California to Require Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk
California Governor Gavin Newsom signed into law a landmark legislative package that places unprecedented climate reporting requirements on public and private companies that do business in California. The two bills in the package, Senate Bill 253 and Senate Bill 261, will require thousands of companies to disclose greenhouse gas (GHG) emissions and climate-related financial risks, with reporting beginning in 2026. The new rules are broader than the SEC carbon reporting requirements introduced last year and its expansive reach will touch public and private businesses across the nation.
Senate Bill 253: Disclosure of GHG Emissions
SB 253 requires the California State Air Resources Board (CARB) to develop and adopt, by January 1, 2025, regulations requiring businesses with more than $1 billion in annual revenue and that do business in California to file annual reports disclosing their scope 1, 2 and 3 greenhouse gas emissions. This covers emissions related to both operations and their supply chain.
Starting in 2026, these companies will be required to report annually their direct emissions from operations (Scope 1) and indirect emissions from energy use (Scope 2) from the prior fiscal year. Starting in 2027, they must also report their indirect upstream and downstream supply-chain emissions (Scope 3) from the prior fiscal year. Scope 1 and Scope 2 emissions would be at a “limited assurance level” beginning in 2026 and at a “reasonable assurance level” beginning in 2030. Scope 3 emissions would be required at a “limited assurance level” beginning in 2030. Businesses will be required to measure and report their emissions using the Greenhouse Gas Protocol standards and guidance and to obtain third party assurance from an independent provider for these disclosures.
Emissions (GHG) disclosures would have to be independently verified and would be housed on a new publicly available digital registry administered by an organization contracted by the California State Air Resources Board (CARB).
Senate Bill 261: Reporting of Climate-Related Financial Risks
SB 261 would require businesses with total annual revenues of more than $500 million and that do business in California to report on their climate-related financial risks, beginning January 1, 2026 and biennially thereafter. The report, which must be posted on the company’s website, must disclose the company’s climate-related financial risk using the recommended framework of the Task Force on Climate-Related Financial Disclosures (TFCD) as well as measures the company has taken to reduce and adapt to the climate-related financial risk disclosed in the report.
Reports that contain a description of an entity’s GHG emissions or voluntary mitigation of those emissions must be verified by an independent third-party. A business that does not submit a complete report must provide information on the recommended disclosures to the best of its ability, give a detailed explanation for any reporting gaps, and describe steps it will take to prepare complete disclosures in the future.
Applicability
Both laws apply to corporations, partnerships, and limited liability companies. Insurance companies are exempted from SB 261. The laws apply to companies “doing business” in California, as expansive term defined by the California Franchise Tax Board that includes not only companies organized or domiciled in the state but also those that “engage in any transaction for the purpose of financial gain within California.” It is unclear how the annual revenue thresholds will be calculated.
Implementation Challenges
In signing statements addressed to the State Senate, Newsom acknowledged some of the issues that need to be addressed in each of the bills. For SB 253, he stated that the implementation deadlines are likely infeasible, and the specified reporting deadline could result in inconsistent reporting across businesses. For SB261, he stated that the implementation deadlines do not allow sufficient time for CARB to carry out the bill’s requirements. For both pieces of legislation, Governor Newsom expressed concern about the financial impact on businesses while instructing CARB to monitor cost impacts and make recommendations to streamline the programs. He instructed his administration to work with the California legislature to address these issues next year.
Next Steps
Public and private companies should assess their readiness to comply with the new regulations and assess the gaps between what they already disclose and what will be required. This includes having monitoring, accounting, and governance policies and practices in place to facilitate the reporting, as well as strong internal controls to mitigate reporting risks. Many companies, including private businesses, will be required to publish timely and accurate emissions information, including the inherently difficult Scope 3 emissions category. With this in mind, they should prioritize process improvement needs and investments.
For assistance with developing or refining your company’s sustainability program, including the new assurance requirements applicable to disclosures of Scope 1, Scope 2, and Scope 3 emissions, contact us. We are here to help.
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