California Governor Signs Climate Disclosure Bills with Significant Impact for Entities of All Forms Doing Business in the State
- The two new California laws apply to both public and private corporations, partnerships, limited liability companies, or other business entities meeting applicable revenue thresholds and doing business in California, without regard to the scope of their California-based operations.
- The Climate Corporate Data Accountability Act requires disclosure of scope 1, scope 2, and scope 3 greenhouse gas emissions by entities with revenue of at least US$1 billion. The required disclosure for scope 3 greenhouse gas emissions goes beyond the disclosures that would be required by the SEC’s March 2022 rule proposal.
- The Climate-Related Financial Risk Act requires disclosure of an entity’s climate-related financial risk and the measures adopted to reduce and adapt to the risk so disclosed by entities with revenue of at least US$500 million.
On October 7, 2023, California Governor Gavin Newsom signed two climate disclosure bills into law. The Climate Corporate Data Accountability Act (SB 253) (the “Data Accountability Act”) and the Climate-Related Financial Risk Act (SB 261) (the “Financial Risk Act”) require significant climate-related disclosures—in some cases beyond the disclosures that would be mandated by the climate-disclosure rule proposal issued by the Securities and Exchange Commission (“SEC”) in March 20221—by large entities doing business in California, regardless of their jurisdiction of incorporation, location of headquarters, status as a public or private corporation, or how much of their revenue is generated in California. It is unclear if affiliated entities would be treated on a consolidated basis for purposes of this legislation.
Climate Corporate Data Accountability Act (SB 253)
The Data Accountability Act applies to U.S.-organized entities that “do business” in California and have total annual revenues in excess of US$1 billion. The statute applies to qualifying reporting entities regardless of the form of entity or jurisdiction of formation, but the statute provides no definition or minimum activity for “doing business” in California.
The Data Accountability Act requires the California Air Resources Board (“CARB”), on or before January 1, 2025, to develop and adopt regulations requiring reporting entities to publicly disclose their scope 1, scope 2 and scope 3 greenhouse gas emissions to the eventual “emissions reporting organization.”2 The definitions of scope 1, scope 2 and scope 3 greenhouse gas emissions are consistent with the definitions used by the Greenhouse Gas Protocol:3
- Scope 1 emissions are all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.
- Scope 2 emissions are indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.
- Scope 3 emissions are indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.
The implementing regulations adopted by CARB are to be structured to minimize duplicative efforts and allow reporting entities to submit organization reports prepared to meet other national and international reporting requirements, including reports required by the federal government, as long as those reports satisfy the requirements of the Data Accountability Act.
Annual reporting commences in 2026,4 on or by a date to be determined by CARB, for all of the scope 1 and scope 2 emissions for the reporting entity’s prior fiscal year. As for scope 3 emissions, annual reporting commences in 2027, and the reporting entity will be required to publicly disclose its scope 3 emissions no later than 180 days after its scope 1 and scope 2 emissions are publicly disclosed to the emissions reporting organization for the prior fiscal year. A reporting entity will be required to obtain an assurance engagement, performed by an independent third-party assurance provider, on all of the reporting entity’s scope 1, scope 2, and scope 3 emissions.5
The Data Accountability Act requires a reporting entity, upon filing its disclosure, to pay CARB an annual fee set by CARB.6 The Data Accountability Act also authorizes CARB to seek administrative penalties, which “shall not exceed US$500,000 in a reporting year,” for violations of the Data Accountability Act. Nonetheless, a reporting entity will not be subject to an administrative penalty for any misstatements with regard to scope 3 emissions disclosures made with a reasonable basis and disclosed in good faith. Moreover, until 2030, scope 3 reporting penalties will be assessed only for nonfiling.
The Climate-Related Financial Risk Act (SB 261)
The Financial Risk Act applies to U.S.-organized entities that do business in California and have total annual revenues that exceed US$500 million (meaning that entities can be subject to the disclosure requirements of the Financial Risk Act without being subject to the Data Accountability Act). As with the Data Accountability Act, the Financial Risk Act applies to qualifying entities regardless of the form of entity or jurisdiction of formation, but the statute provides no definition or minimum activity for “doing business” in California. The Financial Risk Act does not apply to business entities subject to regulation by the California Department of Insurance or that are in the business of insurance in any other state.
Under the Financial Risk Act, commencing on or before January 1, 2026, covered entities will be required to biennially prepare a climate-related financial risk report disclosing the entity’s climate-related financial risk and measures adopted to reduce and adapt to climate-related financial risk. Each covered entity will also be required to make a copy of the report available to the public on its own internet website. Notably, the reports may be consolidated at the parent-level. If a subsidiary qualifies as a covered entity under the Financial Risk Act, the subsidiary is not required to prepare a separate climate-related financial risk report.
The report is required to disclose the following:
- The entity’s “climate-related financial risk” in accordance with the recommended framework and disclosures in the Final Report of Recommendations published by the Task Force on Climate-related Financial Disclosures (June 2017). “Climate-related financial risk” is defined as 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.
- The measures adopted to reduce and adapt to the disclosed climate-related financial risks.
If a covered entity cannot complete a climate-related financial risk report consistent with all required disclosures, it must provide the recommended disclosures to the best of its ability, provide a detailed explanation for any reporting gaps, and describe steps it will take to prepare complete disclosures.
The Financial Risk Act requires reporting entities to pay an annual fee for CARB’s actual and reasonable costs to administer and implement the Financial Risk Act.7 The Financial Risk Act also authorizes CARB to seek administrative penalties, which “shall not exceed US$50,000 in a reporting year,” for violations of the Financial Risk Act.
The California Laws Compared to the SEC’s Proposed Climate Disclosure Rules
With much of the attention of the business community focused on the SEC’s climate-disclosure rule proposal and whether or not it will be adopted (imminently) with or without significant changes from the initial proposal, businesses conducting any business in California must come to terms with the new California laws and how they compare to the SEC’s proposal. First, the SEC’s proposed rules, by definition, only apply to SEC registrants—i.e., public companies and companies offering securities in SEC-registered transactions—while the California laws apply to both public and private entities as long as they do some business in California and meet the applicable revenue thresholds. Second, under the SEC’s proposed rules, a registrant would be required to report scope 3 emissions only if these emissions are material or if the registrant has set reduction goals that include scope 3 emissions. While an assessment of materiality would be difficult for registrants to make without first acquiring the necessary information from third parties, a standard of materiality is still clearly contemplated by the SEC’s proposal. By contrast, the Data Accountability Act requires reporting entities to disclose all scope 3 emissions, with no materiality standard at all. Since the requirement to disclose scope 3 emissions, if material, was perhaps the aspect of the SEC’s proposal that drew the most scrutiny, it is notable that California is pushing further than the SEC was willing to go in its proposal.
In the event that the SEC adopts its climate-disclosure rule proposal, it can expect to face legal challenges arguing that the rule exceeds the SEC’s investor-protection mandate. The California laws can be expected to face legal challenges as well, particularly on the basis of federalism and state overreach into areas of federal concern and compelled speech. If these challenges are defeated, a significant, effectively nationwide disclosure regime will launch in January 2026.
For a detailed description of the SEC’s rule proposal, see our Dechert OnPoint, SEC Proposes Comprehensive Climate-Related Disclosure Rules.
The “emissions reporting organization” is the nonprofit emissions reporting organization contracted by CARB that both:
(i) Currently operates a greenhouse gas emission reporting organization for organizations operating in the United States.
(ii) Has experience with greenhouse gas emissions disclosure by entities operating in California.
CARB will contract with an emissions reporting organization to develop a reporting program to receive and make publicly available disclosures required by the Data Accountability Act.
A reporting entity, beginning in 2026 for scope 1 and scope 2 greenhouse gas emissions and in 2027 for scope 3 greenhouse gas emissions, will be required to measure and report its emissions of greenhouse gases in conformance with the Greenhouse Gas Protocol standards and guidance, including the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard developed by the World Resources Institute and the World Business Council for Sustainable Development, including guidance for scope 3 emissions calculations that detail acceptable use of both primary and secondary data sources, including the use of industry average data, proxy data, and other generic data in its scope 3 emissions calculations.
The assurance engagement for scope 1 and scope 2 emissions will be performed at a limited assurance level beginning in 2026 and at a reasonable assurance level beginning in 2030.
During 2026, CARB will review and evaluate trends in third-party assurance requirements for scope 3 emissions. On or before January 1, 2027, CARB may establish an assurance requirement for third-party assurance engagements of scope 3 emissions. The assurance engagement for scope 3 emissions will be performed at a limited assurance level beginning in 2030.
The statute creates the Climate Accountability and Emissions Disclosure Fund in the State Treasury, requires the proceeds of the fees to be deposited in the fund, and continuously appropriates the moneys in the fund to CARB for purposes of the law.
As with the Data Accountability Act, the Financial Risk Act authorizes the creation and administration of a Climate-Related Financial Risk Disclosure Fund in the State Treasury.