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.

  1. 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.
  2. 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.
  3. The law flexibly builds on existing guidelines for voluntary disclosure.  Like the federal proposals, SB 253 builds upon established standards, including the GHG Protocol. 
  4. 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.
  5. 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.

III. Conclusion

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.

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Photo of Tim Duncheon Tim Duncheon
Tim Duncheon is an associate in the firm’s San Francisco office and a member of the Environmental and Energy Practice Group. He represents clients in litigation, policy, and transactional matters involving greenhouse gas regulation, carbon markets, environmental review, ESG commitments, and other related
Tim Duncheon is an associate in the firm’s San Francisco office and a member of the Environmental and Energy Practice Group. He represents clients in litigation, policy, and transactional matters involving greenhouse gas regulation, carbon markets, environmental review, ESG commitments, and other related issues. Prior to joining Covington, Tim clerked for the Honorable William A. Fletcher of the United States Court of Appeals for the Ninth Circuit and the Honorable Charles R. Breyer of the United States District Court for the Northern District of California.
Photo of Jayni Hein Jayni Hein

Jayni F. Hein co-chairs the firm’s Carbon Management and Climate Mitigation industry group.

Jayni joins the firm after serving as Senior Director for Clean Energy, Infrastructure & the National Environmental Policy Act (NEPA) at the White House Council on Environmental Quality (CEQ).

During…

Jayni F. Hein co-chairs the firm’s Carbon Management and Climate Mitigation industry group.

Jayni joins the firm after serving as Senior Director for Clean Energy, Infrastructure & the National Environmental Policy Act (NEPA) at the White House Council on Environmental Quality (CEQ).

During her tenure at CEQ, she oversaw the Biden Administration’s ambitious environmental and clean energy agenda, leading work on low carbon projects and climate disclosure, and advancing the successful implementation of the Infrastructure Investment and Jobs Act (2021) and Inflation Reduction Act (2022).

Jayni has extensive experience advising clients on NEPA, Clean Air Act, and Endangered Species Act issues, as well as energy development on public lands. As the former senior political appointee spearheading work to revise NEPA regulations and issue guidance on climate change and greenhouse gas emissions, Jayni offers clients first-hand experience with infrastructure projects that require federal and state permits and authorization. She helps clients identify new funding opportunities and successfully advance clean energy and other infrastructure projects, including onshore and offshore wind, solar, hydrogen, transmission, semiconductor, and carbon, capture, sequestration, and utilization (CCUS) projects.

In addition, leveraging her government experience, Jayni advises companies and investors on ESG compliance and strategy in light of increased scrutiny of corporate climate and net-zero commitments. She advises clients on the legal and policy issues relating to ESG and climate-related regulatory requirements, investor demands, global reporting frameworks, and strategic business opportunities.

Clients benefit from her ability to creatively troubleshoot issues, establish relationships across government, and engage policymakers, industry, non-profit organizations, and other key stakeholders in constructive conversations around climate change, environmental justice, and corporate decarbonization goals.

Prior to CEQ, Jayni led energy and climate work at think tanks at NYU Law and Berkeley Law.

Photo of Kevin Poloncarz Kevin Poloncarz

Kevin Poloncarz represents a broad range of clients on policy, regulatory, litigation, commercial, and enforcement matters involving air quality, climate change, and clean energy. He co-chairs the firm’s Environmental Practice Group and Energy Industry Group.

Mr. Poloncarz is ranked by Chambers USA among…

Kevin Poloncarz represents a broad range of clients on policy, regulatory, litigation, commercial, and enforcement matters involving air quality, climate change, and clean energy. He co-chairs the firm’s Environmental Practice Group and Energy Industry Group.

Mr. Poloncarz is ranked by Chambers USA among the nation’s leading climate change attorneys and California’s leading environmental lawyers, with sources describing him as “a phenomenal” and “tremendous lawyer.” He was named an “Energy & Environmental Trailblazer” by the National Law Journal in 2017 and was inducted as a Fellow of the American College of Environmental Lawyers in 2018.

He has extensive experience with California’s Cap-and-Trade Program, Low Carbon Fuel Standard (LCFS), Renewables Portfolio Standard (RPS), and is recognized as a leading advisor on carbon markets. He also assists energy-sector clients in obtaining and defending state and federal approvals for major projects throughout California.

Mr. Poloncarz also assists clients with the development and execution of legislative and policy strategies supporting decarbonization, including carbon capture and sequestration, low-carbon fuels, advanced transportation and energy storage, and is a registered lobbyist in California and Oregon.

Photo of W. Andrew Jack W. Andrew Jack

Andrew Jack has a diverse corporate and securities practice with clients principally in the energy, industrial manufacturing, technology and sports and entertainment industries. He regularly represents corporations, board committees, and other forms of enterprises in mergers and acquisitions, strategic alliances, financing activities, securities…

Andrew Jack has a diverse corporate and securities practice with clients principally in the energy, industrial manufacturing, technology and sports and entertainment industries. He regularly represents corporations, board committees, and other forms of enterprises in mergers and acquisitions, strategic alliances, financing activities, securities law compliance, corporate governance counseling, and executive compensation arrangements. Mr. Jack also co-chairs the firm’s Energy Industry Group.

Photo of Daniel Feldman Daniel Feldman

Drawing on his prior positions in government service spanning multiple Administrations, former Ambassador Dan Feldman’s practice focuses on environmental, social, and governance (ESG) counseling, business and human rights (BHR), global public policy, as well as broader international regulatory compliance. He is a member…

Drawing on his prior positions in government service spanning multiple Administrations, former Ambassador Dan Feldman’s practice focuses on environmental, social, and governance (ESG) counseling, business and human rights (BHR), global public policy, as well as broader international regulatory compliance. He is a member of the firm’s Global Problem Solving initiative.

As Chief of Staff and Counselor to Secretary John Kerry when he was appointed the first Special Presidential Envoy for Climate (SPEC) by President Biden, Dan helped drive the U.S. government’s international climate agenda, coordinating high level interagency policy-making, engaging with corporate stakeholders, and contributing to key bilateral and multilateral climate discussions, including last year’s Leaders’ Summit on Climate and the landmark UN Conference of Parties (COP26) in Glasgow.

Previously, Dan served as deputy and then U.S. Special Representative for Afghanistan and Pakistan at the U.S. Department of State in the Obama Administration, as Director of Multilateral and Humanitarian Affairs at the National Security Council in the Clinton Administration, and as Counsel and Communications Adviser to the U.S. Senate Homeland Security and Governmental Affairs Committee. He also has served as a senior foreign policy and national security advisor to a number of Democratic presidential and Congressional campaigns.

Dan has extensive experience counseling multinational corporations on mitigating risk and maximizing opportunities in the development and implementation of their ESG and sustainability strategies, with a particular background in advising on BHR matters. He was one of the first attorneys in the U.S. to develop a practice in corporate social responsibility, and has been cited by Chambers for his BHR expertise. He assists clients in strategizing about their engagements with a range of key stakeholders, including Members of Congress, executive branch officials, foreign government officials and Embassy representatives, multilateral institutions, trade and industry associations, non-governmental organizations, opinion leaders, and journalists.

Photo of Mark Perlis Mark Perlis

Mark Perlis is a seasoned energy and environmental attorney with a broad-based federal regulatory and litigation practice encompassing all aspects of the electric utility industry.  He regularly represents clients in adjudicatory and rulemaking proceedings before the Federal Energy Regulatory Commission and state public…

Mark Perlis is a seasoned energy and environmental attorney with a broad-based federal regulatory and litigation practice encompassing all aspects of the electric utility industry.  He regularly represents clients in adjudicatory and rulemaking proceedings before the Federal Energy Regulatory Commission and state public utility commissions, and in stakeholder proceedings conducted by ISOs and RTOs across the country.  Mr. Perlis represents independent power producers, power marketers, traditional electric utilities, and renewables developers.  Mr. Perlis specializes in regulatory issues associated with the design of and participation in organized electric markets, including energy and capacity markets, generation interconnection, and transmission service.

Mr. Perlis has led representations of numerous clients faced with non-public, FERC enforcement investigations and has negotiated favorable settlements with the FERC Office of Enforcement.  He also regularly advises companies on compliance policies and procedures and conducts compliance program audits and reviews.  In addition, he counsels clients across the industry on Department of Energy efficiency regulations, energy trading compliance, project development, commercial agreements, and contract disputes.

Mr. Perlis also advises clients in the electricity industry and in the biofuels and biotechnology industries on matters pertaining to federal and state responses to climate change.  He advises clients on U.S. EPA’s Clean Power Plan and potential state implementation plans.  He also advises producers of conventional ethanol and advanced biofuels on federal and state regulatory issues, including the federal Renewable Fuels Standard program, California’s Low-Carbon Fuels Standard, and emerging markets for Renewable Identification Numbers and Low-Carbon Fuel credits.  Mr. Perlis has also advised clients on trading emission allowances and credits, including for sulfur dioxide and carbon dioxide, as well as on renewable energy credit trading.

Bradford McGann

Bradford McGann is an associate in the firm’s Washington, DC office, where he provides strategic advice to clients as a member of the firm’s Environmental and Energy Practice Group, the Environmental, Social, and Governance (“ESG”) Practice, and the Carbon Management and Climate Mitigation…

Bradford McGann is an associate in the firm’s Washington, DC office, where he provides strategic advice to clients as a member of the firm’s Environmental and Energy Practice Group, the Environmental, Social, and Governance (“ESG”) Practice, and the Carbon Management and Climate Mitigation industry group. Bradford’s work focuses on helping clients understand and navigate multijurisdictional climate-related financial disclosure requirements. He also provides regulatory compliance support for clients engaged in carbon-reduction, renewable-energy, and net-zero efforts. His pro bono practice focuses on issues of immigration and international human rights.