On October 7, 2023, California Governor Newsom signed SB 253 and SB 261, collectively known as the “California Climate Accountability Package,” into law. This law sends a clear message to corporations operating in the state: transparency in carbon emissions and climate risks is non-negotiable, and greenwashing will not be tolerated. Continue reading to delve deeper into the implications of these groundbreaking bills, their effective dates, and how they align with global climate disclosure standards.
What Is SB 253 and SB 261?
The adverse effects of climate change, such as escalating wildfires, rising sea levels, and extreme weather conditions, are already manifesting in California.
To address this, the state has introduced SB 253 and SB 261, aimed at requiring companies to transparently report their climate impacts on various stakeholders, including local communities, investors, and citizens.
California is poised to become the world’s fourth-largest economy and is a crucial market for international companies. These bills ensure that corporations reaping the benefits of California’s economy also bear the responsibility for their emissions. Given California’s global influence, these regulations are expected to set a precedent that will impact companies in the U.S. and worldwide.
Key Provisions of SB 253
The Driving Forces
California aims to maintain its pioneering role in climate policy, recognizing the severe impacts of climate change on its people and economy. The bill emphasizes that companies with substantial revenue that do business in the state should disclose their carbon emissions. The end goal is to help stakeholders make informed decisions and transition to a net-zero carbon economy through annual GHG emissions data reporting based on globally accepted standards.
What It Means for Companies
- Starting in 2026, companies must report their Scope 1 & 2 emissions for the previous year.
- By 2027, Scope 3 emissions reporting kicks in.
- The reporting aligns with the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and its Scope 3 counterpart.
- Third-party verification is mandatory: limited assurance for Scope 1 & 2 emissions by 2026 and reasonable assurance by 2030. Scope 3 requires third-party limited assurance starting in 2030.
The state will also commission an “emissions reporting organization” by January 1, 2025, to develop a digital platform for public disclosure. This will be funded by an annual fee from the reporting entities.
Fines for Non-Compliance
Non-compliance will result in administrative penalties, with fines not exceeding $500,000 per reporting year. The state will consider the company’s compliance history and good faith efforts. Safe harbors exist for Scope 3 emissions, protecting companies from penalties for reasonable, good-faith misstatements between 2027 and 2030.
Key Provisions of SB 261
The Driving Forces
California is acutely aware of the severe economic and environmental repercussions of climate change. While global initiatives are pushing for transparent climate-risk reporting, most are voluntary. This bill aims to change that by making climate risk disclosure mandatory for both public and private entities in California, ensuring a more sustainable and resilient future.
What It Means for Companies
- Reporting entities must disclose climate-related risks and their mitigation and adaptation strategies on their websites by 2026 and every two years after that.
- The reporting aligns with the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures, covering governance, metrics and targets, strategy, and risk management.
- If full compliance is not possible, entities must explain the gaps and outline plans for complete disclosure. Compliance can also be met if they already report using TCFD or ISSB standards.
- The state board will commission a "climate reporting organization" to prepare a biennial public report analyzing the climate-related financial risks reported and those facing California.
Originally slated for 2024, the bill was amended to align with SB 253, requiring reporting to start by January 1, 2026, and continue biennially.
Fines for Non-Compliance
Non-compliance will result in administrative penalties, with fines capped at $50,000 per reporting year. The state will consider the entity’s compliance history and good faith efforts in its judgment.
Who Is on the Hook for SB 253 and SB 261?
- Conducting transactions for financial gain within California.
- Being organized or commercially domiciled in the state.
- Exceeding specific thresholds in California sales, property, or payroll, or if these account for 25% or more of the total:
|Year||CA Sales||CA Real and Tangible Personal Property||CA Payroll Compensation Exceeds|
- SB 253: Targets companies with an annual turnover of $1 billion or more, which is estimated to include 5,400 companies.
- SB 261: Focuses on companies (excluding insurance companies) with an annual turnover of $500 million or more, affecting around 10,000 companies.
The Ripple Effect of SB 253 and SB 261
The Direct Impact
Estimates suggest that 5,400 companies will be directly affected by both bills, with an additional 5,000 companies impacted by SB 261 alone. But the influence of these bills extends far beyond these numbers.
The Indirect Reach
- SB 253: The bill's inclusion of Scope 3 emissions means that reporting entities may request supply chain emissions data. Given that Scope 3 emissions often make up the lion's share of a company's total emissions—11.4 times that of Scope 1 & 2—it is a big deal. For financial institutions, this is even more significant as Scope 3 includes financed emissions, which are 700 times that of Scope 1 & 2, requiring data collection from thousands of invested or loaned companies.
- SB 261: The bill mandates companies to report climate-related risks in their supply chains. This will compel companies within those supply chains to share relevant climate data for risk and opportunity assessment.
The Bottom Line
The reach of these bills is expansive, affecting companies of various sizes and locations. Be prepared to disclose climate-related information if you are part of the supply chain for any reporting entity.
The Global Landscape: How California’s Climate Bills Stack Up Internationally
The Global Trend
Climate disclosure regulations are increasingly converging on a global scale. The EU’s CSRD is set to impact over 60,000 companies both within and outside the EU, while the SEC’s pending Climate Disclosure Rule is aimed at the largest publicly traded companies in the U.S. These two regulations have many similarities and differences with the California bills, such as:
California vs. SEC
Common Ground: Both the SEC’s yet-to-be-finalized Climate Rule and California’s SB 253 and SB 261 are built on similar foundations. They both mandate the disclosure of Scope 1, 2, and 3 emissions following the Greenhouse Gas Protocol and require climate-related risk reporting based on TCFD guidelines. Additionally, both the SEC proposal and SB 253 call for third-party assurance.
Divergence: The key difference lies in the scope of affected companies. The SEC’s rule targets only publicly traded companies, while California’s bills extend to large public and private companies operating in the state. Another point of departure is the contentious issue of Scope 3 reporting, which may or may not be included in the final SEC ruling.
California vs. CSRD
Shared Objectives: Both the CSRD and California’s bills affect public and private companies within and beyond their respective jurisdictions. They require the reporting of Scope 1, 2, and 3 emissions, climate risks, and third-party assurances.
Contrasts: The CSRD goes a step further by mandating the disclosure of over 100 additional ESG indicators.
The Takeaway: Compliance with California’s SB 253 and SB 261 positions companies well for alignment with other major global reporting regulations like the SEC and CSRD.
Navigating the Road Ahead: What’s Next for Companies?
While some organizations and advocacy groups are threatening legal action against the State of California to halt these bills, Governor Newsom’s endorsement ensures they will take effect in the interim. The new reporting mandates will kick in starting 2026.
Many companies are already ahead of the curve, but this is uncharted territory for some. Being proactive is not just about compliance but also safeguarding your brand. Research shows that the financial toll of a tarnished brand often surpasses the cost of non-compliance fines.
Your Compliance Journey
Worried about navigating these new waters? We offer a comprehensive, end-to-end solution to ease your compliance journey. From reporting to assurance, we will guide you through every step to meet the bill’s requirements.