California Legislature Approves Landmark Climate Disclosure Bills: What You Need to Know
California racing past SEC when it comes to ESG
Introduction
In a significant development in the fight against climate change, the California Legislature recently approved two ground-breaking climate disclosure bills during its legislative session that ended on September 14, 2023. If these bills are not vetoed by California Governor Gavin Newsom before October 14, 2023, they will become law, ushering in a new era of climate reporting for over 10,000 US companies, both public and private, including subsidiaries of non-US headquartered companies. These laws are poised to have a profound impact on climate disclosure in the United States, with reporting set to commence in 2026 based on 2025 information.
Key Provisions of the Climate Accountability Package
The California State Senate's Climate Accountability Package consists of two key bills: SB 253 and SB 261. These bills introduce stringent climate disclosure requirements that align with internationally recognized standards, specifically the Greenhouse Gas Protocol (GHG Protocol) for greenhouse gas (GHG) emissions reporting and the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations for climate-related financial risk reporting. The GHG Protocol and TCFD requirements are well-known and have been referenced in global sustainability reporting standards.
Who is Subject to the New Laws?
Both bills define the entities subject to these new reporting requirements based on revenue thresholds and the criterion of "doing business" in California. A "reporting entity" is an entity with annual revenues exceeding one billion dollars that conducts business in California, while a "covered entity" has annual revenues exceeding five hundred million dollars and is also doing business in California. Importantly, these definitions do not exempt US subsidiaries of non-US companies that meet the criteria.
The revenue thresholds are calculated based on the entity's total annual revenue, irrespective of where that revenue was generated, including revenue from outside the United States. The revenue calculation should follow US GAAP (or the applicable IFRS Accounting Standards) as reported in the annual financial statements.
Determining whether a company is "doing business" in California involves assessing various factors, including transactions for financial gain within the state, commercial domicile, and specific sales, property, and payroll metrics.
Consolidated Reporting and Exemptions
Subsidiaries that meet the reporting criteria are not required to prepare separate reports if their parent company prepares a consolidated report for GHG emissions. However, this exemption is not explicitly provided for in the case of climate-related financial risk reporting.
Insurance companies regulated by the Department of Insurance are fully exempt from the requirements of SB 261 because they are already mandated to report under the TCFD framework. However, they are not exempt from emissions disclosure requirements in SB 253.
Disclosure Requirements
SB 253 focuses on GHG emissions reporting and requires the disclosure of scope 1, scope 2, and scope 3 emissions, following the GHG Protocol. Scope 3 emissions reporting is deferred by one year in the final bill. Initial reporting begins in 2026, and the specific publication logistics and due dates will be determined by the California Air Resources Board (CARB).
SB 253 also mandates independent third-party assurance of GHG emissions reporting, starting with a review and progressing to an audit in subsequent periods, with qualifications mirroring those proposed by the SEC.
SB 261 mandates comprehensive climate-related financial risk reporting in alignment with TCFD recommendations, including governance, strategy, risk management, and metrics and targets. Companies must publicly release their reports by January 1, 2026, and biennially thereafter.
Interoperability is encouraged, allowing companies to leverage disclosures prepared under other national and international reporting requirements that meet the bills' criteria. SB 261 explicitly mentions compliance with the IFRS Sustainability Disclosure Standards as a valid approach.
Monitoring and Penalties
CARB is tasked with identifying third parties to monitor company disclosures, engage with academic institutions for evaluations, and contract with nonprofit climate reporting organizations to review industry-specific TCFD disclosures. Penalties for non-compliance are specified in both bills but differ in amounts and considerations.
Conclusion
The approval of these landmark climate disclosure bills in California represents a significant step forward in the global effort to combat climate change. While some companies may already be subject to sustainability reporting requirements, these California bills could trigger the first reporting obligations for many.
As we await Governor Newsom's decision, these bills signal a growing momentum toward more comprehensive climate disclosure and accountability in the corporate world, with potential implications for companies operating not only in California but also beyond its borders.