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

As the world anxiously awaits finalization of the SEC’s proposed climate disclosure rules, representatives in California—home to one of the world’s top 5 largest economies—have taken matters into their own hands. 

A significant majority of corporate leaders recently surveyed by PwC LLC shared that they are prepared for pending climate disclosure rules, with more than half saying they see climate change as a risk to their business.

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

On September 12, 2023, the Climate Corporate Data Accountability Act, made substantial progress in its journey toward becoming law by passing its final step through the state’s legislature. This event represents a crucial milestone in the establishment of mandatory emissions reporting regulations. The law requires large public and private US-based organizations that do business in California to disclose their greenhouse gas emissions in accordance with the GHG Protocol. It 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 the policy, impacted companies will need to report their full carbon inventories, including scope 3 emissions. This is pivotal, as scope 3 emissions often account for more than 90% of an organization’s climate impact and are notoriously difficult to measure. 

The bill stipulates that companies will have to submit emissions calculations to a digital reporting platform, and they must make disclosures easily comprehensible to residents, investors, and other stakeholders. They will also be required to hire independent auditors to verify their reported emissions. 

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. 

Enterprises will need to report on their 2025 direct emissions starting in 2026 and their 2026 indirect scope 3 emissions starting in 2027. That means that before the end of this year, organizations will need to have a plan in place for gathering auditable emissions data.

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.

Now that the Climate-Related Financial Risk Act has passed through the legislature , reporting requirements could be implemented swiftly. The initial round of climate risk disclosure reports will be due by December 31, 2024, given Governor Newsom signs it into law.

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?

In 2022, a bill similar to SB 253 came within one vote of passing on the Assembly floor. Since then, the coalition of businesses and advocates supporting the policy has grown significantly. In 2023, influential companies including Microsoft, Apple, Adobe, Patagonia, and IKEA endorsed SB 253. 

The intensity of disasters ravaging California has also changed the political landscape over the past year, 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 Climate Accountability Package will make California the first state in the US to require climate transparency at this level. It will 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 forced to carefully evaluate their vulnerability to climate risks and disclose that information to investors.

The impact of the Climate Accountability Package will likely extend beyond California's borders. 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 — that state’s 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 SB253 shares common ground with the SEC’s climate proposal, it departs from the federal rule on two critical fronts: the type of emissions reported, and the type of company required to report them. 

The SEC proposal requires all public companies to 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 new 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.

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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 respond by creating an action plan for climate disclosure now. If you’re a large company operating in California, you will need to begin gathering emissions data in 2025 in order to meet reporting requirements in 2026. 

Persefoni’s carbon accounting platform enables you to build auditable, investor-grade emissions calculations, so you can confidently report under California’s new law. Our software establishes a single source of carbon truth across an organization, allowing you to manage carbon transactions and inventory with the same rigor and confidence as financial transactions. 

By creating a transparent, repeatable data collection process, teams can meet California’s requirements while also preparing for future federal and global mandates. 

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

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Frequently Asked Questions (FAQs)

When will CA 253 be enacted?

California Governor Newsom has until October 14, 2023 to sign, veto, or let the bill pass into law without signing. At Climate Week NYC on September 17th, Governor Newsom confirmed that he would sign SB 253 into law.

Who would CA SB 253 apply to?

Public and private companies doing more than $1 billion in revenue and operating in California.

How does SB 253 compare to the proposed SEC Climate Rule?

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 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.

When will companies need to start reporting emissions under SB 253?

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.

How will the CA SB 253 impact smaller companies?

Companies under $1 billion in revenue will not be subject to California SB 253, but we expect the inclusion of scope 3 reporting for SB 253 subject companies will lead to increased pressure throughout value chains for scope 1 and 2 emissions disclosures, as these help larger companies create more accurate scope 3 emission footprints.We note that a number of studies estimate that a majority of large companies already perform climate reports with scopes 1-3, which has not resulted in a burden on small businesses. Nevertheless, we can expect even more free tools to emerge on the market to help smaller companies share their data.

What should my company do now to prepare for SB 253?

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.

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