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Climate Disclosure Legislation – California's Ground–Breaking Requirements

Once again California has been a first mover in enacting environmental legislation. On October 7, 2023, California Governor Gavin Newsom signed into law 2 climate disclosure statutes. This legislation will create reporting obligations for thousands of companies. The stated purpose of the new legislation is to enhance transparency, standardize disclosures, and raise the standards for businesses to drive action on addressing climate change.

Climate Corporate Data Accountability Act (CCDA or Senate Bill 253)

This Act applies to companies that are doing business in California, and that have total annual revenues in excess of $1 billion. This Act requires reporting of the following on an annual basis:

  • Scope 1 Greenhouse Gas emissions (GHG), with reporting beginning in 2026. Scope 1 emissions are all direct GHG emissions from sources that a company owns or directly controls, including fuel combustion activities.
  • Scope 2 GHG emissions, with reporting beginning in 2026. Scope 2 emissions consist of all indirect GHG emissions from consumed electricity, steam, heating or cooling purchased or acquired by a company.
  • Scope 3 GHG emissions, with reporting beginning in 2027. Scope 3 emissions are all other indirect GHG emissions including, but not limited to, purchased good and services, business travel, employee commutes, and processing and use of sold products.

The reporting must be in conformance with the Greenhouse Gas Protocol standards and guidance. A company must obtain independent assurance, from a third-party assurance provider, for these reports. The California Air Resources Board (CARB) is required to develop regulations to implement this Act by January 1, 2025.

Climate Related Financial Risk Act (CFRA or Senate Bill 261)

This Act requires companies to prepare and disclose a climate related financial risk report. This Act applies to companies doing business in California with total annual revenues in excess of $500,000,000.

This Act requires that covered entities prepare a climate related financial risk report, and this is to be done on a biannual basis, starting in 2026. The report must be prepared in accordance with the recommended framework and disclosures contained in the Final Report of Recommendations of the Task Force on Climate Related Financial Disclosures, or pursuant to a equivalent reporting requirement. The report must include measures that a company has adopted to reduce and adapt to the disclosed climate related financial risk.

The framework for the report is to be structured around 4 keys areas related to the operations of the company, namely:

  • Governance: recommended disclosures to include descriptions of (i) the board’s oversight of climate related risk and opportunities, and (ii) management’s role in assessing and managing climate related risk and opportunities.
  • Strategy: recommended disclosures include descriptions of (i) the climate related risk and opportunities that the company has identified over the short, medium, and long-term; (ii) the impact of climate related risk and opportunities on the company’s businesses, strategies, and financial planning; and (iii) the resilience of the company’s strategy, taking into consideration different climate related scenarios.
  • Risk Management: recommended disclosures include (i) the company’s processes for identifying and assessing climate related risk; (ii) the company’s processes for managing climate related risk; and (iii) how the company’s risk management integrates processes for identifying, assessing and managing climate related risk.
  • Metric and Targets; recommended disclosures include descriptions of (i) metrics used to assess climate related risk and opportunities; (ii) Scope 1, Scope 2 and Scope 3 GHG emissions and related risks; and (iii) targets used by the company to manage the climate related risk and opportunities.

The report must be verified by an independent third-party.

Observations and Takeaways

Governor Newsom has expressed concerns that the deadlines in these laws may not be feasible, and could result in inconsistent reporting by affected business. Governor Newsom has requested that his administration and CARB work with the authors of the legislation to address the issues. He has also expressed the concern about the overall financial impact on businesses and requested CARB to make recommendations to streamline the programs. Given the broad scope of this new legislation, there may be legal challenges, including potential questions about the constitutionality of California regulating business practices outside its boundaries. This new legislation is stricter, in several respects, as compared to Federal proposed regulations that are under consideration by the SEC. While these uncertainties exist, given the time and effort that will be required to meet the new requirements, affected companies should begin preparing to comply with the new obligations under the CCDA and the CFRA.