On 7 October, California passed the first significant corporate climate disclosure requirements in the United States, slated to have far-reaching impacts on both public and private companies alike.
Governor Newsom signed two bills into law that will require certain climate-related disclosures from large public and private U.S. companies doing business in California. California Senate Bill (SB) 253 requires firms with annual revenue of $1 billion or more to annually disclose Scope 1, 2, and 3 greenhouse gas (GHG) emissions, while SB 261 requires those with annual revenue over $0.5 billion to biennially report their climate-related financial risks. The laws are estimated to cover over 5,300 and 10,000 companies, respectively.
California is an established climate leader and one of the world’s largest economies. Developing legal requirements for corporate climate disclosure in the state will have significant national and international effects.
Widespread impact beyond the 10,000 companies directly covered
Beginning in 2026, companies included in the California laws will be required to work across their supply and value chains to gather climate-related information in order to meet initial reporting requirements. While firms mandated to disclose Scope 3 emissions will most obviously need to partner with suppliers and customers to compile data, smaller businesses not directly covered by the California laws may still be compelled by larger companies to produce hard emissions data or, at the very least, provide information on their own climate-related financial risks. It will be important for these firms to understand risks arising outside their four walls, up and down the chain.
We have already seen the impact of voluntary net zero commitments and regulatory disclosure requirements on supply chains. Amazon, for example, publicly announced their intent to provide supply chain emissions targets and share updates starting in 2024. While the company notes that these steps will help it meet its 2040 net zero target, the timing coincides with the firm’s preparations to comply with climate and other sustainability reporting requirements mandated by the EU, now by California, and likely by the U.S. Securities and Exchange Commission (SEC) in the future. At the same time, many large private suppliers are improving their carbon accounting and working to establish climate transition plans to support their continued business with customers subject to EU or other climate reporting and corporate governance requirements.
Driving international convergence on climate disclosure standards
Under SB 261, companies will satisfy their California reporting obligations if they produce climate disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). This includes reporting in accordance with the sustainability standards put forth by the International Sustainability Standards Board (ISSB) to meet regulatory requirements of another U.S. or non-U.S. jurisdiction or reporting provided voluntarily. The California Air Resources Board (CARB) still needs to implement reporting regulations for both SB 253 and 261 to clarify such equivalence, but based on the laws on the books, California is on its way to promoting a common international sustainability reporting standard and interoperability between different jurisdiction’s requirements. This is especially important since many jurisdictions have already indicated their intent to use the ISSB standards, including the UK, Canada, Hong Kong, Singapore, Nigeria, Japan, New Zealand, and Australia.
Easing the path for other U.S. regulators to enact similar climate disclosure rules
Passage of the California laws improves the cost-benefit analysis of implementing the SEC’s proposed climate disclosure rule, as many of the companies that would be impacted by SEC climate disclosure requirements would already be reporting under California law. More broadly, the California laws create momentum in the market around public disclosure of TCFD-aligned reports and Scope 1, 2, and 3 emissions reporting, helping to clear the runway not only for the SEC’s proposed rule, but for additional federal and state climate disclosure requirements. And California’s precedence-setting may not be done. California Senator Wiener, a lead author of both California laws, publicly indicated that there may be more to come in the way of climate-related legislation from the California legislature.
California’s SB 253 and SB 261 may be the first major pieces of climate disclosure rulemaking in the U.S., but they are unlikely to be the last. U.S. companies large and small should begin preparing for climate-related disclosure requirements. Doing so is not just a data exercise – climate disclosures aligned with the TCFD recommendations or ISSB standards require disclosing information about a firm’s institutional governance and processes for addressing climate-related risks and opportunities. For investors and other stakeholders, disclosures offer insight not just into a company’s emissions level or exposure to physical climate risks, but also into how a firm plans to take concrete action to address these factors.
To understand how to meet your company’s climate disclosure commitments or to more broadly prepare your company to better address climate change in the coming age of heightened transparency, please reach out to Matthew Cranford or Megan Svedman at Pollination.
Annex: Technical Details
- Applies to (1) U.S. companies, public and private; (2) with annual revenues of $1 billion or more; (3) doing business in California (totaling an estimated 5,500 companies).
- Requires annual, third party-assured, public disclosure of Scope 1 and 2 emissions to the CARB, beginning in 2026, and of Scope 3 emissions, beginning in 2027, with disclosures to be in conformance with the Greenhouse Gas Protocol.
- States that disclosure requirements will be standardized and facilitated by an emissions reporting organization to be contracted by the State.
- Authorizes the state board, starting in 2033 and every 5 years thereafter, to assess global greenhouse gas accounting and reporting standards and to adopt an alternative standard if it determines that using the alternative standard would more effectively further the goals of the bill.
- Applies to (1) U.S. companies, public and private; (2) with annual revenues of $0.5 billion or more; (3) doing business in California (totaling an estimated 10,000 companies, only 20% of which are public and would thus be subject to SEC disclosure requirements).
- Requires companies to post a Task Force on Climate-related Financial Disclosures (TFCD) report on their website biennially starting in 2026, and to file an annual attestation confirming as much with the CARB. The annual attestation will be accompanied by the payment of a fee, as yet to be determined by CARB.
- States that a covered company will satisfy its obligations under the law if it prepares a publicly accessible biennial report that includes climate-related financial risk disclosure information to meet the requirements of another U.S. or non-U.S. regulated exchange, or governmental entity or that of another national government.
- Includes a carve-out for insurance companies that would otherwise meet the threshold requirements to be covered by the bill, as insurance companies are already subject to a separate set of climate-related disclosure requirements.