Last week, the California Legislature passed two bills comprising the core of a landmark “Climate Accountability Package.” Together, the two bills will impose extensive new climate-related disclosure obligations on thousands of U.S. public and private companies with operations in California. Senate Bill 253 (SB 253) would require companies with greater than $1 billion in annual revenues to file annual reports publicly disclosing their Scope 1, 2 and 3 greenhouse gas (GHG) emissions. Senate Bill 261 (SB 261) would require companies with greater than $500 million in annual revenues to prepare biennial reports disclosing climate-related financial risk and describing measures adopted to mitigate and adapt to that risk.
Yesterday afternoon during an appearance at Climate Week NYC, Governor Newsom told the audience emphatically, “of course I will sign those bills.” When he does, many more companies will be required to improve the accuracy, completeness and rigor of their GHG reporting and climate risk disclosures. Because of the complexity of GHG reporting, we have focused the remainder of this post on SB 253. Please see our separate post on SB 261 here.
I. Summary of Key Provisions of SB 253
SB 253, authored by Senator Scott Weiner (D-San Francisco), is also known as the Climate Corporate Data Accountability Act. The law declares that current voluntary corporate disclosures “lack the full transparency and consistency needed by residents and financial markets to fully understand these climate risks,” and explains that Californians “have a right to know about the sources of carbon pollution. . . in order to make informed decisions.”
“Reporting entities” include entities that have a total revenue (in the prior fiscal year) larger than $1 billion and do business in the state. Starting in 2026, reporting entities must annually report direct emissions from operations (Scope 1) and indirect emissions from energy use (Scope 2) from the prior fiscal year. Starting in 2027, they must also report their indirect upstream and downstream supply-chain emissions (Scope 3) from the prior fiscal year.
Reports must conform to the Greenhouse Gas Protocol (GHG Protocol) standards and guidance developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) —as explained in an earlier post, the GHG Protocol is currently in the process of updating its guidance. Reporting entities must obtain an assurance engagement from an independent and experienced third-party provider.
The California Air Resources Board (CARB) must promulgate implementing regulations by January 1, 2025. CARB must contract with an experienced emissions reporting organization to develop the program. By the initial 2026 compliance date, CARB must also create a digital platform for the public to access reporting entities’ disclosures. Reporting entities will need to pay a fee for CARB’s implementation efforts. The bill takes off the table the civil and criminal penalties available to CARB for violations of the California Global Warming Solutions Act of 2006 (AB 32) and its mandatory GHG reporting regime, which can be significant. Instead, it authorizes CARB to impose administrative penalties if a reporting entity fails to file, files late, or otherwise violates these provisions, but in an amount limited to no more than $500,000 per year per reporting entity and only through a formal administrative hearing process seldom used by CARB for collection of penalties for other programs. Through 2030, however, a reporting entity is only subject to penalties related to its Scope 3 reporting if it fails to file anything at all. Further, in subsequent years, an entity cannot be subject to penalties if its Scope 3 disclosures were made in good faith and with a reasonable basis.
II. SB 253 in Broader Context
As the saying goes, “if you can’t measure it, you can’t manage it.” Accordingly, jurisdictions around the world are embracing disclosure requirements as an important legal tool in driving stronger emission reductions. For example, the European Union is finalizing the European Sustainability Reporting Standards (ESRS), as we described in a recent client alert.
SB 253 is likely to be the first corporate GHG emissions disclosure law to go into effect in the United States. Although there have been two major federal proposals—the Securities and Exchange Commission’s (SEC) proposed climate disclosure rule and a federal proposal to require major government suppliers and contractors to disclose emissions—neither has yet been finalized.
We highlight five key points below, putting SB 253 in this broader context.
- Private companies are subject to the law. SB 253 applies to partnerships, private corporations, and limited liability companies. In contrast, the proposed SEC rule applies only to publicly listed or traded companies—the proposed contractor rule, however, also applied to some private companies.
- Coverage is otherwise extensive. Because California law broadly defines “doing business” in the state, the law is likely to sweep nearly all entities that meet the $1 billion annual revenue requirement. The Assembly and Senate Floor Analyses estimate that SB 253 will cover 5,344 entities. However, CARB may need to clarify whether the $1 billion total annual revenue test is applied (i) on a gross rather than net basis, (ii) with respect to world-wide income, not income generated in California, and (iii) on a consolidated basis for all affiliates of a reporting entity. CARB may also need to clarify whether the California reporting entity reports emissions only for its activities and not those of its world-wide affiliates.
- The law flexibly builds on existing guidelines for voluntary disclosure. Like the federal proposals, SB 253 builds upon established standards, including the GHG Protocol.
- All reporting entities must report Scope 3 emissions. SB 253 requires disclosure of all Scope 3 emissions. The proposed SEC rule would require disclosure of Scope 3 emissions only if material, or if the registrant had set a target or goal including Scope 3 emissions. The proposed contractor rule would require Scope 3 reporting only by “major” contractors, or those in receipt of more than $50 million.
- In important ways, the law recognizes and provides for uncertainties around Scope 3 reporting. In addition to a later compliance date, misstatements of Scope 3 emissions cannot give rise to a penalty through 2030, and even afterward, a reporting entity cannot be subject to penalties for good-faith disclosures. The law also provides CARB with significant discretion and flexibility to adjust implementation details as Scope 3 best practices evolve in the coming years.
As suggested above, in important respects, SB 253 sweeps more broadly than the two federal proposals. In addition, it effectively serves as a bulwark against likely legal challenges to the federal rules. Even if the federal rules are successfully challenged in litigation, entities that participate in the California market will face major reporting obligations anyway. As another saying goes, “as California goes, so goes the nation,” and so the Golden State—which the bill says is “on track to be the fourth largest economy in the world” (SB 253, § 1(d))—is using its immense market leverage to move the ball forward on GHG reporting.
The GHG Protocol has advanced significantly since first introduced more than two decades ago, from a hortatory framework designed to encourage early movers, to one that has been increasingly adopted by jurisdictional reporting regimes and voluntary GHG reduction frameworks. Yet the Protocol retains its overall design and animating principles, including the goal of increasing the transparency and accuracy of reports over time as both the science evolves and a company’s understanding of the full scope of emissions throughout its supply chain improves. Given the Protocol’s often non-prescriptive, learn-by-doing format, many companies continue to quantify emissions and make associated claims based on methodologies that are aligned with, albeit not strictly adhering to, the GHG Protocol. Now, with SB 253’s passage, a broad swath of companies doing business in what’s poised to be “the fourth largest economy” may need to up their game significantly in assuring the rigorous and accurate application of the Protocol’s requirements.
Covington’s Climate Mitigation and Carbon Management industry group has extensive experience and capabilities in reporting pursuant to the GHG Protocol and other voluntary and mandatory frameworks and is ready to assist entities in navigating this complex and evolving landscape.