On October 7, 2023, California Governor Gavin Newsom signed into law two sweeping climate disclosure bills, Senate Bill 253 ("SB 253"), the Climate Corporate Data Accountability Act, and Senate Bill 261 ("SB 261"), the Climate-Related Risk Act. Taken together, SB 253 and SB 261 overlap the U.S. Securities and Exchange Commission's proposed climate disclosure rule (the "SEC Proposed Rule"), and expand upon it in several significant ways. The SEC Proposed Rule addresses both greenhouse gas ("GHG") emissions and climate risk, while the California measures separate the two, with SB 253 addressing GHG emissions, and SB 261 addressing climate risk.
Other important differences include the following:
- The California laws apply only to companies doing business in
California, although all it takes is selling one product in or into
California to qualify as "doing business" there and
California is the world's fifth largest economy by GDP.
(Notably, SB 253 includes the Legislature's finding that
"California "is on track to be the fourth largest economy
in the world [passing Germany], and is a highly desirable market
for the globe's most profitable companies.")
- Unlike the SEC Proposed Rule, which applies only to certain
public companies, the California laws apply to private as well as
public US companies. The only limitation is annual worldwide
revenue, regardless of how much revenue comes from business in
California: SB 261 applies to any company with total revenues
greater than $500,000, and SB 253 applies to any with total
revenues greater than $1 billion. It's estimated that the
former will apply to over 10,000 companies and the latter to over
- SB 253 requires disclosure of Scope 3 GHG emissions by all
covered entities, whereas the current draft of the SEC Proposed
Rule requires such disclosures only if "material" or if
the covered company has publicly set targets that include Scope 3
- The California laws are state laws, not a federal rule. The SEC Rule could be subject to challenge in federal courts under the Major Questions Doctrine recently developed by the US Supreme Court or the federal Administrative Procedure Act. Many have suggested that this may be part of the reason that the SEC is delaying issuing the rule. At a forum hosted by the U.S. Chamber of Commerce on October 26, 2023, SEC Chair Gary Gensler indicated that the SEC Proposed Rule is not likely to be released until 2024, and he cautioned the Chamber against challenging it in court. The California disclosure laws, on the other hand, are immune to such challenges. California state law has no analogue to the Major Questions Doctrine. The California laws may be subject to challenge in federal court under the Preemption Doctrine or the Commerce Clause, but the federal courts grant the states quite a bit of leeway with their own laws. For example, in its decision last May applying the Dormant Commerce Clause doctrine, National Pork Producers Council v. Ross, No. 21-468, the US Supreme Court upheld California's Proposition 21, which prohibits selling pork in California if the pigs were housed in systems that comply with certain specific standards for freedom of movement, even if the pigs were housed out-of-state. An analogous challenge to California's new climate disclosure laws could meet a similar fate.
What do the California climate disclosure laws require?
SB 253 — GHG Emissions
SB 253 requires affected corporations to publicly report their total annual GHG emissions, beginning with Scopes 1 and 2 in 2026, and phasing in Scope 3 emissions in 2027. This is hugely important, as EPA estimates that Scope 3 emissions often account for more than 90% of an organization's total GHG emissions. Scope 3 emissions also are notoriously difficult to quantify. One company's Scope 1 emissions are another's Scope 3, and methodologies for calculating Scope 3 emissions vary from one industrial sector to another. The problem becomes even more challenging when a company's value chain (upstream or downstream) extends outside the United States.
SB 253's definitions of Scopes 1, 2 and 3 GHG Emissions
(SB 253 expressly references and draws upon the Greenhouse Gas Protocol)
- Scope 1: "all direct [GHG] that stem from sources
that a reporting entity owns or directly controls, regardless of
location, including, but not limited to, fuel combustion
- Scope 2: "indirect greenhouse gas emissions from
consumed electricity, steam, heating, or cooling purchased or
acquired by a reporting entity, regardless of location."
- Scope 3: "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."
Critically, the law delegates to the California Air Resources Board ("CARB") responsibility for developing implementing regulations – not, as one might expect, to an agency such as the Department of Financial Protection and Innovation, which regulates the offer and sale of securities, franchises and off-exchange commodities in California. Since the adoption of Assembly Bill 32 ("AB 32") in 2006, CARB has become the lead agency for climate programs, including the Cap-and-Trade Program and the Low Carbon Fuel Standard. CARB certainly has the expertise to develop these regulations and likely will do so with an eye toward integrating the effort with its other climate programs. As with the model first established by AB 32, SB 253 sets out a series of milestones for CARB to meet – and which reporting entities (i.e., covered companies) will be obligated to meet:
|SB 253 Milestones & Requirements
|CARB to develop and adopt regulations requiring (a) the reporting of GHG emissions and (b) the assurance requirements for those disclosures (i.e., qualified independent third party verifiers).
|With the regulations in place, companies must collect Scopes 1 and 2 emissions data so as to be able to files reports in 2026.
Companies must submit disclosure reports re 2025 Scopes 1 and 2
emissions on a digital platform established by CARB, and will be
obligated to do so annually thereafter. Companies also must collect
Scope 3 emissions data in addition to Scopes 1 and 2 data for
reporting in 2027.
CARB to develop assurance requirements for Scope 3 reporting, and also to contract with an academic institution to prepare an evaluation of the program and to establish a digital platform for the reports (by July 1, 2027).
|Companies must submit disclosure reports re 2026 Scope 3 emissions as well as Scopes 1 and 2 emissions. The Scope 3 report must be prepared in accordance with the Greenhouse Gas Protocol standards and guidance, "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."
|CARB shall review and update the disclosure deadlines and the requirements for third-party assurance providers.
|Companies must submit Scopes 1 and 2 emissions reports that are independently verified at a reasonable assurance level, and must submit Scope 3 emissions reports independently verified at a limited assurance level.
Potential Schedule Slippage: SB 253 provides that CARB can extend the first reporting requirements for Scopes 1 and 2 such that they start at some point after 2026. However, it's not clear that if CARB does extend those deadlines, that it also would push-out the start date for Scope 3 emissions. The provisions re Scope 3 reporting does not contain parallel language allowing CARB to set a later start date, providing instead that Scope 3 reporting must begin in 2027 and no later than when Scopes 1 and 2 emissions are reported. A conflict thus could arise if CARB delays the start date for Scopes 1 and 2 emissions reporting.
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