The state, known for its progressive environmental policies, has recently enacted legislation mandating comprehensive climate disclosures. This landmark step marks a significant stride in the global effort to address climate change and underscores California’s commitment to sustainability and corporate responsibility.
In this blog post, we will delve into the groundbreaking strides taken by California as it leads the way in the global fight against climate change through its latest legislation, which mandates comprehensive climate disclosures. Exploring the intricacies of this bold move, we will uncover the potential impact on businesses, the implications for corporate strategies, and the broader significance of such regulatory measures in the pursuit of a sustainable future.
Understanding California’s Climate Disclosure Legislation – The Climate Accountability Package
In September 2023, the California state congress passed two significant bills: Senate Bill 253 (Climate Corporate Data Accountability Act) and Senate Bill 261 (Greenhouse gases: climate-related financial risk). Governor Gavin Newsom officially signed these bills into law on October 7, 2023, collectively naming them the Climate Accountability Package.
Broader Coverage Compared to SEC Rules
Distinguished from the proposed SEC rules, California’s laws exhibit broader coverage. They are applicable to both private and public companies meeting specific revenue thresholds, while SEC rules primarily target domestic and foreign public companies.
The Three Scopes of Greenhouse Gas Emissions
The core focus of both sets of regulations is the disclosure of three scopes of greenhouse gas (GHG) emissions, with unique requirements for Scope 3. California defines these scopes as follows:
Scope 1- Encompasses all direct greenhouse gas emissions originating from sources owned or directly controlled by a reporting entity.
Scope 2- Encompasses indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity.
Scope 3- Encompasses indirect upstream and downstream greenhouse gas emissions, excluding Scope 2 emissions, from sources not owned or directly controlled by the reporting entity.
Disclosure Requirements and Deadlines
Under SB 253, all private and public companies with an annual revenue exceeding $1 billion and conducting business in California are obligated to publicly disclose all three scopes of GHG emissions. The deadlines for Scopes 1 and 2 disclosures are set for 2026, while Scope 3 disclosures are mandated by 2027, with subsequent annual reporting.
Assurance and Compliance
To ensure transparency, reporting entities must engage an independent third-party assurance provider to review each public disclosure under SB 253. Assurance levels for Scopes 1 and 2 emissions will transition from limited assurance in 2026 to reasonable assurance starting in 2030.
Senate Bill 261: Climate-Related Financial Risk Reporting
Broader Scope and Lower Revenue Threshold
SB 261 applies a lower revenue threshold for climate-related financial risk reporting, mandating all private and public companies with an annual revenue exceeding $500 million and engaging in business in California to disclose their material climate-related risks and adopted measures to mitigate them.
Reporting Requirements and Penalties
By January 1, 2026, covered entities must submit their initial report to the California Air Resources Board, making a copy publicly accessible on their website. Subsequent disclosures are required biennially. Penalties under SB 253 and 261, including any administrative hearings, are determined by the California Air Resources Board.
In the dynamic realm of nascent regulatory regimes, additional state and national actions are anticipated in the coming years. Strategic corporate planning at the outset becomes crucial for seamless reporting, compliance, and risk management. By adopting solutions like IRIS CARBON®, companies not only position themselves as leaders in environmental responsibility but also gain a competitive edge in navigating the complexities of emerging regulations. Proactive compliance becomes a strategic advantage in fostering sustainability and accountability in the corporate landscape.
Conclusion- Global Impact and Future Trends
The impact of California’s legislation extends beyond its borders. As a trendsetter in environmental policies, California has historically influenced other states and even nations. The introduction of comprehensive climate disclosure requirements could inspire similar initiatives globally, creating a standardized approach to environmental reporting.
By compelling businesses to be transparent about their environmental impact, the state is setting a precedent that may well shape the future of corporate reporting. As businesses adapt to these new requirements, we can expect a paradigm shift towards greater sustainability and accountability, ultimately contributing to a more resilient and environmentally conscious global economy.