A series of recently passed California laws will impact many companies throughout the U.S., requiring them to produce climate-related disclosures as soon as 2026.
On October 7, 2023, California Governor Newsom signed a series of state laws that require many U.S. companies to make broad-based climate-related disclosures starting as early as 2026. These laws will have a profound impact on companies doing business in California and the US market at large. The state’s new climate disclosure rules come as the Securities and Exchange Commission (SEC) is still preparing the final version of its own climate disclosure rule. The California bill’s disclosure requirements exceed the requirements of the SEC’s proposed climate-related disclosure rule as well as the current practices of most public companies.
Any company that “does business” in California and has revenues above the threshold (regardless of the geographic source of the revenues) is subject to the laws’ requirements, regardless of where its operations are located. More guidance will be forthcoming to provide qualifying thresholds.
Specifically, California passed three significant climate-related disclosures bills:
- B. 253, the Climate Corporate Data Accountability Act, which will require certain companies to disclose their direct (scope 1), indirect (scope 2), and value chain (scope 3) greenhouse gas (GHG) emissions
- B. 261, the Climate-Related Financial Risk Act, which will require certain companies to disclose climate-related financial risks pursuant to the Task Force on Climate Related Financial Disclosures (TCFD) recommendations
- AB 1305, the Voluntary Carbon Market Disclosures Act, imposes various disclosure requirements on companies that make net-zero, carbon neutrality, or similar claims, including through the use of voluntary carbon offsets. It also establishes disclosure requirements for companies that market or sell voluntary carbon offsets in the state.
An early estimate suggests that S.B. 253 and S.B. 261 will cover over 5,000 and 10,000 companies respectively, which includes many privately held companies unlikely to have assessed the scope of their GHG emissions or adopted the TCFD recommendations (this analysis was conducted by Ceres based on the D&B Hoovers database, which generally includes company data on a consolidated basis).
Key elements of the bills are set forth below:
S.B. 253: The Climate Corporate Data Accountability Act
S.B. 261: The Climate-Related Financial Risk Act
Requires disclosure of greenhouse gas (GHG) emissions in conformance with the Greenhouse Gas Protocol (GHGP) standards and guidance developed by the World Resources Institute and the World Business Council for Sustainable Development, which includes indirect GHG emissions from value chain (Scope 3)
Covered entities are required to prepare a climate-related financial risk report that discloses (1) their climate-related financial risks (including both physical and transition risks in corporate operations and the supply chain), and (2) measures they have taken to reduce and adapt to the climate-related financial risk disclosed in the report. Reports must be in accordance with the recommended framework of the Task Force on Climate-Related Financial Disclosures (TCFD)
Who has to disclose?
“Covered entity” defined as a corporation, partnership, limited liability company, or other business formed under the laws of the state, the laws of any other state of the U.S. or District of Columbia, or under an act of Congress of the US that does business in California
Annual revenues in excess of $500 million
Does business in California
Formed in the U.S.
What has to be disclosed?
Scopes 1, 2 and 3 GHG emissions for the prior fiscal year
Climate-related financial risks in accordance with TCFD & measures taken to mitigate/adapt to these risks
How are disclosures made?
Report to an “emissions reporting organization”
Prepare and publish a publicly available report on company’s internet website
Provide required disclosures to the best of the entity’s ability and explanations for gaps and steps to be taken to fully comply
When and how often?
2026 (scopes 1 & 2)
2027 (scope 3)
2026 and every two years thereafter
Scopes 1 & 2
Beginning in 2026: limited assurance (is the baseline level of assurance where an auditor does a review to state they are not aware of material modifications that should be made)
Beginning in 2030: reasonable assurance (is a higher level of assurance and more rigorous that requires evidence to demonstrate the reporting is free of significant misstatements)
Beginning in 2030: limited assurance
To the extent a report contains a description of an entity’s GHG emissions or voluntary mitigation of those emissions, such claims must be verified by an independent third-party verifier
California Air Resources Board (CARB) to issue regulations
Disclosure standards are self-implementing
Interoperability with other reporting standards
Compliance can be achieved via reports under national/international legal regimes that meet the bill’s disclosure standards
Compliance can be achieved via reports under regulatory or voluntary frameworks that meet the bill’s disclosure standards including the IFRS Sustainability Disclosure Standards
CARB authorized to seek penalties for nonfiling, late filing or other failure to meet requirements. Penalties not to exceed $500,000 per year
Scope 3 disclosures:
(1) no penalties for disclosure made with reasonable basis/good faith
(2) before 2030, penalties limited to failure to file
CARB authorized to seek penalties for failure to publish report or inadequate or insufficient reports. Penalties not to exceed $50,000 per year
To be determined by CARB
To be determined by CARB
The Voluntary Carbon Market Disclosures Act (AB 1305)
AB 1305, known as the Voluntary Carbon Market Disclosures Act, imposes disclosure requirements on companies that make net-zero, carbon neutrality, or similar claims, including using voluntary carbon offsets. It also establishes disclosure requirements for companies that market or sell voluntary carbon offsets in the state.
AB 1305: The Voluntary Carbon Market Disclosures Act
If a company markets or sells voluntary carbon offsets in California:
Must publicly provide information regarding the applicable carbon offset project, the accountability measures in place, and the data and calculation methods, including:
If a company makes claims regarding the achievement of net zero emissions, carbon neutral claims or claims regarding reduction of greenhouse gas emissions:
Must publicly provide all information documenting how such a claim was determined to be accurate or actually accomplished, and how interim progress toward that goal is being measured, including:
This requirement only applies to companies that operate within or make claims within California.
If a company makes the claims described above and purchases or uses voluntary carbon offsets:
In addition to the information described above, companies must publicly provide information regarding the applicable project and offsets, including:
This requirement only applies to companies that operate within or purchase or use voluntary carbon offsets sold within California.
When and how often?
AB 1305 is effective January 1, 2024. The disclosure required under AB 1305 must be updated at least annually.
Companies are subject to civil penalties of up to $2,500 per day for each day that information is not available or is inaccurate on a company’s website, for each violation, not to exceed $500,000.
California disclosure rules mirror EU regulations
The California Climate Accountability Act goes further than the SEC’s proposed climate rule, as it applies to both public and private companies that do business in the state and meet certain annual revenue thresholds. The SEC’s proposed climate rule targets only public companies that report to the SEC, including U.S. public companies and foreign private issuers.
“In this respect, the California rules more closely approximate the European Union’s Corporate Sustainability Reporting Directive (CSRD), which applies to non-E.U. entities that meet certain presence and size thresholds,” the law firm Cooley wrote in a note to clients.
One important difference, however, is that compared with the California bills, the European CSRD has a lower revenue threshold. The California bills are focused on companies that make more than $1 billion in annual revenue per calendar year.
Clarifications will be forthcoming
The California Air Resources Board (CARB) is expected to clarify in the coming year what businesses are considered covered entities that do business in California, especially to help determine the applicability of these laws to businesses and subsidiaries within complex corporate structures or those with limited connection to California. As California moves forward with the implementation of this legislation, businesses should stay informed about any updates or changes to these laws.
Next steps for businesses to advance disclosure preparations
To comply with California’s new laws, we suggest the following key steps:
- Get started now. The first reporting year under SB 253 is 2025 (with disclosures required in 2026), and the disclosures under SB 261 are required by January 1, 2026. Companies should consider ramping up now to complete a “dry run” reporting cycle in 2024 to prepare for the initial 2025 reporting year. Furthermore, the AB 1305 disclosure requirements go into effect January 1, 2024
- Envision forward-looking maturity. With many options across sectors and industries, better imagine an enhanced ESG and Sustainability maturity by building or leveraging existing maturity models
- Set goals for both compliance and value creation. With the extensive effort required to put together an emissions and climate risk disclosure report, companies should build in mechanisms to identify top-line, value-generating opportunities from required reporting
- Assign executive reporting oversight and leadership. Start by assigning internal responsibility for climate reporting, which will require cross-functional participation and oversight by executive management
- Build internal capability and expertise across all levels. Deliver training across levels and functions of organization, as many facets of the organization will be required to support successful reporting
- Establish quantifiable and rigorous approach. Ensure statements regarding climate benefits are quantifiable, accurate, and supported by widely accepted methodology
- Design climate data management strategy. Inventory and identify gaps in ESG, Sustainability and Climate data that will be required for disclosure reporting and create strategy to mitigate key data gaps
- Conduct baseline GHG emissions. Baseline existing carbon footprint (Scopes 1, 2, and 3)
- Review any existing claims of net-zero, carbon neutral. Given requirements under AB 1305, start process of identification and review of any existing program to offset emissions or claim emissions reduction, net-zero, etc. As a starting point, companies may look to the Core Carbon Principles (CCPs) developed by the Integrity Council for the Voluntary Carbon Market (ICVCM), an independent governance body for VCMs
- Telesto Strategy’s maturity model on ESG and Sustainability readiness
- Navigating The Storm: What Climate Risks And Opportunities Mean For Businesses
- A Corporate Accounting and Reporting Standard (Revised Edition) – Greenhouse Gas Protocol
- Corporate Value Chain (Scope 3) Accounting and Reporting Standard – Greenhouse Gas Protocol
- Science-Based Targets Initiative FAQ
- TCFD Knowledge Hub
- The Use of Scenario Analysis in Disclosures of Climate-related Risks and Opportunities