California’s new climate bill sets precedent for US carbon reporting
The Californian State Legislature has pushed ahead of the Securities and Exchange Commission by passing a bill that forces big companies to disclose their Scope 1, 2 and 3 emissions
The bill, SB253, requires companies with annual revenues over $1 billion to publicly disclose greenhouse gas emissions from their operations and electricity use by 2026.
By 2027, they will also have to disclose emissions generated in their supply chain and from consumers.
The new bill, put forward by Senator Weiner, closely resembled an earlier proposal, SB260, which was rejected by just one vote last year.
Since then, momentum has gathered among both supporters and opponents of the proposals. While the California Chamber of Commerce opposed the bill, arguing that it would drive consumer prices up, a growing number of companies have come out in support of the bill.
The list of firms backing SB253 includes Microsoft, IKEA USA, Sierra Nevada Brewing Co., Patagonia, Adobe, Avocado Green Brands, Dignity Health, Grove Collaborative, REI Co-Op, Everlane, Eileen Fisher, Recology, Atlassian, and Seventh Generation.
Firms are backing the new rules because they face growing pressured from investors to report on their Scope 1, 2 and 3 emissions, argues Danielle Fugere, president at shareholder campaign group As You Sow: “Clear and standardized reporting of greenhouse gas emissions is the bedrock of sound investor decision-making on climate risk.”
The bill could play a key role in streamlining US disclosure standards with those already in practice in the US and UK, Fugere believes: “The passage of SB 253 is yet another signal that full-Scope 1-3 emissions reporting is the new norm, not the exception.”
The new rules will apply to more than 5,300 companies and are designed to complement the IFRS’s International Sustainability Standards Board disclosure standards, the EU’s Corporate Sustainability Reporting Directive, and the federal disclosure rule soon to be finalized by the U.S. Securities and Exchange Commission.
In passing the new carbon reporting rules, California, the world’s fifth largest economy, overtakes the Securities and Exchange Commission which planned to introduce similar standards last year but had to postpone the introduction, among others due to controversy over Scope 3 reporting standards.
Institutional investors have been broadly supportive of the new bill, as most pension funds and insurers now face internal carbon reporting challenges and greater corporate transparency on carbon disclosure would benefit their efforts to measure the carbon footprint of their portfolios.
Divestment pressures on pension funds
But SB253 is not the only climate related bill being discussed by the Californian State Legislature.
SB261 would require companies doing business in California to prepare and submit climate-related financial risk reports consistent with TCFD recommendations. It could apply to all firms with a revenue of more than $500 million.
The draft bill has been revised last week, significantly softening potential penalties that firms could face, from an earlier $500,0000 to $50,000 per reporting year. If passed, firms would now have to report bi-annually rather than annually. The new rules could enter into force in 2026.
Another climate-related bill, SB 252 is specifically aimed at California’s two main retirement systems, CalPERS and CalSTERS. The Californian Fossil Divestment Act would not only prohibit the two pension funds from making any new fossil fuel investments but also force them to divest from up to $14 billion of existing fossil fuel holdings.
Both CalPERS and CalSTERS have expressed their disagreement with the proposals. “As laudable as the underlying motivations may be, divestment for the purpose of achieving certain goals, such as promoting social justice, focus on companies that do business in a specified country or are engaged in a specified industry that do not appear to be primarily investment-related (Divestment Initiatives) has unintended consequences for the CalPERS fund, its members, and employer partners,” warned CalPERS’ deputy CEO Brad W. Pacheco in a statement released earlier this year.
He also warned that divestment from fossil fuels could be in breach of CalPERS’ fiduciary duty and would “almost invariably harm investment performance”, cause increased transaction costs and compromise investment strategies.
SB 252 was introduced in May 2023 and could pass in 2024.