California Corporate Data Accountability and Climate-Related Financial Risk Act
California is poised to become the first state to require large companies to disclose greenhouse gas (GHG) emissions from direct operations, supply chains and employees and report on climate-related financial risk and any measures adopted to mitigate those risks.
During Climate Week in New York City, Governor Gavin Newsom (D) announced he would sign two measures: SB 253, the Climate Corporate Data Accountability Act, and SB 261, the Climate-Related Financial Risk Act. If signed, the landmark bills would mark the most extensive emissions- and climate-risk disclosure laws enacted in the nation to-date.
SB 253 would require corporations or other United States business entities with total annual revenues greater than $1 billion and that operate in California to publicly disclose their annual scope 1 (direct emissions from operations) and scope 2 (indirect emissions from purchased energy) beginning in 2026, and scope 3 (upstream and emissions associated with products and supply chains) beginning 2027. The law would direct the California Air Resources Board (CARB), to develop reporting regulations and define effective reporting dates by January 1, 2025.
SB 261 in turn would require companies with over $500 million in annual revenues to prepare biennial reports that disclose climate change related financial using a structure consistent with the framework of the Task Force on Climate-Related Financial Disclosures (TCFD). According to the author, SB 261 is intended to provide transparency into a company’s climate-related economic impacts and associated risks, as well as describe currently implemented or planned mitigation measures. The bill aims to safeguard consumers and investors from losses resulting from climate-related disruptions while also improve an entity’s ability to identify and plan for short- and long-term risks in the low carbon transition.
California Corporate Data Accountability Act (SB 253)
SB 253 would require CARB to adopt regulations by January 1, 2025, for covered entities to report their GHG emissions from direct and indirect operations, from purchased energy and from their supply chains. U.S. business entities with total annual revenues greater than $1 billion that operate in California must submit their disclosures to a nonprofit emissions registry, beginning in 2026 or a date determined by CARB, and in accordance with the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and Corporate Value Chain (Scope 3) Standard. The measure also directs the emissions registry to develop a public online portal to disseminate the information provided by reporting entities. Reporting requirements will be separate from, and in addition to, GHG reporting requirements under the state’s Mandatory Greenhouse Gas Emissions Reporting program (MRR). The bill also requires reporting entities to secure an assurance engagement by an independent third-party provider.
SB 253 arguably is stricter than the climate-related disclosure rules proposed by the U.S. Securities and Exchange Commission (SEC) in that the bill explicitly covers privately held companies while the SEC’s proposed rules only target companies with publicly traded securities; the bill mandates reporting of scope 3 emissions while the SEC’s proposed rules only require scope 3 emissions if “material” or included in a reporting company’s publicly announced goal; and SB 253 does not impose a phase-in period of reporting obligation, coupled with significant administrative penalties for non-compliance, while the SEC has not yet proposed repercussions for non-compliance and will have a phase-in period for all registrants with the compliance date dependent on the entity’s filer status.
In response to complaints that the legislation could lead to burdensome GHG emission reporting requirements, the bill directs CARB to adopt regulations that minimize duplication and allows reporting entities to submit “emissions reporting reports prepared to meet other national and international reporting requirements,” including any adopted by the U.S. government.
SB 253 is similar to legislation (SB 260) introduced by Sen. Wiener during the 2021-2022 legislative session.1 While the previous measure cleared policy and fiscal committees in both legislative chambers, it failed passage on the Assembly floor under heavy opposition from business groups.
However, unlike previous versions of the legislation, SB 253 explicitly permits industry average, proxy and other data to be used in scope 3 emission calculations. Instead of mandating both civil and administrative fines in the event of non-compliance, the new law clarifies that failure to comply with disclosure requirements could result in an administrative penalty of up to $500,000 per reporting year to be “imposed and recovered” by CARB.
With respect to scope 3 emissions reporting, SB 253 includes a safe harbor provision that protects reporting entities from penalties for misstatements if made pursuant to a reasonable basis and in good faith. This is in line with the SEC’s proposed rule which also includes safeguards against inaccurate scope 3 disclosures where statements will not be deemed fraudulent if they were made with reasonable basis or in good faith. Further, SB 253 provides that between 2026 and 2027, the only penalties for scope 3 reporting violations will be for parties who fail to file required disclosures.
Companies will also be required to pay an annual fee to contribute to the newly created Climate Accountability and Emissions Disclosure Fund to help maintain the program. The bill is estimated to impact approximately 5,300 entities to reporting requirements, according to Ceres, a business sustainability advocacy program and co-sponsor to the bill.
Pushback to SB 253 largely mirrored opposition to the SEC’s proposed rule, particularly concerning the difficulty of accurately measuring supply chain GHGs. The California Chamber of Commerce, for example, stated that the information would either be “unreliable or unattainable,” and is not feasible for companies to account for all the emissions outside of their direct control. The oil and gas industry noted the legislation may lead to higher consumer prices and expressed concern that there are not enough resources available or expertise within companies to accurately measure and report scope 2 and 3 emissions.
While Gov. Newsom stated he will sign SB 253, he indicated there will be a “modest caveat” and “some cleanup on some little language,” and while the governor did not provide further details, the business community believes he may be open to making technical adjustments to clarify reporting requirements and strengthen implementation controls by CARB.
Climate-Related Financial Risk Act (SB 261)
SB 261 requires CARB to adopt regulation on or before January 1, 2026, for covered entities to prepare a climate-related financial risk report publicly disclosing the entity’s climate-related financial risk and measures adopted to reduce and adapt to those risks.
“Climate-related financial risk” is broadly defined to mean any “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.”
The bill states that disclosure must be modeled after the Task Force for Climate Related Disclosures (TCFD) recommendations; however, it will allow reports to be prepared consistent with “any equivalent reporting requirement,” according to the following methods:
- Reports prepared pursuant to a law, regulation or listing requirement issued by any regulated exchange, national government, U.S. or the International Financial Reporting Standards Sustainability Disclosure Standards, as issued by the International Sustainability Standards Board (ISSB);
- Reports provided voluntarily using the TCFD or ISSB standards.2
TCFD recommendations incorporate into the framework scenario analysis, which is a tool companies use when assessing their climate resilience and developing mitigation strategies according to distinct climate scenarios. Companies undertake this exercise to gauge the significance of various climate risks on their operations, as well as explore alternatives that may alter any “business-as-usual” assumptions. This is noteworthy because SB 261 will mandate scenario analysis in contrast to the SEC’s proposed rule that only requires companies to disclose any scenario analysis they choose to conduct.
Covered entities include both public and private companies who will be required to report every two years beginning January 1, 2026, and provide a copy of their report on its own website. Insurance companies are exempt from the law, as the California Insurance Commissioner adopted the National Association of Insurance Commissioners climate-related risk reporting standards in April 2022.3 Failure to make the report publicly available or publishing "inadequate or insufficient" data will result in administrative penalties assessed by CARB up to $50,000 in a reporting year. Notably, the legislation allows a subsidiary company to meet its reporting obligations through its parent company’s climate-related financial risk disclosure.
Companies will be required to pay an annual fee to the newly created Climate-Related Financial Risk Disclosure Fund upon submittal of their report. Opponents to this bill argue its strict standards will create difficult challenges and that the state should pause rulemaking until the federal government has finalized its own regulations on climate-related disclosure to avoid any duplicative reporting requirements.
Next Steps
Gov. Newsom has until October 14 to sign the bills. Thus far, the Governor has declined to comment on any amendments to SB 253. Given business’ concerns about the bill’s broad language and scope, however, his office likely will seek to enhance the discretion and flexibility of CARB to implement the law through technical adjustments. Due to fierce opposition to the bills, especially SB 253, it is also possible that litigation will follow, which could delay implementation or further modify the bill. Interested parties will have an opportunity to comment and testify on proposed regulations to implement both bills during the CARB rulemaking process next year. Interested parties can also engage with the Governor’s office regarding any technical changes or clarifications to SB 253 as legislation will likely be required in the next legislative session to facilitate those amendments.
If you have questions about this client alert, please contact any Akin lawyer or advisor below:
1 California Climate Disclosure Legislation Clears Critical Hurdles | Akin Gump Strauss Hauer & Feld LLP – July 13, 2022.
2 A prior version of the bill did not include protections for entities that already provide TCFD disclosures in voluntary filings.
3 U.S. insurance commissioners endorse internationally-recognized climate risk disclosure standard for insurance companies (ca.gov) Press Release, California Department of Insurance, April 8, 2022.
