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California SB 253 and SB 261: What Businesses Need to Know

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April 21, 2023
April 21, 2023
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Article Overview

As organizations in the U.S. and around the world anxiously await the finalization of the SEC’s proposed climate disclosure rules, representatives in California, which hosts one of the world’s top 10 largest economies, have decided to take matters into their own hands. Two new bills in California could dramatically change the way thousands of companies track and disclose their greenhouse gas emissions and climate risks.

The Climate Corporate Data Accountability Act (SB253) and Climate-Related Financial Risk Act (SB261) would raise the bar on corporate climate action, with lasting repercussions for the economy and the environment.

What Happened: California’s Climate Accountability Package

In January 2023, a group of California lawmakers introduced The Climate Accountability Package, a suite of bills designed to enhance transparency, standardize disclosures, align public investments with climate goals, and raise the standards for businesses to drive climate action. The package includes a measure to divest state retirement funds from fossil fuels, along with SB 253 and SB 261, which we’ll focus on here.

While they’re similar to proposed federal regulations put forward by the SEC, the bills reach further on several fronts. And because of California’s outsized influence on the global economy, they promise to shape business practices well beyond the borders of the state.

SB 253: The Climate Corporate Data Accountability Act

The first bill, the Climate Corporate Data Accountability Act, would require all large US-based organizations that do business in California to publicly disclose their greenhouse gas emissions in accordance with the GHG Protocol. The bill applies to US-based partnerships, corporations, limited liability companies, and other entities with operations in California and annual gross revenue of more than $1B USD — an estimated 5,400 companies.

Under this proposed regulation, impacted businesses would need to report their full carbon inventories, including scope 3 emissions. Mandatory reporting on scope 3 would be pivotal — these emissions often account for more than 90% of a company's climate impact and are notoriously difficult to measure.

SB 253, if adopted, will establish a digital reporting platform, and companies will have to do more than just submit emissions calculations — they must make disclosures easily comprehensible to residents, investors, and other stakeholders.

The California Air Resources Board will oversee reporting and ensure verification of data by a registry or third-party auditor with expertise in carbon accounting. Companies that fail to comply with the new regulations could be subject to civil penalties from the state’s attorney general.

If the bill passes, businesses will have to disclose their 2025 GHG emissions data starting in 2026.

SB 261: The Climate-Related Financial Risk Act

The second bill in the package, the Climate-Related Financial Risk Act, would require large corporations to prepare and submit an annual climate-related financial risk report, publicly disclosing their climate-related financial risks and the measures they’re taking to mitigate these risks.

The bill would be applicable to any corporation or business entity established under California laws, the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the United States. Those impacted would have total annual revenues greater than $500,000,000 and do business in California.

In the climate-related financial risk report, businesses would need to disclose their (i) climate-related financial risk, based on the recommendations of the Task Force on Climate-Related Financial Disclosures, and (ii) the measures adopted to mitigate and adapt to the disclosed climate-related financial risk.

Submissions will then be reviewed by the Climate-Related Risk Disclosure Advisory Group, which will identify inadequate reports, as well as propose additional policy changes and best practices for disclosure.

SB 261 is modeled after existing climate disclosure rules used by the state’s teachers’ retirement fund (CALSTRS) and hundreds of major financial institutions. It aims to safeguard consumers and investors from losses resulting from climate-related disruptions to supply chains, workforces, and infrastructure, which are increasing due to the effects of climate change.

The bill also addresses the financial risks businesses could face if they are unprepared for the transition toward a low-carbon economy. For instance, automobile manufacturers who fail to prepare for the shift towards electric vehicles will likely experience a decline in market share, resulting in revenue losses.

Assuming the bill is passed, reporting requirements are expected to be implemented swiftly. The initial round of climate risk disclosure reports will be due by December 31, 2024.

Why It Matters

The two bills promise to shape climate disclosure practices — and emissions reporting — for more than 7,000 companies. Supporters of the package contend that enhanced accountability will contribute to reducing the carbon footprint of large corporations, which are the major emitters of greenhouse gasses. With the proposed legislation, consumers and regulators will be able to readily identify companies that are falling behind and encourage them to take climate action. Moreover, companies subject to significant climate-related financial risk will be revealed.

In contrast, climate-forward companies stand to benefit. If a business is already measuring and disclosing its GHG emissions, the proposed reporting framework will highlight those initiatives. Though the bills apply only to entities doing business in California, they reflect a global push for increased transparency in carbon accounting.

Many businesses are already beginning to prepare and adapt to emerging disclosures, such as the SEC Climate Proposal and the European Union’s Corporate Sustainability Reporting Directive. These regulatory developments reflect the demand from investors to obtain consistent, comparable, reliable information that can help them integrate climate-related financial information into their investment decisions.

An increasing number of organizations have made commitments to achieve net zero emissions. Enhanced transparency will enable investors to assess whether companies are genuinely making progress toward their climate commitments. A company's carbon footprint offers a comprehensive overview of its readiness to adapt to a low-carbon economy and its vulnerability to climate risks.

The new reporting requirements will also help businesses in identifying value-creation opportunities. Accurate carbon accounting allows companies to gain a deeper understanding of their emissions profile, as well as identify and analyze hotspots such as high-emitting suppliers. Business opportunities may arise from lowering the cost of capital by adhering to strong sustainability standards, and from consumers who are willing to pay a premium for sustainable brands or change their buying behavior to reduce their carbon footprint.

How did it happen?

The Climate Accountability Package, if successfully passed, is set to make California the first state in the US to require climate transparency. The package aims to curb greenwashing by providing communities and consumers with access to transparent and accurate data on how much companies are contributing to climate change. Businesses will be required to carefully evaluate their vulnerability to climate risks and disclose that information to investors.

The impact of the Climate Accountability Package is expected to extend beyond California's borders. This is because California is a major player in global markets and is rapidly moving up the ranks to become the world's fourth-largest economy, overtaking Germany. This is not the first time California has used its market power to champion the planet - its ambitious tailpipe regulations compelled automakers worldwide to comply.

It's not surprising that Sacramento is taking the lead on ambitious climate policy. In the last decade, California has been hit hard by wildfires, floods, and other climate-related disasters. Without prompt measures to reduce greenhouse gas emissions, climate change could devastate the state's finances, economy, and environment.

The Climate Accountability Package promises to set a new gold standard for corporate transparency, and could ignite similar efforts across the country.

A Comparison to the SEC’s Proposed Climate Disclosure Rules

While California’s policy package has a lot in common with the SEC’s proposed climate disclosure rules, it departs from the federal regulations on two critical fronts: the type of emissions being reported, and the type of company required to report them.

The SEC proposed rule would have all public companies disclose scope 1 (direct emissions from their owned operations) and scope 2 (indirect emissions from purchasing electricity, steam, heating, and cooling) emissions. Businesses would only report on scope 3 emissions if they have set scope 3 reduction targets or if scope 3 emissions are material. Moreover, smaller companies would not have to report their scope 3 emissions.

California goes further. Its policy calls for disclosure of all three types of emissions for any US company operating in the state with annual revenue over $1B USD. This is significant, as scope 3 emissions often make up the lion’s share of corporate carbon inventory.

The other notable difference between the regulations is the type of company involved. While the proposed SEC rule applies only to publicly traded companies, California’s policy targets both public and private companies. This could help drive decarbonization of the private market, and would enable investors to initiate climate action across multi-asset portfolios.

What Comes Next?

The Climate Accountability Package is being closely watched and the legislature is expected to act on it by the end of California’s 2023 legislative session in September.

In 2022, a bill similar to SB 253 came within one vote of passing on the Assembly floor. The bill’s sponsor, Senator Scott Wiener (D-San Francisco), says that, since then, the coalition of businesses and advocates supporting the bill has grown significantly, improving its odds.

The intensity of disasters ravaging California has also changed the political landscape, as voters grow increasingly impatient for climate action. Meanwhile, more and more companies have initiated voluntary disclosures, and the number of investors demanding that organizations set net zero commitments continues to rise.

The two bills will go to the Senate Judiciary Committee on April 18, before moving to the floor for a vote.

Prepare for GHG Emissions Reporting Under California's New Regulations

The world is rapidly shifting to a low-carbon economy, and California’s Climate Accountability Package will further speed that transition.

Businesses can prepare by creating an action plan for disclosure now. If you’re a large business operating in California, you should be ready to calculate emissions in line with the TCFD and the Greenhouse Gas Protocol, which will remain the global standards regardless of evolutions in state policy.

Persefoni’s carbon accounting platform helps companies meet regulatory requirements. Our software creates a single source of carbon truth across an organization, enabling you to manage carbon transactions and inventory with the same rigor and confidence as financial transactions.

Learn more about how Persefoni can help you get ready for reporting under California’s Climate Accountability Package.

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