Earlier this month, California Gov. Gavin Newsom enacted into law two bills, both of which will — for the first time in any U.S. state — require large companies doing business within the state to release a wide array of climate emissions information. Specifically, on October 7, Newsom signed into law Senate Bills (SB) 253 and SB 261, which affect both private and public businesses and their accountability towards what carbon footprint they are making in the state and their climate-related financial risks.
These new laws come on the heels of the U.S. Securities and Exchange Commission (SEC) finishing up its new rules requiring all public companies to include climate-related disclosures as part of their annual reports and registration documents. The new laws enacted by California actually require even more disclosures from companies that hope to make money in California.
So, what do these new laws require?
California Sen. Scott Weiner introduced SB 253, which requires the affected companies to report annually their carbon emissions at certain levels. Those affected companies, as defined by SB 253 as “reporting entities,” include (a) partnerships, corporations, limited liability companies, or other business entities formed under the laws of California or any other U.S. State or District of Columbia, or under an act of the U.S. Congress, (b) with total annual revenues in excess of $1 billion (based on revenue for the prior fiscal year), and (c) that do business in California.
It is worth noting that the disclosure requirements under SB 253 don’t officially start until 2026, but it will thereafter require the reporting entities to annually disclose to an “emissions reporting organization” retained by the California Air Resources Board, their Scope 1, and Scope 2, Greenhouse Gas Emissions for the prior fiscal year. Scope 1 emissions covers those from sources that an organization owns or controls directly. Scope 2 emissions are those that a company causes indirectly and come from where the energy it purchases and uses is produced.
Then beginning in 2027, reporting entities must also start annually disclosing their Scope 3 emissions within 180 days after it discloses its Scope 1 and Scope 3 emissions. Scope 3 emissions covers those that are produced by the company itself and are not the result of activities from assets owned or controlled by them, but by those that it’s indirectly responsible for up and down its value chain, including purchases goods and services, business travel, employee commutes, and processing and use of sold products.
The California Air Resources Board is authorized pursuant to SB 253 to establish administrative penalties for any company that either fails to meet the new law’s requirements altogether or by filing their climate disclosures late. The penalties can be up to $500,000 in a reporting year. These penalties, however, will not punish a reporting entity for any misstatements on their Scope 3 emission disclosures that are made with a “reasonable basis and disclosed in good faith.” Instead, the penalties will only punish those reporting entities that fail to file any Scope 3 emission disclosures at all.
Finally, the disclosures filed under SB 253 require assurance on emissions from the first year of disclosure. Beginning in 2026, Scope 1- and Scope 2-emissions disclosures will require limited assurance, whereas Scope 3 disclosures will require limited assurance beginning not until 2030 subject to a review by the California Air Resources Board starting in 2027.
Introduced by California Sen. Henry Stern, SB 261 mandates that the affected entities create and disclose a climate-related financial risk report.
So, what companies does SB 261 affect? These disclosure requirements will apply to so-defined “covered entities” which include (a) partnerships, corporations, limited liability companies, or other business entities formed under the laws of California or any other U.S. state or District of Columbia, or under an act of the U.S. Congress, (b) with total annual revenues in excess of $500 million (again based on revenues for the prior fiscal year, including revenues generated outside of California), and (c) that do business in California.
Like, SB 253, the disclosure requirements under SB 261 begin in 2026 and must be re-filed every two years after that and be published on that company’s website. SB 261 makes it clear what must be included in each affected entities climate-related financial risk report, including (a) its climate-related financial risk, as outlined by the recommended framework and disclosures found in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures from June 2017 or pursuant to an equivalent reporting requirement and (b) what steps that company has taken to reduce and adapt to its disclosed climate-related financial risk.
SB 261 describes a company’s “climate-related financial risk” as “the material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.” SB 261’s reporting requirements are meant to ensure that large companies operating in California are aware of and can prepare for any economic risks they might face as a result of climate events such as “wildfires, sea level risk, extreme weather events, extreme droughts, and associated impacts to the global economy,” and that by being aware of these financial risks, they might take steps to reducing harm to Californians.
The disclosures outlined in SB 261 will come in the form of a twice-a-year public report prepared by a nonprofit climate organization contracted with the California Air Resources Board. Just which nonprofit climate organization will get that contract has not yet been chosen or has at least not yet been made public by the agency. The public report generated will review the disclosure contained in a subset of publicly available climate-related financial risk reports by industry, then analyze the systemic and sector-wide climate related financial risks facing the state based on the contents of the climate-related financial risk reports and highlight any inadequate or insufficient reports.
A company’s failure to publish this required climate-related financial risk report as outlined by SB 261 can result in administrative penalties of up to $50,000 per reporting year.
Both of these new laws are likely to face substantial legal challenges in the coming future, including, as critics have highlighted, potential questions about the constitutionality of one state regulating private- and public-business practices that occur outside of its state boundaries; potential federal preemption; and the potential implications of several states enacting similar, but different regulations on the same subject in the future. It remains to be seen whether these laws will be able hold up to these and other potential legal challenges.
In the immediate future, however, these two laws will next be implemented by the California Air Resources Board, which needs to pass regulations by January 1, 2025, before the affected companies are required to start filing their disclosures in 2026.