California Requires Large Companies to Disclose Certain Climate Change-Related Information

Starting in 2026, large companies doing business in California need to comply with new climate change-related disclosure requirements described in two separate bills (S.B. 253 - Climate Corporate Data Accountability Act^[1] (CCDAA) and S.B. 261 - Climate-Related Financial Risk^[2] (CRFR)) signed into law by California Governor Newsom on October 7, 2023).^[3]

The California Air Resources Board (CARB) must develop and adopt implementing regulations for those laws by January 1, 2025 and has been directed by Governor Newsom to closely monitor the cost impacts to companies.^[4] Governor Newsom also acknowledged that CARB may not have adequate time to adopt such regulations and directed his administration to work with the legislature to address this concern.^[5]

California passed these laws as some large companies already voluntarily disclose certain climate change-related information and while other companies across the United States wait to see the details of proposed climate change-related disclosure requirements by the Securities and Exchange Commission (SEC).^[6] Nevertheless, these California laws will pose challenges for all affected companies and their supply chains. Affected companies should start planning now to assure compliance with these laws.

CCDAA

The CCDAA requires companies with more than $1 billion in gross annual revenue to disclose greenhouse gas emissions for their operation and supply chains. Interestingly, the trigger for this disclosure is annual revenue as opposed to greenhouse gas emissions. As a result, entities that may not have high greenhouse gas emissions (e.g., service providers) may still be required to track and disclose such information.

Under the CCDAA, starting in 2026 on or by a specific date to be determined, affected companies need to publicly disclose their “Scope 1” and “Scope 2” emissions for the prior fiscal year. In 2027, no later than 180 days following disclosure of “Scope 1” and “Scope 2” emissions, those companies will also need to publicly disclose their “Scope 3” emissions for the prior fiscal year. Briefly, the covered greenhouse gas emissions are defined under the law as follows:

• Scope 1 emissions means “all direct greenhouse gas emission that stem from sources that a reporting entity owns or directly controls, regardless of location, including but not limited to, fuel combustion activities.”^[7]
• Scope 2 emissions means “indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.”^[8]
• Scope 3 emissions means “indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control," which may include "purchased goods and services, business travel, employee commutes, and process and use of sold products.”^[9]

The law also requires these companies to engage a third party to audit the Scope 1 and Scope 2 emissions (beginning in 2026) and Scope 3 emissions (beginning in 2030).^[10] Affected companies must use the Greenhouse Gas Protocol,^[11] which describe how such emissions are to be measured and reported.

Many large companies already track and disclose Scope 1 and Scope 2 emissions and some even track their Scope 3 emissions, so the impact to these companies will not be as significant as companies that do not internally track and report such emissions. Tracking Scope 3 emissions has historically been difficult given the lack of information required to be obtained from third parties and need for estimation in many cases. In fact, the proposed SEC disclosure rules currently only contemplate disclosure of Scope 3 emissions if such emissions are material, or if the company has set greenhouse gas targets or goals that include such emissions.^[12]

CRFR

Under the CRFR, companies (other than insurers)^[13] with annual revenues in excess of $500 million that do business in California need to prepare and make climate-related financial risk reports publicly-available. The first report  is due by January 1, 2026, and subsequent reports, on a biennial basis thereafter.^[14] The term “climate-related financial risk” is defined as:

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.^[15]

The required reports must disclose the company’s climate-related financial risks along with associated measures adopted by the company to reduce and adapt to such risks.^[16] In general, most large public companies already evaluate some climate-related risks, in part to address Environmental, Social and Governance matters and to comply with current SEC reporting obligations. These disclosures, however, may be new for many privately-held companies. All companies that may be affected should start internally planning now to assure compliance with these new requirements.