Over the weekend, California Governor Gavin Newsom signed into law two major climate-related disclosure bills, Senate Bill 253: Climate Corporate Data Accountability Act (SB 253) and Senate Bill 261: Greenhouse Gases: Climate-Related Financial Risk (SB 261), which could have potentially broad application for companies meeting certain revenue thresholds that conduct business in California, whether or not such companies are incorporated or headquartered in California.
This legislation would require extensive climate-related disclosures, and, while sharing some similarities with aspects of the proposed climate disclosure rules issued by the U.S. Securities and Exchange Commission (SEC) in March 2022, could be farther reaching than such proposed climate disclosure rules in certain respects.
Applicability and Scope
By its terms, this legislation applies to companies (public or private) doing business in California that meet certain revenue thresholds anywhere, not just in California. Specifically, SB 253 applies to "reporting entities," and SB 261 applies to "covered entities," both of which are defined as entities incorporated in the United States with total annual revenues over $1,000,000,000 (reporting entities under SB 253) or $500,000,000 (covered entities under SB 261), and that do business in California. Neither bill defines what it means to do business in the state.
Senate floor analysis does provide that under existing law and as defined by the California Franchise Tax Board, an entity is considered to do business in California when it does any of the following:
- Engages in any transaction for financial gain within California.
- Is organized or commercially domiciled in California.
- Has California sales, property or payroll exceeding specified amounts, which were $690,144, $69,015 and $69,015, respectively, in 2022.
A brief overview of the substantive aspects of this legislation is set forth above.
Key Highlights of the Legislation
SB 253
SB 253 would require reporting entities with annual revenues over $1,000,000,000 (anywhere, not just California) that do business in California to publicly file a disclosure with the state board and pay an annual fee regarding their Scope 1 and Scope 2 greenhouse gas emissions beginning in 2026. Moreover, Scope 3 emissions would need to be publicly disclosed beginning in 2027. The legislation would also require entities to obtain assurance performed by certain independent third-party assurance providers. Specifically, Scope 1 and Scope 2 emissions will need to be performed at a limited assurance level starting in 2026 and then at a reasonable assurance level by 2030. Additionally, Scope 3 emissions will require a third-party assurance performed at a limited assurance level beginning in 2030. SB 253 also requires the California Air Resources Board to adopt regulations implementing the bill's disclosure obligations prior to January 1, 2025. However, Governor Newsom's signing message acknowledges that the bill's implementation deadlines "are likely infeasible" and expresses concern regarding the overall financial implications of the bill's reporting requirements on businesses.
SB 261
SB 261 would require covered entities, starting in 2026 and biannually after that, to prepare a climate-related financial risk report and make a copy of such report available on its website that discloses the following information:
- The entity's climate-related financial risk in accordance with a recommended framework.
- Its measures adopted to reduce and adapt to climate-related financial risk disclosed pursuant to clause (1).
A climate-related financial risk is defined as a "material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health." Like SB 253, Governor Newsom's signing message expresses concern that the implementation deadlines of SB 261 "fall short" and do not provide the California Air Resources Board with enough time to meet the bill's requirements. Further, like SB 253, he expresses concern about the bill's financial implications.
Final Thoughts and Next Steps for Companies
This California climate disclosure legislation is broader in certain respects than the SEC's proposed climate disclosure rules noted above. For example, this California legislation applies to private companies meeting certain revenue thresholds, not just public companies. Additionally, the Scope 3 disclosure obligations go beyond the Scope 3 requirements of the proposed SEC disclosure rules in certain respects, in that the Scope 3 obligations under such proposed SEC rules would only apply to certain public companies, whereas the Scope 3 obligations under the California legislation would apply to any companies doing business in California that meet the $1 billion revenue threshold. Moreover, it has been speculated that the final SEC climate disclosure rules, which are scheduled to be released later this year, will not (unlike the proposed SEC rules) include any Scope 3 requirements.
Given the jurisdictional reach of this California legislation (which could apply to a broad set of large U.S. companies that have fairly tangential connections to California), there is no doubt that both SB 253 and SB 261 will face judicial challenge, the outcome of which is difficult to predict. In the meantime, companies should assess whether they fall within the reporting requirements of either or both bills and (for companies that might fit within the scope of this legislation) should monitor the potential requirements under this legislation and the status of any judicial challenges.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.