In the world of climate accountability, the Golden State has once again taken the lead with groundbreaking legislation as Governor Newsom signs the landmark climate disclosure bills SB 253 and 261 into law. The passage of SB 253, better known as The Corporate Climate Data Accountability Act, marks a pivotal moment in California's commitment to environmental transparency and sustainable corporate practices.
To shed light on the nuances of this landmark bill and to address the queries echoing through our community, we recently hosted a webinar featuring the bill's author, Sen. Scott Wiener. You can find the on-demand recording here and key takeaways here. This interactive session provided invaluable insights and allowed us to delve into the intricacies of SB 253.
In this week's edition, we're thrilled to answer the most frequently asked questions so you're equipped and ready to navigate this transformative legislation with confidence.
Q: Who would CA SB 253 apply to?
A: SB 253 applies to US-based partnerships, corporations, limited liability companies, and other entities doing business in California and with annual gross revenues of $1B USD or more.
Q: Is that $1B threshold for USA revenue alone or globally?
A: The bill defines a “reporting entity” as a US-based entity with $1B in total annual revenue, not just revenue within the US. Please see SEC 2 Section 38532 of the bill text. Further details as to the interpretation of “reporting entity” and other definitions in the bill are expected to be fleshed out in the implementing regulations to be adopted by the California Air Resources Board (CARB).
Q: So if a parent company is located outside California but has operations in California, the full parent will be subject to reporting?
A: As the legislative text is currently written, yes, that would be the case, assuming the thresholds set forth in the bill are satisfied.
Q: Will franchisors with corporate revenue under $1B, but revenue across the franchisee network over $1B be required to report?
A: As the legislative text is currently written, this is not yet clear. We expect the CARB implementing regulations to provide further guidance on such issues.
Q: Who would CA SB 261 apply to?
The second component of the legislative package, known as the Climate-Related Financial Risk Act, proposes that large corporations must compile and present an annual report on climate-related financial risks. This report would be made available to the public, outlining the specific climate-related financial challenges faced by these corporations and detailing the steps they are taking to address and minimize these risks.
This proposed legislation would be applicable to any corporation or business entity operating under the jurisdiction of California laws, the laws of any other U.S. state, the District of Columbia, or established under a federal law enacted by the U.S. Congress. It would impact those entities with total annual revenues exceeding $500,000,000 that conduct business in California.
Q: Is there a more specific definition for "doing business in California"? What constitutes "doing business"? Will there be a sales or dollar threshold?
A: As the legislative text is currently written, this is not yet clear. The State of California Franchise Tax Board defines “doing business in California” as meeting any of the following criteria:
- Engage in any transaction for the purpose of financial gain within California
- Are organized or commercially domiciled in California
- Your California sales, property, or payroll exceed the following amounts:
- $690,144 in CA sales exceed (either the threshold amount or 25% of total sales) for 2022
- $69,015 in CA real and tangible personal property exceed (either the threshold amount or 25% of total property)
- $69,015 in CA payroll compensation exceeds (either the threshold amount or 25% of total payroll)
To be clear, SB 253 does not clearly state that this law will use this definition or if it will use revenue from financial reporting, tax revenue, or some other definition. As with other details, the CARB implementing regulations will provide further detail. It seems likely, however, based on the existing standards as set forth above, that the bar for “doing business in California” could be quite low.
This is not uncommon. When the General Data Protection Regulation in Europe was developed, the threshold for which companies would have to be in compliance was developed after the regulation was approved.
Q: How exactly will companies file with CARB? Could a CDP disclosure be sufficient?
A: This is not yet clear, as the legislative text has not defined the process for filing with the Board.
Here is what we know from the text:
- CARB will contract with an emissions reporting organization to develop a reporting program to receive and make disclosures publicly available.
- CARB will ensure that “emissions reporting is structured in a way that minimizes duplication of effort and allows a reporting entity to submit to the emissions reporting organization reports prepared to meet other national and international reporting requirements, including any reports required by the federal government.”
Q: In addition to the revenue threshold, are there any plans to focus on mandating reporting for high-emitting industries?
A: SB 253 does not address industries specifically.
Q: Does the act require companies to report emissions from sales in California or emissions worldwide?
A: As the legislative text is currently written, it appears that companies will be required to report emissions for their entire organization, even those generated outside California. Again, further detail will emerge in the implementing regulations.
Q: In line with SB 253, if a company is under the $1B threshold but over $500M in revenue, what could those timelines look like?
A: If the company is below the $1 billion threshold, SB 253 will not apply. However, SB 261 would require climate-related financial risk reporting on or before January 1, 2026, and biannually thereafter.
Q: How many corporations will be subject to SB 253?
A: Estimates reported at this time show approximately 5,400 companies will be subject to the law.
Q: Do you see Transition Plan disclosures as helpful in the implementation of SB 253?
A: Transition plans are not required in SB 253 disclosures. However, transition plans are a helpful tool in climate disclosure generally because they outline a company’s strategy for managing the risks and opportunities associated with climate change. It also helps communicate to stakeholders, including investors and the public, how the company intends to meet its goals (if they have any) and transition to a more sustainable and low-carbon economy.
Q: How does SB 253 compare to the proposed SEC Climate Rule?
A: There are two notable differences between SB 253 and the proposed SEC Climate Rule. The first is who is subject to each rule. SB 253 targets public and private companies doing more than $1 billion in revenue and operating in California. The SEC Climate Rule targets public companies reporting to the SEC, including U.S. public companies and Foreign Private Issuers. The second difference relates to scope 3 reporting. SB 253 requires all scope 3 emissions to be reported, while the SEC Climate Rule requires scope 3 emission disclosure only if the company has set scope 3 reduction targets or the scope 3 emissions are material.
Q: When will companies need to start reporting emissions under SB 253?
A: As the bill text states, by 2026, companies will need to adhere to GHGP standards for measuring and reporting scope 1 and 2 emissions on the prior fiscal year, as well as obtain limited third-party assurance for scope 1 and 2 emissions. By 2027, companies will need to adhere to the GHGP standards for measuring and reporting scope 3 emissions on the prior fiscal year. By 2030, companies will need to obtain reasonable, third-party assurance for their scope 1 and 2 emissions reporting, as well as limited third-party assurance for their scope 3 emissions reporting.
It is important to note that when the Governor signed SB 253 into law, he included a letter with his announcement that stated that his Administration would work with the bill's author and the Legislature next year to address concerns regarding the feasibility of the implementation timelines.
Q: How can my company prepare for SB 253?
A: The bottom line — companies need to focus on controls and transparency. As we move from a voluntary reporting landscape to a regulated one, emissions data will be treated in a similar manner to financial data, including increased financial and legal internal review as well as third-party assurance. Companies will need to be confident in their reporting and be able to show their work.
Q: When should my company start getting ready for California climate disclosure?
A: Companies should start taking action now. While the level of readiness for disclosing on climate will depend on your organization’s unique structure, operation, value chain, and exposure to climate-related risks, beginning the development of your carbon accounting and disclosure capabilities at an early stage will enable you to proactively address the risks and opportunities associated with climate-related transitions. Additionally, engaging in the process of climate disclosure now can be beneficial for ironing out any challenges before it becomes a public requirement. This will also provide the time and opportunity for organizations to establish and document the necessary controls, ensuring confidence in their disclosures.
Climate & ESG News Roundup
EU announces Green Bond standards
In 2021, green bonds issued in Europe consisted of more than half of the global total. In recent years, the EU has taken various steps to support sustainability efforts, and a new regulation — in line with the EU’s taxonomy framework that define economic activity as sustainable — furthers the EU’s support of companies’ transitions to climate neutrality.
In October 2023, the first voluntary standard to define a “European Green Bond” was approved by lawmakers in the European Union. All companies that use this designation will have to adhere to the requirements in “template formats,” and share information about how the bond’s proceeds will be used to improve sustainability within the company. Users of a European Green Bond must certify that 85% of the money raised from the bond will be used for sustainable practices that align with the EU’s taxonomy framework. These bonds will then be subject to external reviewers in order to improve transparency.
This standardization will be beneficial to both investors and companies. Investors will be able to more confidently and precisely invest in sustainable and environmentally conscious companies and businesses, limiting the amount of greenwashing incidents. Companies will be able to clearly define their intentions and more easily stand out to investors looking for companies with green aspirations. This standard, celebrated as the first of its kind, is expected to help companies and investors participate in a widespread transition to more sustainable practices.
75% of companies feel unprepared for more comprehensive ESG disclosures
With stricter and more comprehensive ESG data regulations introduced by the European Union and the U.S., companies across the globe are anticipating the external auditing of ESG related data. Though not as extensive or intense as financial auditing, companies are preparing to adhere to varying requirements. For example, the EU will require audited disclosures, but countries that adhere to the International Sustainability Standards Boards reporting requirements might also have external checking.
Some companies already have systems of disclosing and auditing their data in place, such as through certain private sector practices. According to a new KPMG report, over half of the companies surveyed have some experience with external auditing of their ESG data, but only a fraction of those companies are functioning at the level of accuracy and efficiency that the new regulations will require. For example, only 14 percent of the companies with external auditing experience for ESG data are obtaining reasonable assurance.
The KPMG also notes that larger companies, as well as those from Japan, France, and the U.S., are better prepared for the external auditing than smaller companies or companies in Brazil and China. Out of the 750 companies that KPMG surveyed, only 25 percent feel prepared for the new auditing processes. Because external fact-checking of disclosed ESG data is essential for minimizing greenwashing incidents, leaders at the KPMG state that in order to comply with upcoming regulations, controls, processes, and frameworks regarding disclosing climate data must be matured and made more robust.
New York City infrastructure suffers under historic rainfall
New York City, currently home to over 8 million people, was not built to survive heavy rainfall. Manhattan’s drainage system was built to only handle about two inches of rain per hour, a level which has often been quickly surpassed in recent years. In September, the city saw levels of downpour similar to 2021 levels, which were influenced by Hurricane Ida. Of the millions living in the city and its suburbs, tens of thousands of people live in the basement or on the ground floor. These residents and business owners are disproportionately overwhelmed by this intense rain and the city’s lack of appropriate infrastructure.
As the city continues to grow, it is important that its infrastructure continue to account for the imminent dangers of climate change and the ways that severe and unpredictable weather will disproportionately affect certain areas and demographics. A 2021 study predicts that upgrading sewage systems to be able to adequately handle major storms may cost up to $100 billion.
If you enjoyed today’s edition of Climate Decoded, please subscribe for more.