, business travel, employee commutes, and processing and use of sold products. Reporting is expected to be required starting in 2027.

Penalties for SB 253 Noncompliance

Noncompliant companies could incur administrative penalties, with fines of up to $500,000 annually. The state will consider the company's past and present compliance and good faith efforts. Safe harbors exist for Scope 3 emissions, shielding companies from penalties for reasonable, good-faith misstatements between 2027 and 2030.

What Is SB 261, the Climate-Related Financial Risk Disclosure Act?

SB 261 follows multiple federal, industry and international climate-risk reporting standards, such as the:

Following these still-voluntary precedents on reporting climate risk, SB 261 was passed to establish what California lawmakers call an "opportunity to set mandatory and comprehensive risk disclosure requirements for public and private entities to ensure a sustainable, resilient and prosperous future for California."

A "covered entity" under SB 261 is defined as a corporation, partnership, limited liability company or other business entity formed under the laws of the state, the laws of any other state of the U.S. or the District of Columbia with total annual revenues exceeding $500 million and that does business in California. Covered entities will be required to submit a climate-related financial risk report every two years.

Borrowing from the TCFD framework on climate-related financial risk, California's climate-related financial risk reporting will begin in 2026. Both private and public companies will be required to disclose:

  • Measures the organization adopts to reduce and adapt to climate-related financial risk.
  • How the organization will address reporting gaps and complete disclosures if it misses reporting requirements.

Notable SB 261 Measures:

  • SB 261 requires the covered entity to publish its biennial climate-related financial risk disclosure publicly on its own website.
  • Insurance companies regulated by the California Department of Insurance are exempt from this required financial risk report because they already have a similar requirement.
  • The California climate-related financial risk reporting will allow for some overlap of existing disclosures for companies that provide publicly accessible reports, including climate-related financial risk disclosure information.
  • SB 261 also calls for the state to contract with a third-party "climate reporting organization" to produce a public report every two years, reviewing the reported climate-related financial risks and analyzing those facing California.

Penalties for Noncompliance:

Failure to comply will result in administrative fines of up to $50,000 per reporting year. The state will consider the entity's compliance history and good faith efforts.

Who Do SB 253 and SB 261 Impact?

These bills could affect you if you're a public or private company operating or doing business in California. The state's criteria for "doing business" include any of the following:

  • Engaging in any financial transactions within California
  • Being organized or commercially based in the state
  • Crossing certain thresholds in California sales, property or payroll

Companies Meeting the Covered Entity Definition

  • SB 253: This is aimed at companies with an annual turnover exceeding $1 billion, estimated to be around 5,400 companies.
  • SB 261: Targets companies (excluding insurance companies) with an annual turnover over $500 million, expected to encompass roughly 10,000 companies.

Companies Doing Business With a Covered Entity

If you do business with a company that qualifies as a covered entity under SB 253 and SB 261, expect that you will have to report climate data, particularly if you're part of the supply chain for these companies.

Here's a breakdown of how you could be affected:

  • SB 253: The inclusion of Scope 3 emissions means that companies will likely request emissions data from their suppliers. This is significant given that Scope 3 emissions are typically 11.4 times that of Scope 1 & 2. For financial institutions, the implications are even more substantial, as Scope 3 includes financed emissions, which can be 700 times higher than Scopes 1 and 2.
  • SB 261: The bill specifies that companies must report climate-related risks in their supply chains. This mandate will require suppliers to share data related to climate risks and opportunities.

California's Climate Legislation in a Global Context

Climate disclosure regulations are increasingly aligning across the globe. The EU's CSRD is expected to have a broad impact, with 60,000 companies affected worldwide, and the SEC's forthcoming Climate Disclosure Rule will impact thousands of the largest publicly traded U.S. companies. These rules are designed to be compatible with each other, but how do the California bills fit in?

California and the SEC Climate Rule:

  • Points of Convergence: Both the SEC's proposed Climate Rule and California's SB 253 and SB 261 are aligned in several key areas, especially in the standards they are based on. Both require the disclosure of Scope 1, 2, and 3 emissions as per the Greenhouse Gas Protocol and climate risk reporting based on the TCFD. SB 253 and the SEC proposal also call for third-party assurance.
  • Points of Divergence: The SEC's rule is limited to publicly traded companies, while California's bills apply to large companies, whether public or private, operating or doing business in California. Another point of departure is the debate over including Scope 3 reporting in the SEC's proposal.

California and the CSRD:

  • Points of Convergence: Both the CSRD and California's bills have a broad reach, affecting private and public companies inside and outside their borders. They mandate the reporting of Scope 1, 2, and 3 emissions, climate risks and third-party verification.
  • Points of Divergence: The CSRD goes beyond by requiring the disclosure of additional sustainability metrics.

The takeaway? By meeting California's SB 253 and SB 261 requirements, companies will be well-positioned to comply with other major global regulations.

Is Your ESG Reporting Ready for CA Scrutiny?

California SB 253 and 261 will require a detailed review of a host of data. The ESG experts at Armanino — the only certified B corporation amongst the nation's top 20 accounting and business consulting firms — can assist with data audits, risk assurance and regulatory compliance as these new laws roll out. Contact our ESG consultants today for an ESG assessment.

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