California’s new climate rules set a new standard for emissions disclosures
Emmy Shaw, an analyst at Canbury argues that the new climate legislation introduced in California has the potential to have a much wider reach
The impending consequences of climate change have always been on the agenda for family and friends in California (whether they’ve known it or not!).
My uncle, based in rural Northern California (where wildfires have recently been severe), is acutely aware of climate change’s risks, anticipating what each year’s wildfire season may bring with increased weather extremities. Back in 2021, he fended off one of the largest wildfires in California’s history, by fire-proofing his house and sheltering firemen. The fire burned almost 1 million acres and destroyed 1,311 structures[1]. This is just one example, but for my friends, family, and Californians in general, wildfires like these, among other extreme weather events like this year’s record-breaking flooding, are known all too well.
With this in mind, it’s not surprising that in October 2023 California became the first state to pass climate disclosure bills to make its most economically influential players assess and address their emissions and associated climate change risks. What is surprising is that there isn’t more of a conversation around these bills, at least in our industry. Everyone’s heard of the EU’s SFDR, and the US’ SEC climate disclosure rule, but few are talking about California’s pivotal SB-253 and SB-261.
California’s importance in environmental policy
Throughout my time at UCLA, California was frequently labelled as the leader in environmental policy in the US (perhaps with some bias). California was frequently used as a case study in my classes, having passed historic bills that turned out to shape the US environmental policy landscape.
But, on this side of the pond, California’s policy movements are often left out of the conversation. Particularly amidst the federal level anti-ESG rhetoric, from my understanding, the state should be one to watch because of its:
- Federal and global influence: the state is on track to be the world’s 4th largest economy. The size of the California market alone has given the state a unique ability to drive change
- History of bipartisan environmental leadership: the state has advanced major environmental policies, across partisan shifts
- Policy trendsetting: the state has been at the forefront of pioneering policies on issues like environmental regulations, tech governance, and labour laws. Other states frequently follow California’s lead
A Brief Background on the Bills
7 October 2023, California Governor Gavin Newsom signed into law two pivotal bills, SB-253 and SB-261.
SB-253: Climate Corporate Data Accountability Act
SB-253, known as the Climate Corporate Data Accountability Act, requires companies doing business in California and with annual revenues of more than $1 billion, to publicly disclose their scope 1, scope 2, and scope 3 greenhouse gas emissions once a year. These “reporting entities” must develop disclosures in alignment with standards of the Greenhouse Gas Protocol standards and guidance. Disclosure of scope 1 and 2 emissions is due starting 2026, while scope 3 emissions are not due until 2027.
SB-261: Greenhouse Gases: Climate-related Financial Risk Act
SB-261, known as the Greenhouse Gases: Climate-related Financial Risk Act, requires companies doing business in California with annual revenues of more than $500 million to prepare and publicly disclose climate-related financial risk reports every two years, starting from January 1, 2026.
These “covered entities” will develop reports in alignment with the Task Force on Climate-related Financial Disclosures (TCFD). A covered entity may also choose to report in alignment with the framework of another similarly established standard, such as the International Financial Reporting Standards Sustainability Disclosure Standards. Reports must be published publicly on the entity’s website.
Unanswered questions: clarifications needed in SB-253 and SB-261
Whilst the two bills represent significant steps towards improving corporate climate disclosure in California, in my opinion, several questions remain unanswered, and clarifications are needed to ensure effective implementation and compliance.
- Applicability to non-US entities: The bills don’t explicitly state whether non-US entities will be subject to the reporting requirements. Clarification will be needed on the extent to which foreign companies operating in California will be required to comply with SB-253 and SB-261.
- Scope of reporting for SB-261: It’s unclear whether the scope of reporting for SB-261 is limited to a covered entity's California-based activities or if it includes national and international operations. Further guidance is needed to determine the geographical scope of the climate-related financial risk reports.
- Defining "doing business in California": The ambiguity potentially most questioned since the passing of the bills. It’s unclear as to what defines "doing business in California". Clarification will be needed on the criteria used to determine whether a company is considered to be doing business in the state, such as the presence of employees, facilities, or sales.
- Assurance requirements: SB-253 requires third-party assurance of emissions data, but the specifics of the assurance process and the qualifications of assurance providers, aren’t specified. In my opinion, more details are needed to ensure consistent and reliable assurance engagements.
- Annual fees: Both Acts mention an annual fee to be paid to the Board to cover the costs of the Acts, but the amount is yet to be determined.
Implications of the Bills
From my perspective, the requirement for all information to be publicly available under both SB-253 and SB-261 could provide investors, consumers, and other stakeholders with valuable insights into the risks that could impact large businesses. For the reporting and covered entities themselves, the bills may serve as an opportunity to pre-emptively flag exposure to climate-related risks and increase preparedness. For investors, the transparency could reveal potential areas for engagement, influence investment decisions, and may increase the accountability of companies.
The passage of these bills is part of California's broader efforts to address climate change and increase resilience, demonstrating the state's commitment to taking action (at least from a disclosure standpoint).
Could other states introduce similar bills?
The states of New York[2] and Washington[3] currently have similar legislation pending, indicating a growing interest in regulation around climate change accountability. As public awareness and legislative interest in these issues continue to grow, additional states could be inspired to adopt similar laws.
If successful and in best-case scenario, California's bills could serve as a model for further states looking to take proactive measures to prepare for the risks associated with climate change.
[1] https://www.fire.ca.gov/incide...
