First to the Finish Line: Governor Newsom Signs California’s Emissions Disclosure Law

First to the Finish Line: Governor Newsom Signs California’s Emissions Disclosure Law

Blog ESG Epicenter

On October 7, 2023, Governor Newsom signed into law California Senate Bill 253 (SB 253), the Climate Corporate Data Accountability Act. With the passage of SB 253, California takes the lead in implementing greenhouse gas emissions disclosure requirements, while federal agencies including the Securities and Exchange Commission (SEC) and the Federal Acquisition Regulatory Council continue to consider their own climate disclosure rules.

Reporting Entities

SB 253 requires all specified partnerships, corporations, limited liability companies, and other business entities with total annual revenues exceeding $1 billion that do business in California to report their global greenhouse gas (GHG) emissions beginning in 2026. Companies, or “reporting entities,” subject to the law will also be required to obtain third-party assurance to audit their emissions reports and verify compliance. The California Air Resources Board (CARB) is tasked with implementing and enforcing the requirements of SB 253 and is directed by the law to publish regulations with more detailed reporting requirements and guidance by 2025. The CARB rulemaking process is expected to involve a public comment period allowing stakeholders to engage with the agency on the proposed regulations.

Emissions Reporting Requirement

Beginning in 2026, SB 253 requires public disclosure of both scope 1, or “direct,” GHG emissions from activities such as fuel combustion and scope 2, or “indirect,” emissions such as from consumed electricity, for the prior fiscal year. Beginning in 2027, reporting entities will also be required to report scope 3 emissions, which remain challenging to calculate and often require third-party inquiries to identify all indirect emissions from individuals and entities related to the company, such as emissions resulting from employee commutes, business travel, and goods and services purchased.

Penalties for failure to comply with these requirements are authorized up to $500,000 per reporting year.

While companies await CARB’s regulations outlining specific disclosure requirements, they should begin preparing for the detailed emissions accounting and assurance obligations by beginning to assess their corporate emissions and by establishing processes and protocols for calculating, recording, and managing compliance with the disclosure requirements. Further, with the anticipated publication of the SEC Climate Disclosure Rules, covered companies should closely assess the requirements of the two similar yet distinct disclosure regimes.

California’s new reporting requirements also come shortly after the European Commission’s adoption of the European Sustainability Reporting Standards (ESRS) earlier this year, highlighting a broader trend.  The ESRS extended the scope of ESG disclosure obligations in the EU, requiring covered companies to follow detailed and comprehensive standards for reporting on their sustainability impacts in areas including climate, pollution, biodiversity, and human rights.  While California’s SB 253 is not as expansive as the ESRS, it is notable as the first emissions disclosure requirement in the U.S., following the EU’s lead.

WilmerHale monitors trends in the ESG and disclosure space and regularly advises companies on navigating developments, including in California.  Please contact the WilmerHale ESG team to learn more.

 

Authors

More from this series