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New Climate Change Disclosures Pass into Law in California

Oct. 25, 2023
A pair of senate bills will make emissions reporting mandatory for certain companies that are operating in California.

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By Jan. 1, 2026, certain companies operating in California will have to prepare climate-related financial reports on a biennial basis. The new rule stems from the California Global Warming Solutions Act of 2006, which requires California’s Air Resources Board to adopt regulations “to require the reporting and verification of statewide greenhouse gas (GHG) emissions.” The Board must also monitor and enforce compliance with the act.

According to Inside Energy & Environment, SB 253 requires companies with greater than $1 billion in annual revenues to file annual reports publicly disclosing their GHG emissions, as verified by an independent and experienced third-party provider. The bill also requires the state board to adopt regulations requiring specified entities with total annual revenues in excess of $1 billion—and that do business in California—to publicly disclose their scope 1 and scope 2 GHG emissions, among other requirements.

SB 261 requires companies with $500 million in annual revenues to prepare biennial reports disclosing climate-related financial risk and measures they have adopted to reduce and adapt to that risk. The bill also requires the covered entities to prepare a climate-related financial risk report disclosing the entity’s climate-related financial risk and measures adopted to reduce and adapt to climate-related financial risk. It also requires the covered entity to make a copy of the report available to the public on its own website.

The Most Extensive Emissions Disclosure Laws

Inside Energy & Environment says SB 253 and SB 261 mark the “most extensive emissions- and climate-disclosure laws enacted in the United States to date.” It also says the bills are the latest example of California’s first-mover effect with regard to climate action and disclosure. 

“While these bills are significant and mark a turning point in private sector reporting and compliance, they should not come as a surprise to businesses operating in the U.S.,” It continues, “as they arrive after years of increased scrutiny and deliberate action to improve and standardize voluntary reporting frameworks at the federal, state, and international levels.”

With both bills signed by Gov. Newsom, law firm Morgan Lewis says SB 253 is now officially the first “widely applicable law” in the nation to require the assurance of Scope 1 and Scope 2 emissions reporting. According to the EPA, Scope 1 emissions are direct GHG emissions that occur from sources that are controlled or owned by an organization (e.g., emissions associated with fuel combustion in boilers, furnaces and vehicles). Scope 2 emissions are indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling.

“Accordingly, companies must not only develop the infrastructure to gather and report emissions data, but also consider potential options for obtaining the required GHG emissions attestation, including through an external auditor,” the firm points out.

Getting Ready to Comply

Failure to comply with the newly-introduced reporting obligations could create significant legal exposure for companies, says Morgan Lewis, which estimates that 5,000 companies that do business in California have been identified as potentially subject to SB 253.

“Many of these companies already track Scope 1 and 2 GHG emissions but may need to consider how they will implement systems to track their Scope 3 GHG emissions earlier than they had anticipated,” it adds. “To do so, covered companies also may require upstream and downstream companies to collect emissions data. As a result, SB 253 may have far-reaching consequences beyond the entities immediately covered by the law.”

These two new bills focus on U.S. companies that do business in California, but Watershed says they’re part of a larger global movement towards legislation that requires robust climate reporting from companies, including the SEC’s proposed climate disclosure rule in the U.S. and the Corporate Sustainability Reporting Directive (CSRD) in the EU.

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About the Author

Bridget McCrea | Contributing Writer | Supply Chain Connect

Bridget McCrea is a freelance writer who covers business and technology for various publications.