Recent years have seen a rise in litigation that centers on companies’ climate and sustainability marketing claims. At the same time, regulators are paying increased attention, with the U.S. Securities and Exchange Commission working to finalize proposed climate disclosure rules that will require companies to disclose certain climate-related information, ranging from greenhouse gas (“GHG”) emissions and expected climate risks to their corresponding transition plans. At the same time, the Federal Trade Commission is going back to the drawing board to revamp its Green Guides for the first time in over a decade to better equip companies with guidance to avoid greenwashing in their climate and broader sustainability-centric advertising.
All the while, lawmakers in California have passed – and on October 7, Governor Gavin Newsom signed into law – two pieces of legislation that are slated to drastically impact how companies track and disclose greenhouse gas emissions and climate risks: The Climate Corporate Data Accountability Act (SB 253) and Climate-Related Financial Risk Act (SB 261).
Climate Corporate Data Accountability Act
First introduced in 2021 and then re-introduced this year with other legislation (including the Climate-Related Financial Risk Act) in California’s Climate Accountability Package, SB 253 will require all public or private entities that: (1) have total annual revenue that exceeds $1 billion, and (2) conduct business in California (i.e., that “engag[e] in any transaction for the purpose of financial gain within California, being organized or commercially domiciled in California, or having California sales, property or payroll exceed specified amounts: as of 2020 being $610,395, $61,040, and $61,040, respectively,” per the Senate Floor Analyses) to report GHG emissions (Scopes 1-3) annually.
Scope 1 and Scope 2 reporting will be required starting in 2026, whereas reporting on Scope 3 emissions – those that result from the activities of entities not owned or controlled by the reporting organization, but that indirectly affects in its value chain – will be required beginning in 2027. Companies’ disclosures would need to be independently verified by a third-party auditor that has expertise in GHG emissions, and the disclosures would be housed on a publicly available digital registry administered by an organization contracted by the California State Air Resources Board. (It is worth noting that disclosures were originally scheduled to commence for all Scopes in 2026, but Scope 3 emissions disclosures have since been pushed back by a year.)
*SB 253 will authorize the California Attorney General to bring civil actions against subject companies and seek civil penalties for violations of the Act. A Scope 3 safe harbor was added to the bill to shield entities from penalties in the event that they make misstatements in their Scope 3 GHG emissions disclosures – as long as the statements were “made with a reasonable basis and disclosed in good faith.”
Climate-Related Financial Risk Act
SB 261 will require companies with $500 million or more in annual revenue to disclose their climate-related financial risk in accordance with Task Force on Climate-Related Financial Disclosure (“TCFD”) framework, and describe what measures they have adopted to reduce and adapt to that risk. (Note: The TCFD served as the basis for much of the SEC’s climate disclosure proposal.) In addition to submitting these climate-related financial reports risk reports to the California State Air Resources Board, covered entities will need to make the reports available on their websites.
An Applicability Snapshot: SB 253 will apply to over 5,300 companies and SB 261 would apply to over 10,000 companies, according to Bloomberg data.
Going Forward
In a signing message about SB 253 distributed to the California state Senate, Governor Newsom stated, “This important policy, once again, demonstrates California’s continued leadership with bold responses to the climate crisis, turning information transparency into climate action. However, the implementation deadlines in this bill are likely infeasible, and the reporting protocol specified could result in inconsistent reporting across businesses subject to the measure. I am directing my Administration to work with the bill’s author and the Legislature next year to address these issues.”
Addressing SB 261, Newsom similarly expressed timing-related concerns, stating: “This policy will illustrate the real risks of climate change for businesses operating in California and will encourage them to adopt practices that seek to minimize and avoid these risks. However, the implementation deadlines fall short in providing the California Air Resources Board (‘CARB’) with sufficient time to adequately carry out the requirements in this bill. I am directing my Administration to work with the bill’s author and the Legislature next year to address this issue.”
With regard to both pieces of legislation, Newsom said that he is “concerned about the overall financial impact of this bill on businesses, so I am instructing CARB to closely monitor the cost impacts” as it implements these new bills and “to make recommendations to streamline the program.”
The Bigger Picture
The California bills go beyond the proposed SEC rules in several ways, making the Climate Corporate Data Accountability Act, in particular, the strictest corporate emissions disclosure legislation in the country. For example, unlike the SEC’s proposed rules, which would apply only to public companies, the California legislation will apply to public and private entities, alike. More than that, as distinct from the SEC’s rules, which require Scope 3 reporting only where the emissions were material or were included in a GHG emissions reduction target or goal of the company, SB 253 lacks a materiality threshold and would also require all reporting entities to report Scope 3 emissions.
In a recent note, Jones Day attorneys encouraged companies to “take prompt steps to determine the applicability of the rules and to develop procedures for collecting necessary data and measuring their emissions in compliance with GHG Protocol standards.” They assert that “companies will likely need a coordinated, global strategy to ESG disclosures in light of similar proposed SEC disclosure requirements and European disclosure requirements.” And in addition, “Affected companies may want to evaluate potential legal challenges to these two California bills” – for instance, “requiring disclosures from private companies implicates the First Amendment’s protection against compelled speech” – in light of “the broad scope and significant impact on their operations.”
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