California Climate Disclosures: How CA SB 253 and 261 Will Affect Companies

California has long been at the vanguard of US environmental policy. As global trends for climate disclosure regulations pick up steam with the SEC Climate Disclosure proposal in the US and the European Union’s Corporate Sustainability Reporting Directive (CSRD), the state has accordingly moved quickly to not be left behind.

In September 2023, the California State Assembly took another leap toward maintaining its position as a global leader in sustainability by proposing SB 253 and SB 261, known together as the “California Climate Accountability Package.” This package signals to all companies that do business in California that they will have to be transparent about their carbon emissions, climate risks. and will be held accountable for greenwashing.

The bills now only need final signature from California Governor, Gavin Newsom before becoming final. Newsom dispelled any doubts of him vetoing the bill, assuring as much in an interview at New York Climate Week. He added that he would not cede California’s climate leadership but that he would “add some slight caveats to the bill,” which he did not give specifics on.

Of course, I will sign these [CA Climate Disclosure] bills.

CA Governor, Gavin Newsom

Read on for a comprehensive understanding of what these bills are, when they come into effect, and how they might affect your company. Plus, learn how these new California Climate Disclosures relate to other global climate disclosures and standards.

Update:

On October 7th, 2023, Newsom lived up to his promise and signed both bills, making them the US’s first climate disclosure regulations. For SB 253 Newsom wrote:

This important policy, once again, demonstrates California’s continued leadership with bold responses to the climate crisis, turning information transparency into climate action.

CA Governor, Gavin Newsom

He did, however, concede that the reporting protocol under SB 253 could result in inconsistent reporting for businesses affected by the bill, which could be a reference to how Scope 3 reporting affects different businesses in vastly different ways. For SB 261 he wrote:

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.

CA Governor, Gavin Newsom

For both bills Newsom did share his worry about the feasibility of the implementation deadlines, which he said his team would work with the bill creators on. And, his concern of the financial impact of the bills on business and would monitor that and make recommendations to streamline the bills if costs are too high.

Introduction to CA SB 253 and SB 261

Climate change is already causing unprecedented weather, including increased wildfires, sea-level rise, and extreme weather events across California. Both the SB 253 Climate Corporate Data Accountability Act and SB 261 Greenhouse Gases: Climate-related Financial Risk are designed to ensure that US companies operating in California assess and report their climate impacts for communities, citizens, investors, and other stakeholders in a transparent and consistent manner.

As the world’s fifth-largest economy and expected to become the fourth-largest economy later this year, California is a key market for many global companies. These bills ensure companies benefitting from the Californian market also share the responsibility for their contribution to the state’s emissions. With California’s standing in the world, these regulations will likely have far-reaching repercussions for companies not only in the US but globally.

Breaking Down the CA Climate Disclosures Bills

What You Need to Know About CA SB 253

  • Purpose of CA SB 253

California’s desire to continue its leadership in climate policy, coupled with the recognition of the severe impacts of climate change on its citizens, industries, and economic prosperity, are the two main drivers of the policy. The bill stresses the importance of companies with significant revenue sharing their carbon footprint. It will mandate comprehensive annual GHG emissions data reporting using globally recognized standards to promote informed decision-making and transition towards a net-zero carbon economy.

  • Main requirements of CA SB 253

CA SB 253 will require the state to contract an “emissions reporting organization” on or before January 1, 2025, to build a digital reporting platform to receive and make publicly available the annual disclosures, funded by an annual fee paid by reporting entities.

CA SB 253 expects affected companies to publicly report their Scope 1 & 2 emissions starting in 2026 (Scope 1: Direct emissions from owned sources, Scope 2: Indirect emissions from purchased energy) for 2025 data. Then, in 2027, additional reporting of Scope 3 (Indirect emissions from the entire value chain) comes into effect based on 2026 data. Reporting should align with the guidance in the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard.

Scope 1 & 2 emissions would have to be independently third-party verified by limited assurance beginning in 2026 and reasonable assurance by 2030. Scope 3 would need third-party limited assurance beginning in 2030.

  • CA SB 253 Timeline

Companies will be required to report on their previous year’s Scope 1 & 2 emissions starting in 2026 and acquire limited assurance. They will be required to report on Scope 3 from 2027 onwards. Reasonable assurance for Scope 1 & 2 is required starting in 2030, along with a limited assurance requirement for Scope 3.

  • Potential penalties for non-compliance with CA SB 253

The state will seek administrative penalties for non-filing, late filing, or other failure to meet the requirements of the bill. The fine imposed on a reporting entity shall not exceed $500,000 in a reporting year. The state will consider the reporting entity’s past and present compliance and whether they took good faith measures to comply when making their judgment. A late amendment to the bill implemented some safe harbors for penalties regarding Scope 3. Reporting entities will not be penalized for any misstatements of Scope 3 emissions disclosure if they were made with a reasonable basis and in good faith, and penalties for Scope 3 between 2027 and 2030 will only be given for non-filing.

What You Need to Know About CA SB 261

  • Purpose of CA SB 261

California recognizes the profound economic and environmental impacts of climate change and the urgent need for comprehensive risk disclosures from major organizations. While numerous global initiatives and policies have begun advocating for transparent climate-risk reporting, current standards remain predominantly voluntary. This bill aims to set a precedent by introducing mandatory and comprehensive climate risk disclosure for both public and private entities in California, ensuring a sustainable and resilient future for the state.

  • Main requirements of CA SB 261

By 2026 and every second year thereafter, reporting entities will be required to disclose their climate-related risks and mitigation and adaptation measures on their websites.  Reporting would be in line with the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures, which requires reporting of climate-related financial disclosures across four reporting pillars: governance, metrics and targets, strategy, and risk management.

If reporters have not made disclosures in line with all of the bill’s requirements, they have to provide as many disclosures as they can, provide a detailed explanation for any reporting gaps, and describe steps they will take to prepare complete disclosures in the future. Reporting entities can satisfy the rule if they already report using the TCFD or ISSB.

CA SB 261 will also require the state board to contract a “climate reporting organization” to biennially prepare a public report that reviews reported climate-related financial risk from reporting companies and an analysis of climate-related financial risks facing California.

  • Timeline of CA SB 261

The bill was originally intended for companies to start reporting in 2024 but was amended to start at the same time as SB 253 by January 1, 2026, and biennially thereafter.

  • Potential penalties for non-compliance with of CA SB 261

The state will seek administrative penalties from any covered entity that fails to publish or publishes an inadequate or insufficient report on its website. The fine for non-compliance will not exceed $50,000 in a reporting year. The state will consider the reporting entity’s past and present compliance and whether they took good faith measures to comply when making their judgment.

Which Companies Will Be Affected by CA SB 253 & 261

SB 253 and SB 261 will affect both public and private US companies “doing business” in California. The state of California defines doing business as any of the following:

  • Engaging in any transaction for the purpose of financial gain within California
  • Organized or commercially domiciled in California
  • If California sales, property, or payroll exceed the following amounts or 25% of the total:
YearCA SalesCA Real & Tangible Personal PropertyCA Payroll Compensation Exceeds
2022$690,144$69,015$69,015

CA SB 253 and SB263 requirements will also affect the US public and private companies doing business in California based on their revenue for the previous fiscal year:

  • SB 253: Any company doing business in California with a turnover of $1 billion or more, expected to be around 5,400 companies.
  • SB 261: Any company (apart from insurance companies) doing business in California with a turnover of $500 million or more, expected to be around 10,000 companies.

Who Else Needs to Pay Attention to CA SB 253 & 261

Many companies will be directly affected by these two bills; 5,400 by both bills and an additional 5,000 by SB 261 based on initial estimates. However, key parts of the bills mean that they will impact many more companies indirectly by virtue of making up the value chains of those companies that are directly affected.

The inclusion of Scope 3 GHG Emissions in SB 253 will mean that reporting entities may request supply chain emissions data related to them. For most companies, Scope 3 emissions are the vast majority of their emissions, accounting for 11.4 times companies Scope 1 & 2. For financial institutions, it would constitute a huge overhaul because Scope 3 incorporates financed emissions, which are 700 times that of Scope 1 & 2 for most financial institutions, and would require them to collect data from thousands of companies they have invested in or loaned to.  

In SB 261, the key language in the bill is companies will have to report climate-related risks in their supply chain. This will implicate the companies in the supply chains of companies directly affected to share climate data related to assessing climate risks and opportunities.

Overall, these bills will reach far more companies than just those identified as reporting entities. Companies of all sizes and geographies should be prepared to report some climate information to the companies they supply to.

Global Context of CA SB 253 & 261

Comparison to International ESG & Sustainable Regulations and Standards

The global climate disclosure landscape has seen substantial convergence in recent years. The EU’s CSRD is expected to affect more than 60,000 companies in and out of the EU, and the yet-to-be-finalized SEC Climate Disclosure Rule, is expected to affect the largest US publicly traded companies. These regulations have all been underpinned by the work of the International Sustainability Standards Board (ISSB), which has created the gold standards for sustainability reporting and ensured all global regulations and standards are interoperable with each other.

Here’s a breakdown of how the new California bills compared to other key regulations and standards:

SB 253 & SB 261 vs. SEC

  • Alignment: Although the SEC Climate Rule is yet to be finalized. The SB 253 and 261 align with the SEC’s Climate Rule Proposals as they currently are in multiple ways, mainly by the standards they are based upon. Both the SEC proposal and the California bills include the disclosure of Scope 1, 2, & 3, using the Greenhouse Gas Protocol, and the reporting of climate-related risks as based on the TCFD. Both the SEC proposal and SB 253 will also require third-party assurance.
  • Differences: The main difference is the affected reporting entities, with the SEC proposal only affecting publicly traded companies, whereas the California bills will affect any large public or private companies doing business in the state. Another potential divergence is in the reporting of Scope 3, which has been a major point of contention in the SEC ruling.

SB 253 & SB 261 vs. ISSB

  • Alignment: SB 253 is aligned with the ISSB’s climate-related disclosure standard (S2) in that they both expect the reporting of Scope 1, 2, and 3. The reporting of SB 261 is also very much aligned with the ISSB, as they are both based on the reporting requirements of the TCFD. Companies are considered compliant with SB 261 if they use the ISSB guidance. Plus, SB 261 includes language that says companies must report to “any successor thereto” the TCFD, which will be the ISSB, as it takes over the responsibilities of the TCFD in 2024.
  • Differences: The primary differences between the California climate bills and the ISSB are that the ISSB Standards also require the disclosure of other sustainability-related financial risks (S1). The ISSB is also a voluntary standard and does not require third-party audit assurance.

SB 253 & SB 261 vs. CSRD

  • Alignment: The CSRD is similar to the California bills in that they both affect public and private companies inside and outside their borders. They both require the reporting of Scope 1, 2, & 3, climate risks, and require third-party assurances.
  • Differences: The CSRD requires the disclosure of additional sustainability metrics over 100 other environmental, social, and governance indicators.

In summary, the California bills share interoperable requirements with other major reporting standards and regulations. By complying with the reporting requirements of SB 253 and 261, companies are also aligned to the requirements of the SEC, CSRD, and ISSB.

What CA SB 253 & 261 Mean for The Future

Some suggest companies opposed to the bills may sue the state, which may see the bill go to California voters for final approval. However, Governor Newsom’s support for the bill looks like it will pass in the interim.

In that case, companies will have to meet the new reporting requirements starting in 2026. Many companies already do this, but for others, this is a net new process that they will have to get up to speed on. The question is, will this embolden the SEC to include Scope 3 in their rule? And will all companies start reporting their climate data in this way? One thing is certain: the era of business-as-usual, without accountability for environmental impact, is drawing to a close.

Taking a proactive approach will help you stay compliant and avoid potential penalties and damage to your brand reputation. Studies have found that the cost of a damaged brand reputation is far more than that of fines for non-compliance.

To help you avoid non-compliance, Good.Lab can help you with an end-to-end solution. We will take the difficulties out of compliance and walk you through the entire process, ensuring you are measuring and reporting everything you need to meet the requirements. As an end-to-end offering, we can also help you build effective strategies across the whole spectrum of ESG.

Do you need a comprehensive review of your current and future compliance requirements? Reach out to our experts.

Disclaimer: Good.Lab does not provide tax, legal, or accounting advice through this website. Our goal is to provide timely, research-informed material prepared by subject-matter experts and is for informational purposes only. All external references are linked directly in the text to trusted third-party sources.

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Gary Gao, CEM, PMP, SEA
Senior Manager

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