According to CDP's Carbon Majors Database Report, 100 corporate and state-producing entities were responsible for 71% of global GHG emissions between 1988 and 2015 (1). In the ongoing effort to mitigate climate change, organizations will increasingly be held accountable by governments, investors, and consumers to be transparent with their emissions profile, and to chart a course towards decarbonization. Legislation is usually the driving factor of such change. Just this past week, the state of California passed two pieces of legislation with the aim of increasing transparency around emissions and disclosing climate-related financial risks.
In the lead up to the SEC’s pending Climate Disclosure Rule expected this year, which we’ve previously reported on, the legislation in California is a game changer in the race to deliver more comprehensive climate-related disclosures. We believe this presents an immediate opportunity for companies to get ahead of the curve, now, and develop a strategic plan of action for their reporting amid a rapidly changing environment.
The transition from optional sustainability pledges to mandated transparency also reflects a growing awareness of sustainability on a global scale. Consequently, the standard for gaining a competitive edge through sustainable actions is likely to rise substantially, as sustainable practices increasingly become required norms.
As the LA Times reports, “With California being the fifth largest economy in the world, advocates are hopeful the legislation could reach beyond the state’s borders by forcing some of the world’s biggest companies to disclose their emissions and incentivizing other states to adopt similar climate laws.” Read more here.
California lawmakers initially introduced three bills in January 2023, making up the Climate Accountability Package:
- Senate Bill (SB) 252: Public retirement system divestment from fossil fuels
- Senate Bill (SB) 253: Climate Corporate Data Accountability Act
- Senate Bill (SB) 261: Climate-related financial risk disclosure
SB-253 and SB-261 were recently approved on October 7, 2023 by California Governor Gavin Newsom. In this quick newsbyte, we focus on the upcoming implications of these approved pieces of legislation.
The third bill, SB-252, is undergoing deliberation and this review is expected to continue through 2024. Newsom highlighted some key issues with this bill, including implementation deadlines and financial impacts, which his Administration, along with the California Air Resources Board (CARB), will be working to address and monitor.
For many companies that don’t currently meet the requirements for disclosure, they will experience the impacts of these laws, as they may be a part of a qualifying entity’s total value chain. At the onset, both publicly traded and privately held companies doing business in California will be required to disclose their Scope 3 emissions and the effects of climate change on their financial performance (2).
Senate Bill (SB) 253: Climate Corporate Data Accountability Act: designed to increase transparency and accountability in how corporations manage and report their greenhouse gas emissions. It mandates that companies disclose their direct and indirect greenhouse gas emissions, as well as their efforts to reduce these emissions.
SB-253 applies to entities with operations in the State of California with annual revenue over $1B. These companies are mandated to take several actions, including:
Disclose greenhouse gas emissions in accordance with the Greenhouse Gas Protocol
- Disclose Scopes 1, 2 and 3 Emissions (requires disclosure of all Scope 3 emissions)
- Companies are required to have independent auditors with expertise in carbon accounting verify their reported emissions (starting with limited assurance and eventually moving to reasonable assurance)
- Must submit emission calculations to a digital reporting platform, ensuring that the disclosed information is easily comprehensible to residents, investors, and other stakeholders.
- Note: California Air Resources Board (CARB) will contract with an emissions reporting organization to develop a reporting program to receive and make publicly-available disclosures required on a digital platform.
Senate Bill (SB) 261: Climate-related financial risk disclosure: SB-261 requires both publicly-traded and private companies to disclose their climate-related financial risk pursuant to the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, and the measures they are taking to either mitigate or adapt to these risks. This legislation is the first of its kind to go into effect in the United States.
The primary objective of the legislation is to introduce a culture shift amongst large companies towards climate preparedness. SB-261 requires these entities to account for possible financial risks emerging throughout this period of significant industry decarbonization and physical climate adaptation.
While the spirit of this legislation, in terms of transparency and accountability, is in keeping with SB-253, SB-261 has some key differences in scale and scope:
- Covers a larger pool of companies: applying to those who operate in the State of California with $500 million in annual revenues.
- Requires these companies to organize relevant data and then prepare and publish a publicly-available report on their website, rather than reporting disclosures to a third-party entity.
- Compliance will also commence in 2026, with the first report required to be prepared by December 31. The cadence of continuous disclosures will be biennially rather than annually.
Preliminary Timelines at a Glance: Quick Chart
Reputation Management Under the New Era of Reporting: Turning Challenges into Opportunities
One of the significant implications of SB-253 and SB-261 is the potential impact on a company's reputation. In an era where consumers and investors are increasingly conscious of environmental issues, companies that fail to disclose their emissions or take steps to reduce them could face backlash – potentially resulting in lost business, decreased investor interest, legal repercussions, and fines.
Companies will also experience increased operational costs as they implement processes to track, measure, and report emissions and climate-related financial risk. Oftentimes, these processes can be complex and resource-intensive, and may require investments in new technologies or additional resources to comply with requirements.
While companies will be required to navigate these potential challenges, there are also many opportunities to gain. Those that proactively address their environmental impact can differentiate themselves in the market, attract environmentally conscious consumers and investors, and potentially gain a competitive advantage.
Overall, Senate Bills 253 and 261 represent a significant step forward in the fight against climate change, allowing businesses to embrace transparency and take decisive action on environmental sustainability. Following the passing of this recent legislation, companies should be proactively preparing for these disclosures before the official submission dates.
Schneider Electric helps companies identify key areas for improvement and delivers a comprehensive readiness strategy with customized solutions to achieve successful and compliant disclosures – addressing both the recent California legislation, and readiness for the SEC’s pending Climate Disclosure Rule. With more than 20 years of expertise, our team serves as a trusted advisor and partner, helping businesses navigate climate change reform to champion this new era of sustainability.
To learn more about how our team of Sustainability experts is meeting the challenge of this new legislation in California, read our fact sheet.