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Oct 10, 2023

California’s Newsom signs landmark climate reporting laws

Legislation includes Scope 3 emissions

  

California Governor Gavin Newsom on Saturday signed into law two landmark climate disclosure bills for the state that are finalized before the SEC’s proposed climate risk reporting rule and in some respects go further than the agency’s plan.

Senate Bill 253 (SB 253) orders the California Air Resources Board (CARB) by January 1, 2025 to implement regulations requiring companies with total annual revenues of more than $1 bn that operate in California to disclose their GHG to an emissions reporting organization.

According to a notice from law firm Skadden, Arps, Slate, Meagher & Flom, SB 253 will require companies falling under the law to disclose each year: Scopes 1 and 2 emissions and, starting in 2026, the company’s Scope 1 and Scope 2 GHG emissions for the previous fiscal year; Scope 3 emissions and, starting in 2027, the company’s Scope 3 GHG emissions for the previous fiscal year.

The SEC’s proposal includes requiring disclosure of Scope 3 GHG emissions if these are material or if the company has set a GHG emissions target or goal that includes Scope 3 emissions. As proposed, the SEC would provide a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies.

The GHG emissions data would have to be measured and reported in accordance with the Greenhouse Gas Protocol (GHG Protocol) standards and guidance from World Resources Institute and World Business Council for Sustainable Development. After a phase-in period, companies will have to get third-party assurance of their GHG emissions.

Under Senate Bill 261 (SB 261), companies with more than $500 mn in total annual revenues that do business in California will have release a climate-related financial risk report every other year starting January 1, 2026 that includes:

  • A description of the company’s climate-related financial risk, defined as material risk of harm to immediate and long-term financial outcomes due to physical and transition risks such as risks to corporate operations, supply chains, employee health and safety, capital and financial investments, institutional investments and shareholder value
  • Measures the company has adopted to reduce and adapt to climate-related financial risk it discloses int he report.

The reports must be prepared according to the TCFD or any successor or certain ‘equivalent’ reporting requirements.
 

SCOPE AND IMPLICATIONS
In a separate notice, attorneys with Gibson Dunn & Crutcher note that unlike the SEC’s proposal, which would apply to public companies and investment firms, the new California laws apply to both public and private companies. They add that the SEC proposal and SB 253 reference the GHG Protocol when defining reportable emissions, but that SB 253’s Scope 3 GHG emissions reporting requirements are more ‘onerous.’

The SEC’s proposal would only require Scope 3 reporting where emissions are material to the company or part of a reduction plan, but SB 253 would require Scope 3 GHG emissions reporting for all companies regardless of whether they are material. SB 253 also authorizes but does not require CARB to impose a third-party assurance requirement for Scope 3 GHG emissions from 2027. The SEC’s proposal only requires third-party assurance for Scope 1 and Scope 2 GHG emissions, the lawyers note.

However, the Gibson Dunn lawyers state that both California laws use existing international reporting frameworks and standards. ‘As a result, some companies may find that they already track and report the necessary information, although for many others, these will be costly new undertakings,’ they write.

They add: ‘SB 253 would be the first widely applicable law in the [US] to require the assurance of Scope 1 and Scope 2 emissions reporting. As a result, companies will need to consider potential options for conducting the required GHG emissions attestation…  Companies may also need to implement, enhance, or alter their processes for collecting and measuring GHG emissions data, including, in the case of Scope 3 emissions data, by working with industry resources and partners in their value chains.’

The Skadden attorneys write that the laws are likely to face legal challenges, which could delay their implementation or strike them down. ‘Companies should continue monitoring the numerous developments with respect to climate-related disclosure initiatives and consider developing an action plan to comply with California’s requirements, if implemented and upheld,’ they add.

NEWSOM RESERVATIONS
Although he signed the bills into law, Newsom also expressed some reservations about their full content. He writes in a statement about SB 253: ‘This important policy, once again, demonstrates California's continued leadership with bold responses to the climate crisis, turning information transparency into climate action.

‘However, the implementation deadlines in this bill are likely infeasible, and the reporting protocol specified could result in inconsistent reporting across businesses subject to the measure. I am directing my administration to work with the bill's author and the legislature next year to address these issues.’

In that statement he also expresses concern about the ‘overall financial impact of this bill on businesses, so I am instructing CARB to closely monitor the cost impact as it implements this new bill and to make recommendations to streamline the program.’

In a statement on SEB 261 Newsom says: ‘This policy will illustrate the real risks of climate change for businesses operating in California and will encourage them to adopt practices that seek to minimize and avoid these risks.’ However, he also raises concerns about deadlines set for CARB and the overall financial impact of the law on companies.