California has taken a bold step in holding businesses accountable for their environmental impact. With the enactment of Senate Bills 253 (SB 253) and 261 (SB 261) as part of the Climate Accountability Package, companies operating in the state now face mandatory climate reporting. These laws, along with the amendments from SB 219 signed on September 27, 2024, are shaping the landscape for how businesses disclose their greenhouse gas (GHG) emissions and climate-related financial risks.
In this article, we’ll explain what these laws mean for businesses, what the reporting requirements are, and how companies can comply. Whether you’re running a large corporation or a business considering its climate responsibilities, understanding California's climate disclosure laws is crucial.
What is the California Climate Reporting Law?
California’s Climate Accountability Package, consisting of SB 253 and SB 261, mandates comprehensive climate reporting for businesses operating in the state. These laws are designed to enhance transparency, requiring companies to disclose both their GHG emissions and the financial risks they face due to climate change. The aim is to push companies towards greater responsibility in their operations and contribute to global decarbonisation efforts.
- SB 253: Known as the Climate Corporate Data Accountability Act, this law requires companies to publicly report their GHG emissions, including Scope 1, 2, and 3 emissions. This means businesses must account not only for their direct emissions but also for those throughout their supply chains.
- SB 261: The Climate-Related Financial Risk Act requires companies to disclose climate-related financial risks and detail how they are addressing these risks. These reports will highlight how a company is preparing for both physical climate impacts and the risks tied to transitioning towards a low-carbon economy.
Is Climate Reporting Mandatory in California?
Yes, climate reporting is now mandatory in California. Businesses operating in the state must comply with these disclosure laws if they meet specific revenue thresholds. SB 253 applies to companies with annual revenues exceeding $1 billion, while SB 261 covers companies earning over $500 million.
This mandatory climate reporting sets a new standard in the United States, as it applies to both public and private entities.
Key Reporting Requirements Under SB 253 and SB 261
The reporting requirements outlined in SB 253 and SB 261 are comprehensive and apply to various aspects of a company’s operations:
- SB 253 Reporting Requirements:some text
- SB 253 applies to companies with annual revenues exceeding $1 billion
- Scope 1 & 2 Emissions: By 2026, businesses must report their direct emissions (Scope 1) and emissions from purchased electricity (Scope 2).
- Scope 3 Emissions: Starting in 2027, companies will need to report their Scope 3 emissions, which cover indirect emissions across their entire value chain. These emissions often make up 90% of a company’s total climate impact.
- Third-Party Assurance: Companies must obtain third-party verification for the accuracy of their emissions data, ensuring the credibility of their reports.
- Consolidated Reporting: Parent companies can report emissions on behalf of their subsidiaries, easing the reporting burden for larger organisations.
- SB 261 Reporting Requirements:some text
- By January 2026, companies must submit reports detailing climate-related financial risks. These reports must include both the physical risks of climate impacts (such as extreme weather events) and risks related to the transition towards decarbonisation.
- Businesses are required to update these reports biennially, ensuring that stakeholders have access to up-to-date information on climate risks.
How SB 219 Updates the Climate Disclosure Laws
On September 27, 2024, SB 219 was signed into law, enacting several amendments to SB 253 and SB 261. These amendments provide businesses with more flexibility while maintaining the original reporting deadlines. Key updates from SB 219 include:
- CARB Rulemaking Extension: The California Air Resources Board (CARB) now has an additional six months, until July 1, 2025, to finalise regulations on Scope 1, 2, and 3 emissions.
- Flexible Timeline for Scope 3 Emissions: Instead of the previous rigid deadline, SB 219 allows CARB to set a flexible schedule for the disclosure of Scope 3 emissions.
- Consolidated Reporting: SB 219 clarifies that parent companies can consolidate their reporting across subsidiaries, streamlining the compliance process.
- Fee Requirements: While the payment of fees for filing disclosures remains, SB 219 removes the requirement that these fees must be paid upon filing, offering more flexibility for businesses.
California’s Laws Compared to Other Regulations
California’s laws go beyond similar regulations, such as those proposed by the SEC and adopted by the European Union’s Corporate Sustainability Reporting Directive (CSRD). While the SEC’s rules focus primarily on public companies, California’s laws also apply to private companies with substantial revenues.
- Inclusion of Private Companies: California’s regulations apply to both public and private companies, expanding the scope of climate reporting and increasing the pressure on businesses to take action.
- Scope 3 Reporting: California is the first U.S. state to mandate Scope 3 emissions reporting, which covers indirect emissions across the entire value chain. This goes beyond federal rules and sets a precedent for other states and countries.
How to Start Complying with California’s Climate Reporting Laws
With compliance deadlines approaching, businesses must take proactive steps to meet these climate reporting requirements. Here’s how to get started:
- Start with Carbon Accounting: The first step is understanding your carbon footprint. Tools like sustainability softwares can help measure your Scope 1, 2, and 3 emissions. Adopting the GHG Protocol—a widely used international standard for carbon accounting—will align your reporting with California’s requirements.
- Engage Third-Party Assurance: Prepare for the need to have your emissions data verified by an independent third party. This ensures that your reports are accurate and credible.
- Align with International Standards: SB 253’s reporting requirements are consistent with global standards like the GHG Protocol, meaning early adoption of these standards can help streamline your reporting process.
Costs of Compliance and Non-Compliance
Compliance Costs: The cost of complying with California’s climate reporting laws can vary based on the size of your business and the complexity of your operations. Expenses typically include investments in carbon accounting software, third-party assurance services, and staff training to ensure accurate data collection.
- Small to Medium-sized Businesses: Smaller businesses may face initial challenges in setting up these systems but can benefit from lower long-term costs by building sustainable business practices.
- Larger Corporations: Larger entities may need to allocate more resources to track emissions across complex supply chains and to ensure compliance with Scope 3 reporting requirements.
Non-Compliance Costs: Failure to comply with California’s climate reporting laws can lead to penalties, legal challenges, and reputational damage. The California Attorney General’s Office will be responsible for enforcing the laws, and non-compliance could result in civil penalties and fines. Additionally, businesses that fall behind in climate transparency may face increased pressure from investors, consumers, and regulators.
Conclusion
California’s mandatory climate reporting laws are a critical step towards increased corporate transparency and climate accountability. Businesses need to act now to ensure they meet the reporting requirements of SB 253, SB 261, and the recent updates from SB 219. By starting with carbon accounting and preparing for third-party assurance, companies can stay ahead of these regulations and contribute to global efforts in combating climate change.
In the face of mounting environmental pressures, businesses that adopt strong climate reporting practices will not only avoid penalties but also position themselves as leaders in the transition to a low-carbon economy. Take action today to ensure your business complies with these landmark regulations.
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