On the 7 October 2023, Governor Newsom signed into law two new mandates that are unparalleled to any in the nation, California SB 253 and SB 261. The purpose of both laws is to bring more transparency to the public regarding the contributions big business makes to climate change.
It is acknowledged that California’s law will be stricter than the impending Securities and Exchange Commission’s ruling on Climate Disclosure.
Many argue that California’s laws will duplicate work that is already being done at the federal level. Companies insist the new laws will make it costly and more difficult for smaller companies that are already challenged to report indirect emissions. To get ahead of the reporting deadlines, industry is calling for tools to be developed that would support SB 253 and SB 261 to make the challenge of collecting the data more cost effective and more efficient.
SB 253: The Climate Corporate Data Accountability Act
According to the legal team at Greenburg Traurig, there are three areas to pay attention to when building your program as quoted from their article, "California Enacts First-of-Their-Kind Laws Requiring Corporate Climate Disclosures."
Companies that fall under the purview of SB 253 are (i) partnerships,corporations, limited liability companies, or other business entities formed under the laws of California or any other U.S. state or District of Columbia,or under an act of the U.S. Congress, (ii) with total annual revenues in excess of $1 billion (based on revenue for the prior fiscal year), and (iii) that do business in California. The law refers to these companies as“reporting entities.”
Beginning in 2026, reporting entities must annually disclose publicly each year to an “emissions reporting organization,” contracted by the California Air Resources Board (CARB), the Scope 1 and Scope 2 Greenhouse Gas Emissions (GHG)for the prior fiscal year. Scope 1 emissions consist of all direct GHG emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities. Scope 2 emissions consist of all indirect GHG emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location, including emissions outside of the United States.
Beginning in 2027, reporting entities must annually disclose the Scope 3 emissions no later than 180 days after its Scope 1 and Scope 2 disclosures. Scope 3emissions consist of indirect upstream and downstream GHG emissions, other than Scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.
As part of these disclosures, reporting entities must engage with independent third parties to provide assurance engagements on all of the reporting entity’s Scope 1, Scope 2, and Scope 3 emissions. SB 253 requires that these third-party auditors have significant experience measuring the emission of greenhouse gases and be sufficiently competent to perform assurance engagements in accordance with applicable legal and professional standards.
Penalties for Noncompliance
SB 253 directs CARB to adopt regulations authorizing it to seek administrative penalties for non-filing, late filing, or other failure to meet the law’s requirements. The administrative penalties imposed on a reporting entity may not exceed $500,000 in a reporting year. However, reporting entities will not be subject to an administrative penalty for any misstatements regarding Scope 3 emissions disclosures made with a reasonable basis and disclosed in good faith. Further, any penalties assessed on Scope 3 reporting between 2027 and 2030 will only be for non-filing. While proponents of SB 253estimate that the cost of compliance for affected businesses should not exceed$300,000 per year, others estimate that the cost to comply with the bill’s requirements will likely exceed the potential $500,000 administrative penalty.
SB 261: Greenhouse Gases: Climate Related Risks
Like their statements on SB 253, they succinctly summarized concerns for SB 261:
SB 261’s climate-related financial risk disclosure requirements apply only to “covered entities,” which are (i) partnerships, corporations, limited liability companies, or other business entities formed under the laws of California or any other U.S. state or District of Columbia, or under an act of the U.S. Congress, (ii) with total annual revenues in excess of $500 million(based on revenue for the prior fiscal year, including revenues generated outside of California), and (iii) that do business in California.
Beginning Jan. 1, 2026, and once every two years afterwards, covered entities must publish on their websites a climate-related financial risk report. These reports must disclose the following:
Its climate-related financial risk, in accordance with the recommended framework and disclosures contained in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017) published by the Task Force on Climate-related Financial Disclosures (TCFD) or pursuant to an equivalent reporting requirement; and
The measures it has adopted to reduce and adapt to the disclosed climate-related financial risk.
The law defines “climate-related financial risk” as the “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations,provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand,and financial markets and economic health.” Ultimately, SB 261’s reporting requirements, according to the law’s text, are meant to ensure that covered entities are aware of and can prepare for any economic risks they might face as a result of climate events such as “wildfires, sea level rise, extreme weather events, extreme droughts, and associated impacts to the global economy,” and that awareness of these climate-related financial risks will avoid significant harm to California and its residents.
If a covered entity cannot provide a complete report that contains the required disclosures, it must provide disclosures to the best of its ability,explain any reporting gaps, and describe steps it will take to prepare complete disclosures in the future.
The disclosures will be consolidated in a biennial public report from a nonprofit climate organization yet to be determined that will work with CARB.This public report will (i) review the disclosure contained in a subset of publicly available climate-related financial risk reports by industry; (ii)analyze the systemic and sector-wide climate-related financial risks facing the state based on the contents of climate-related financial risk reports; and (iii) identify inadequate or insufficient reports.
Penalties for Noncompliance
SB 261 directs CARB to adopt regulations authorizing it to seek administrative penalties from a covered entity that fails to publish the required climate-related financial risk report or publishes an inadequate or insufficient report. The civil, administrative penalties imposed on a reporting entity may not exceed $50,000 in a reporting year.
What to Do Next
Build your team, define your regulatory and customer requirements, and develop a strategy for how your company will move forward. Define the components for your program.
Determine the type of data that your company will need to collect, analyze, manage, and report, along with internal and external resources that can help you build the data repository.
Engage with stakeholders across the organization as well as customers and suppliers. Find an external auditor who can provide invaluable expertise.
Think about how to make your program repeatable year after year and develop a baseline of key performance indicators that help you determine your company’s progress according to your goals.
BlueCircle Advisors can help you get started by performing a gap analysis of your current emissions program or by helping you build a repeatable program that enables you to report year over year on your Scope 1, 2, and 3 emissions.
We'll work together to meet your regulatory obligations and keep your customers choosing you as their preferred vendor. Contact us today!
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