While much attention has been given to the SEC’s final climate disclosure rule (and its subsequent stay), more imminent regulations with potentially longer to-do lists for public and private companies are emerging from the EU and California. The EU’s CSRD has been finalized and will impact any U.S. company with sufficient EU exposure, while California’s SB-253 (Climate Corporate Data Accountability Act) and SB-261 (Climate-Related Financial Risk Act) were signed by Governor Newsom in October 2023.
Despite a recent lawsuit against California’s two climate laws filed on January 30, 2024, coupled with budgetary challenges that may delay implementation, companies in scope must prepare for compliance now. Efforts committed to climate disclosures today will also likely pay off in the long run, as it’s probable that more states will follow California’s lead with their own legislation. For example, New York already has its own version, the Climate Corporate Accountability Act (S897A), sitting in the state senate.
Background
Like the SEC’s final climate rule, California’s aim in passing SB-253 and SB-261 is to drive reliable, consistent, and comparable climate-related disclosures. Many corporations already voluntarily report greenhouse gas (GHG) emissions; however, the quality of the reported data can vary significantly, and not all companies provide the same level of information in their reports. Like the SEC’s rule, SB-253 and SB-261 lean on existing standards like the GHG Protocol and the Task Force on Climate-Related Financial Disclosures (TCFD), respectively.
The GHG Protocol is the globally recognized GHG emissions accounting standard developed and updated by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), providing the foundation for much of the existing voluntary GHG emissions accounting and reporting that many companies already complete.
Meanwhile, the TCFD approaches climate-related disclosures from the perspective of business risks, specifically focusing on the financial impact of climate-related risks and opportunities. Its recommendations center on the four key areas of governance, strategy, risk management, and metrics/targets.
However, unlike the SEC’s climate rule, SB-253 and SB-261 both include private companies within their scope with an expectation that several thousand companies in total, including non-U.S.-based entities, will fall within their purview.
Proposed Requirements
SB-253: Applies to public and private companies with annual revenue over $1 billion with operations in California. This refers to a company’s total revenue, not just the revenue earned within the state. The bill requires disclosure of Scope 1, Scope 2, and Scope 3 GHG emissions, reported in accordance with the GHG Protocol. Given the complexity of calculating Scope 3 emissions, the bill does include a safe harbor provision shielding companies from legal action as long as Scope 3 was calculated and disclosed in good faith.
SB-261: Applies to companies with annual revenue over $500 million with operations in California and requires the disclosure of climate-related financial risks in accordance with the TCFD and any measures adopted to reduce and adapt to climate-related financial risk.
Compliance Timeline
Regarding effective dates, SB-253 requires companies to begin reporting Scope 1 and Scope 2 GHG emissions in 2026 using 2025 data. Scope 3 must be reported in 2027, no later than 180 days after reporting Scope 1 and Scope 2 emissions.
Companies must begin reporting their TCFD-aligned reports in 2026 and then biennially thereafter to comply with SB-261. However, with the ongoing legal challenges against the two laws and budget challenges around implementation, the current compliance dates may shift.
Assurance
Assurance currently only applies to SB-253. Limited assurance would be required over Scope 1 and Scope 2 GHG emissions in the initial year of reporting, moving to reasonable assurance in 2030. Limited assurance over Scope 3 emissions would be required in 2030. It’s critical to begin thinking about what is required to withstand audit scrutiny. This will mean considering how to oversee the completeness and accuracy of data, particularly through a control framework. In March 2023, the Committee on Sponsoring Organizations (COSO) published updated guidance to help companies establish effective internal controls over ESG topics, which may help do just that.
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Enforcement
The California Air Resource Board (CARB) has been granted enforcement authority and was given the power to levy fines for late filings, failing to file, and any general failure to meet the reporting requirements of SB-253 and SB-261 (although penalties cannot exceed $500,000).
Preparing for Compliance
Compliance might appear overwhelming given short implementation timelines, especially if organizations haven’t previously reported ESG information. Though some organizations will be tempted to delay compliance preparation due to recent legal challenges, it’s more prudent to begin assessing GHG inventories and existing disclosures against GHG protocol and TCFD now. State, federal, and international regulations continue to emerge, making disclosure readiness critical.
Below are several ways companies can get ready for SB-253 and SB-261:
- Gap analysis: Compare your existing climate disclosures to the disclosures required by SB-253 and SB-261.
- Get GHG data inventory ready: a) Map your business operations to the GHG Protocol b) Perform a data health check or data inventory, and c) Calculate your greenhouse gas emissions.
- Update disclosures to align with SB-253 and SB-261 rules (based on recommendations from the GHG Protocol and TCFD).
- Assess and strengthen governance and oversight, including data collection, reporting process, and control framework.
- Plan for assurance.
Next Steps
By taking the actions outlined above, companies will be strongly positioned to meet SB-253 and SB-261 requirements, in addition to confidently being able to face the regulatory uncertainty currently surrounding ESG reporting.
For support in understanding and implementing new climate-related disclosures, contact CrossCountry Consulting.