Yet again, California is ahead of the rest. This September, the state assembly passed a major climate bill—California’s Senate Bill 253 (SB 253)—that will alter how companies do business and make a significant impact on the climate crisis. It broadens the information investors and consumers can access concerning a company’s sustainability actions and considerations.
SB 253 could dramatically alter what businesses must consider within their sustainability reporting. Now that it has been passed into law, it is the first law in the U.S. mandating that companies report on their greenhouse gas emissions across scopes 1, 2, and 3. And another bill, SB 261, requires businesses to report on their climate risks.
California—the U.S. state with the largest economy—has a long history of setting policy that later gets adopted elsewhere. The Clean Air Act allows California to set tailpipe emission standards—historically adopted by more progressive states, like New York and Massachusetts, to reduce air pollution. Even if your business is not technically doing business in California, this type of emissions reporting may be heading your way as more states home in on their GHG emissions targets.
Both bills moved to Governor Gavin Newsom’s desk on September 11, 2023 and he affirmed that he would sign both climate bills—SB 253 and SB 261. He did just that, signing them into law in early October, 2023. The California Air Resources Board will now oversee the implementation of these laws, and they must establish regulations by January 1, 2025. Companies will then begin submitting disclosures in 2026.
Together, these two climate bills could reshape business considerations around climate change and sustainability in California and across the U.S.
What is the Climate Corporate Data Accountability Act (SB 253)?
California Senate Bill 253, also known as the Climate Corporate Data Accountability Act, passed the state assembly with a 29-40 vote in support. The bill states that current laws lack the transparency and consistency consumers and investors need to consider how the climate impacts business costs and require this information to make informed decisions. Presently, there is no mandatory scope emissions reporting policy in the U.S. (though the upcoming SEC climate disclosure rule could change that)—all scope reporting is done voluntarily. SB 253 will impact public and private companies with over $1 billion in revenues, compelling them to report on their scope emissions if they are “doing business” in California. More on what “doing business” means below.
Starting in 2026, companies will have to report on their direct and indirect emissions from energy consumption for the previous year (scope 1 and 2 emissions, respectively). In 2027, companies will have to report on their scope 3 emissions—their indirect supply chain-oriented emissions—for the previous year. Companies must conform to the Greenhouse Gas Protocol (GHG Protocol) standards and guidance to comply with SB 253.
RELATED: What are scope 1, 2, and 3 carbon emissions?
California will know that reporting companies are being truthful, thanks to third-party assurance requirements. In other words, reporting companies will be responsible for getting third-party assurance on their reports, or they will be considered incomplete. They’ll also need to submit reports on a forthcoming digital platform to make this information publicly available and searchable. The California Air Resources Board (CARB) will promote and create this web-based platform by January 1, 2025, and reporting companies will pay a yet-to-be-determined fee to report on the platform. However, there is some leeway on the emissions data—companies can share information they receive from suppliers directly in their reporting.
RELATED: “Limited assurance vs. reasonable assurance”
If companies misreport their scope emissions or misuse data, CARB can enforce fines of up to $500,000. Scope 3 emissions can be provided under a safe harbor (or excluded from penalties) due to the difficulty in measuring and assessing the entirety of scope 3 emissions. SB 253 clearly delineates incentives and penalties, unlike many other sustainability reporting frameworks.
Who will have to report under SB 253?
SB 253 casts a wider net than any current or planned U.S. policy by requiring private and publicly traded companies to report on their scope emissions. The list includes any large companies in the U.S.—private or public—that do business in California. That includes partnerships, LLCs, corporations, or other types of firms with annual revenues at or over $1 billion. It’s estimated that over 5,300 companies will have to report on their GHGs across scope 1, scope 2, and scope 3.
“Doing business” in California is a lower bar than one might expect. If a company meets any of the following criteria, it is considered to be a business operating in California and subject to associated laws:
- Engage in any transactions for financial gain in the state of California
- Organized or domiciled commercially in the state of California
- California sales, property taxes, or payroll taxes meet or exceed the following amounts for 2022 (these figures are updated annually):
– Sales: $690,144
– Property taxes: $69,015
– Payroll taxes: $69,015
For instance, a New York-based billion-dollar shoe company that sells sneakers in California would have to report under the California bill. It’s worth also noting that the policy is not industry-specific or siloed—any reporting entity meeting the revenue and “doing business” thresholds would be impacted.
Scope reporting under SB 253
SB 253 will require reporting companies to submit their scope 1 and scope 2 emissions as a priority. Scope 3 value chain reporting has some flexibility built in, but it is still a required part of the bill. While companies need to start reporting on scope 1 and 2 emissions for 2025 in 2026, companies have an extra year to start reporting on their scope 3 emissions for the previous year. Don’t expect companies to wait, though—companies like Amazon, Walmart, Apple, and others already require a portion of their suppliers to share their data around their carbon footprint.
Companies have some leeway on the data aspects of scope 3 reporting beyond the one-year delay. Misstatements on scope 3 emissions will not result in a reporting penalty until after 2030. Even beyond 2030, companies will not receive fines for disclosures given in good faith. Ultimately, CARB will have the authority and the discretion to adjust scope reporting implementation as reporting periods commence.
How will SB 253 impact investments?
Once scope 1–3 emissions information is available and searchable online, investors and stakeholders, along with consumers, will all have access to a trove of new information about the true climate costs of certain businesses. This could, in turn, impact investment deals, consumer choices, and emerging “green” investment funds and ETFs. Scope emissions will become an essential point of understanding for business strategies and measuring overall risk.
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What other policies require Scope 3 reporting?
Right now, there are no required scope 3 reporting requirements in the U.S. The proposed U.S. Securities and Exchange Commission rule would require scope 3 emissions disclosures only if the specific reporting company set an emissions reduction target or climate goal that included scope 3 emissions. The SEC’s proposed policy would also only cover publicly listed companies.
Additional bills coming out of California
In addition to SB 253, the California Assembly passed SB 261, also known as the Climate-related Financial Risk Act. This bill will broadly require companies with revenues over $500 million to report on their company’s climate risks—both the risks to businesses themselves and the climate risks they contribute to. It will require climate-related financial risk reports modeled after existing California climate disclosure policies surrounding pensions. On the whole, the state assembly estimated that both bills would impact roughly 7,000 companies.
Why scope reporting? Why now?
Clearly, California is not waiting for federal regulatory bodies to set scope emissions reporting standards. That’s a good thing. Historically, what happens in California matters for the nation. We’ve seen California set the standard time and again, whether it’s how California’s Consumer Protection Act changed how companies use and store our digital data or how California sets its own vehicle tailpipe emissions restrictions. And now, the California Climate Corporate Data Accountability Act could change how we consider and report on scope emissions across the U.S.
Anyone needing to or wanting to opt in for emissions reporting should do so now. As scope reporting (particularly scope 3 reporting) becomes more manageable and data becomes easier to access, policies like SB 253 will likely cast a wider net by lowering revenue indicators. Other state lawmakers with aspirations to decarbonize will likely follow suit. Now is the time to take notice and take climate action to ensure your business incorporates scope reporting into your overall strategies and annual sustainability reporting.
Sources
1. Politico, “Newsom signs first-in-the-nation corporate climate disclosure bills,” https://www.politico.com/news/2023/10/07/newsom-california-climate-disclosure-00120474 Accessed October 12, 2023
2. Politico, “Newsom says he’ll sign major corporate climate disclosure bill,” https://www.politico.com/news/2023/09/17/newsom-corporate-climate-disclosure-bill-00116439 Accessed September 26, 2023
2. Covington, “California Legislature Passes Landmark Climate Disclosure Laws: Spotlight on SB 253,” https://www.insideenergyandenvironment.com/2023/09/california-legislature-passes-landmark-climate-disclosure-laws-spotlight-on-sb-253/ Accessed September 26, 2023
3. Greenhouse Gas Protocol, “Standards,” https://ghgprotocol.org/standards Accessed September 26, 2023
4. California Air Resources Board, https://ww2.arb.ca.gov/ Accessed September 26, 2023
5. NBC News, “California bill would force large companies to disclose greenhouse gas emissions,” https://www.nbcnews.com/science/environment/california-bill-force-large-companies-disclose-greenhouse-gas-emission-rcna105119 Accessed September 26, 2023
6. State of California Franchise Tax Board, “Doing business in California,” https://www.ftb.ca.gov/file/business/doing-business-in-california.html Accessed September 26, 2023
7. Bloomberg Law, “California Emissions Reporting Bill Would Go Further Than SEC (Correct),” https://news.bloomberglaw.com/ip-law/california-emissions-reporting-bill-would-go-further-than-sec Accessed September 26, 2023
8. Morningstar, “California Poised To Enact Climate Disclosure Laws. What That Means for Investors.,” https://www.morningstar.com/sustainable-investing/california-poised-enact-climate-disclosure-laws-what-that-means-investors Accessed September 26, 2023
9. Senator Scott Wiener Representing Senate District 11, “California Senators Announce Climate Accountability Package to Raise The Bar For Corporate Climate Action,” https://sd11.senate.ca.gov/news/20230206-california-senators-announce-climate-accountability-package-raise-bar-corporate Accessed September 26, 2023
10. State of California Department of Justice “California Consumer Privacy Act (CCPA),” https://oag.ca.gov/privacy/ccpa Accessed September 26, 2023
