News

California Sets the Standard for Mandatory Carbon Disclosures

11th October 2023

While the world patiently awaits the long-delayed SEC climate disclosure rules, the state of California has taken matters into its own hands. At the weekend, Governor Gavin Newsom signed into law the Climate Corporate Data Accountability Act or otherwise known as SB-253.

The state bill, introduced by Senator Scott Wiener, is the first in the nation to require businesses to disclose their emissions in accordance with the Greenhouse Gas Protocol. Reporting requirements apply to all public and private companies earning at least $1 billion in annual revenue that do business in California, which impacts an estimated 5,400 businesses globally. They will be required to disclose their Scope 1 (direct emissions) and Scope 2 emissions (indirect emissions) from 2026, using data from 2025, as well as their Scope 3 emissions (all indirect emissions produced from a company’s entire supply chain) from 2027, using data from 2026.

Under the law, companies will have to submit their emissions calculations to a digital reporting platform, ensuring that they are digestible to both investors and stakeholders. Companies will also be required to hire an independent auditor to verify their emissions. The responsibility for implementing the law and overseeing reporting and verification will fall under the purview of the California Air Resources Board (CARB). Businesses that fail to comply with the law may receive a penalty of up to $500,000 per reporting year, imposed by CARB.

The law has faced staunch opposition on the basis of mandatory Scope 3 emissions disclosure. Critics have argued that calculating these will be both costly and burdensome, with little guidance on the best method of calculation. However, the law will allow businesses to use secondary data in reporting Scope 3. Any misstatements of Scope 3 emissions will also be excluded from penalties due to the difficulty in measuring and assessing the entirety of these emissions. The law also grants CARB significant discretion and flexibility to adjust implementation details as Scope 3 best practices evolve.

Comparing it to the SEC

California surpassing the nation’s climate ruling has sparked numerous questions about the forthcoming SEC announcement and how SB-253 measures up in comparison. Whilst the two do share similarities, including requiring greenhouse gas emissions disclosures and third-party assurance of that data, they do have differences with California going beyond the SEC.

According to sources close to the SEC, only publicly traded companies would need to disclose their Scope 1 and Scope 2 emissions. Companies will only disclose Scope 3 emissions if they have a specific target or if these emissions hold material significance. SB-253, on the other hand, requires disclosure of all three emissions for any company operating in the state with an annual revenue over $1 billion. California takes the SEC proposal one step further, driving decarbonisation in the private sector.

California has significant economic influence on a global scale, being the world’s fifth largest economy. The state has a track record of leveraging its economic influence to bypass the US federal government, especially when it comes to environmental laws. SEC Chair, Gary Gensler, noted that California’s climate regulation will lend valuable support to the SEC in its efforts to introduce similar rules which currently face major opposition. The passage of SB-253 changes the baseline for reporting, assisting the SEC in reducing costs as businesses operating in California will already be required to do similar disclosures.

What happens next…

While Governor Newsom has signed the bill, he cited some concerns about its timeline. His administration will now work with the bill’s author and the Legislature to address this concern, as well as any issues surrounding the financial impacts on businesses.

What are people saying about it:

• Senator Scott Wiener said: “These disclosures are simple but transformational, which is why companies like Apple are already reporting their emissions and calling them essential to their corporate climate goals. We need strong transparency to create a level playing field among private and public companies. Once again, California is leading the nation on essential climate action.”

• Kristina Wyatt, Deputy General Counsel and Chief Sustainability Officer at Persefoni, said: “There’s a tremendous amount of voluntary reporting of greenhouse gas emissions. It’s rapidly moving into a regulated space, which to me means we’re going to see greater standardisation and more consistency in the reporting, as well as a higher quality of reporting.”

• Jennifer Barrera, President & CEO of the California Chamber of Commerce, said: “We are disappointed that SB 253 was signed today…we look forward to working with the Governor’s office on SB 253 clean-up legislation that will address some of the major concerns of our members, particularly the impact on small business. The tools developed to meet the goals of SB 253 must be cost-effective and useful.”