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The Golden State’s Green Blueprint: California Climate Disclosure Bills

California Climate Disclosure

Introduction  

California has once again positioned itself at the forefront of environmental regulation, pioneering a California Climate Disclosure initiative that demands unparalleled transparency from corporations. This transformative directive compels businesses to scrutinize and share their climate-related vulnerabilities and mitigation strategies, integrating sustainability into their core financial and operational reporting. As the first tremors of this policy shift are felt across the state, this mandate stands as a testament to California’s commitment to combating climate change through corporate governance.  

Here’s why this law carries so much weight: 

California’s Economic Powerhouse Status: 

Forget Gross Domestic Product (GDP) comparisons for a moment. While projections suggested California might have surpassed Germany as the world’s fourth-largest economy in 2022 [Bloomberg, 2022], the bigger picture lies in California’s sheer economic influence. As a hub for innovation and home to a vast network of businesses, California sets trends that ripple across the US and, often, the globe. Its leadership in climate disclosure has the potential to become the new industry standard. 

Investor Demand for Transparency: 

Financial markets are increasingly thirsty for environmental, social, and governance (ESG) data. A 2023 report by the CFA Institute found that 88% of investment professionals globally now integrate ESG factors into their investment decisions. California’s new rules provide exactly what these investors crave: comprehensive, comparable information on a company’s climate impact. This empowers them to make informed choices, considering long-term risks and opportunities associated with climate change. 

A Catalyst for National Leadership: 

California has a long history of pioneering environmental regulations that eventually become national benchmarks. Remember the tailpipe emission standards that originated in California and later became the foundation for federal clean air regulations? Climate disclosure could follow the same path. With California taking the lead, other states and the federal government may be more likely to implement similar disclosure mandates, creating a unified national approach to climate risk assessment. 

Building a Sustainable Financial System: 

Climate change presents both risks and opportunities for investors. Companies with robust emission reduction strategies and resilient supply chains are likely to be better positioned for the future. Conversely, those lagging behind could face regulatory hurdles, stranded assets, and reputational damage. California’s disclosure framework allows investors to see this bigger picture, encouraging them to support companies actively managing their climate footprint. This fosters a more sustainable financial system that rewards responsible businesses and ultimately benefits everyone. 

In essence, California’s climate disclosure law is a powerful confluence of economic clout, investor demand, and the potential for national leadership. It’s a strategic move with the potential to reshape how businesses approach climate change and how investors navigate the evolving landscape of climate risk. 

California Climate Disclosure: A Breakdown of the Key Legislation and Timeline 

Governor Gavin Newsom’s commitment to environmental leadership played a key role in bringing California’s groundbreaking climate disclosure legislation to life. Recognizing the growing need for transparency and accountability on climate issues, California enacted a series of bills in October 2023 that establish a robust framework for climate-related reporting. These bills aim to empower investors, stakeholders, and the public with the information they need to make informed decisions about the environmental impact of businesses operating in the state. 

Let’s delve into the specifics of these three landmark bills, along with their timelines and reporting requirements: 

Climate Corporate Data Accountability Act (SB 253):

This bill, spearheaded by Senator John Laird, focuses on mandatory greenhouse gas (GHG) emissions reporting for large companies. Here’s a breakdown of who needs to disclose and what: 

  • Who: Any business entity formed in the United States with a total annual revenue exceeding $1 billion and “doing business in California” is considered a “reporting entity” under SB 253. 
  • What: Reporting entities must measure and publicly disclose their Scope 1 (direct emissions) and Scope 2 (purchased energy emissions) annually, starting in 2026. The disclosures must follow established protocols set forth by the World Resources Institute (WRI) and World Business Council for Sustainable Development (WBCSD). 

Timeline: 

  • Starting in 2026 (and annually thereafter): Reporting of Scopes 1 & 2 emissions. 
  • Starting in 2027 (and annually thereafter): Reporting of Scope 3 emissions (indirect emissions from the value chain) within 180 days of disclosing Scopes 1 & 2. 

SB 261: Climate-Related Financial Risks

Authored by Senator Ben Allen, this bill mandates that companies with over $500 million in annual revenue disclose their climate-related financial risks. 

  • Who: Similar to SB 253, this bill defines a “covered entity” as any business entity formed in the US with a revenue exceeding $500 million and “doing business in California.” 
  • What: Covered entities must prepare and submit a climate-related financial risk report that aligns with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). This report should detail how climate change can impact the company’s business strategy, governance, and financial performance. Additionally, companies must outline measures they’re taking to mitigate or adapt to these climate-related risks. 

Timeline:

The first climate-related financial risk reports are due on or before January 1, 2026, with subsequent reports submitted every two years thereafter. 

AB 1305: Transparency in Carbon Offsets

While not directly related to emissions reporting, Assembly Bill 1305, authored by Assembly member Josh Green, promotes transparency in the carbon offset market. 

  • Who: This bill applies to companies selling or marketing carbon offsets within California. 
  • What: Companies must disclose details about the origin, methodology, and verification process used for the carbon offsets they offer. This empowers consumers to make informed choices when considering carbon offset purchases. 
Bill  Who Has to Disclose?  What Has to be Disclosed?  Timeline 
SB 253 (Climate Corporate Data Accountability Act)  Reporting entity (Revenue > $1 billion, doing business in CA)  Scopes 1, 2 & 3 GHG emissions  – Scopes 1 & 2: Annually starting 2026 <br> – Scope 3: Annually starting 2027 (180 days after Scopes 1 & 2) 
SB 261 (Climate-Related Financial Risks)  Covered entity (Revenue > $500 million, doing business in CA)  Climate-related financial risks (aligned with TCFD) & mitigation/adaptation measures  – First report: January 1, 2026 (or before) <br> – Subsequent reports: Every two years thereafter 
AB 1305 (Transparency in Carbon Offsets)  Companies selling/marketing carbon offsets in CA  Information on carbon offset origin, methodology, and verification process  – Ongoing disclosure for companies involved in carbon offset sales 

 California Climate Disclosure:  Caveats 

California’s climate disclosure legislation is a groundbreaking step, but it also presents complexities for businesses to navigate. Here are some key caveats and potential challenges to consider: 

1. The Scope 3 Conundrum:

One of the biggest hurdles lies in mandatory Scope 3 emissions reporting under SB 253. Unlike Scopes 1 & 2 (direct and purchased energy emissions), Scope 3 covers indirect emissions across a company’s entire value chain, including suppliers and customers. This can be extremely challenging to track and audit accurately, requiring significant data collection and analysis capabilities. 

The SEC Factor: While the US Securities and Exchange Commission (SEC) has proposed its own climate disclosure rules, these currently exclude mandatory Scope 3 reporting. This discrepancy creates a compliance burden for companies operating in California, who may need to follow a more stringent standard than the federal one. 

2. The “Doing Business” Threshold:

California defines “doing business” broadly. Even a company with minimal revenue in the state, say $1 million compared to a national presence with billions elsewhere, could fall under the disclosure requirements. This broad definition casts a wide net and could capture a much larger pool of businesses than initially anticipated. 

3. The Ripple Effect:

California may be the first mover, but its legislation is likely to inspire similar actions by other states. New York and Illinois already have bills in the works mirroring SB 253. Companies should be prepared for a potential patchwork of climate disclosure regulations across the country, further adding to the compliance complexity. 

4. The Interoperability Puzzle:

While California’s requirements are distinct, there might be some degree of overlap with other emerging ESG (environmental, social, and governance) reporting frameworks. These include the European Sustainability Reporting Standards (CSRD), the IFRS Sustainability Reporting Standards by the International Sustainability Standards Board (ISSB), and potentially future SEC rules. 

The good news? These frameworks often share a common foundation in the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. This means companies that are already aligning with TCFD may be closer to compliance than they realize. However, navigating the specific nuances of each framework will require ongoing effort. 

In essence, California’s climate disclosure legislation presents a mix of challenges and opportunities. Businesses will need to carefully assess their compliance obligations, explore available resources for data collection and reporting, and stay informed about potential changes to both state and federal regulations.

A Roadmap to Compliance and Beyond 

As we saw earlier, accurately tracking and reporting Scope 3 emissions, which encompass a company’s entire value chain, is a significant challenge when it comes to California Climate Disclosure bills. Traditional audit methods might not be sufficient for such a comprehensive assessment. Here are some potential solutions: 

  • Engaging with Partners and Suppliers: Open communication and collaboration with suppliers and other value chain partners are crucial for gathering accurate data on their emissions. Companies can develop standard data request forms, conduct surveys, and potentially incentivize partners to improve their own sustainability practices. 
  • Leveraging Technology Solutions: Fortunately, a growing number of technology platforms and data providers are emerging to streamline Scope 3 data collection and reporting. These tools can help automate data gathering, manage complex datasets, and ensure consistency in reporting metrics. 

The Early Bird Gets the Disclosure: 

California’s climate disclosure legislation requires action, and starting early is paramount. Here’s why: 

  • Internal Stakeholder Alignment: Building consensus and buy-in from various internal departments, such as supply chain, operations, and finance, is essential for successful implementation. Early engagement allows for open discussions, identification of potential roadblocks, and a collaborative approach to data collection and reporting. 
  • Technology Integration: Exploring and integrating appropriate technology solutions takes time. Identifying the right tools, implementing them within existing systems, and training staff on their use all require a planned approach. Starting early allows for a smooth integration process without last-minute scrambling. 
  • Auditor Selection and Training: Finding qualified auditors with expertise in Scope 3 emissions reporting may require additional effort. Beginning the search early increases the chances of securing the right partner and allows time for auditors to familiarize themselves with your company’s specific needs. 
  • Supplier Engagement: Obtaining reliable data from suppliers often takes time and ongoing communication. A proactive approach allows for building stronger relationships with suppliers, encouraging their participation, and potentially fostering collaborative efforts towards shared sustainability goals. 

The implications of not starting early are significant. Companies that delay risk missing deadlines, facing potential fines, and damaging their reputation with investors and stakeholders who increasingly value transparency on climate issues. 

In conclusion, California’s climate disclosure legislation is a wake-up call for businesses to embrace environmental responsibility and transparency. By proactively navigating the complexities of Scope 3 reporting, collaborating with partners, and leveraging technology solutions, companies can transform this challenge into a strategic advantage. Early action goes beyond simply meeting deadlines; it positions your business as a leader in sustainability, fosters trust with investors and stakeholders increasingly focused on ESG factors, and potentially unlocks new market opportunities in a carbon-conscious world. 

Don’t Wait to Act 

While the SEC’s climate disclosure rules are currently on hold, there are compelling reasons for companies to get started now, rather than waiting for a later implementation date. Here’s why: 

Building a Strong Foundation: 

  • Internal Alignment: Early engagement fosters open communication and collaboration across departments like supply chain, operations, and finance. This helps identify potential roadblocks and establish a cohesive approach to data collection and reporting. 
  • Technological Integration: Implementing climate disclosure requires exploring and integrating appropriate technology solutions. Starting early allows for a smoother transition – identifying the right tools, integrating them within existing systems, and training staff on their use all require careful planning. 

Securing Expertise and Building Relationships: 

  • Auditor Selection: Finding qualified auditors with expertise in greenhouse gas emissions reporting may require additional effort. Beginning the search early increases the chances of securing the right partner and allows time for auditors to understand your company’s specific needs. 
  • Supplier Engagement: Obtaining reliable data from suppliers often hinges on clear communication and established relationships. A proactive approach strengthens these ties, encourages supplier participation, and fosters collaborative efforts towards shared sustainability goals. 

Competitive Advantage and Risk Mitigation: 

  • Early Leadership: By proactively navigating climate disclosure requirements, companies can position themselves as leaders in sustainability. This builds trust with investors and stakeholders increasingly focused on ESG factors. 
  • Market Opportunities: Early movers unlock new market opportunities in a world prioritizing climate action. Companies that demonstrate environmental responsibility can attract eco-conscious consumers and investors. 

The Cost of Delay: A Missed Opportunity 

While the current pause on implementation offers a temporary reprieve, delaying action on climate disclosure presents significant risks. Companies that wait until the eleventh hour risk scrambling to meet deadlines, potentially facing fines and, more importantly, damaging their reputation. Investors and stakeholders increasingly value transparency on climate issues. Lagging behind can erode trust and hinder a company’s ability to attract capital and talent in a world where environmental responsibility is a key differentiator. 

However, the decision to proactively engage with climate disclosure extends beyond simply avoiding penalties. It’s a strategic move that positions your company as a leader in sustainability. Early movers gain a competitive edge by demonstrating a commitment to a low-carbon future. This resonates with environmentally conscious consumers and investors alike, potentially unlocking new market opportunities.

The world is catching up to the reality of climate change accountability, and companies that embrace this shift will be best positioned to thrive in the evolving landscape. Don’t wait for the regulations to take effect – form strategic alliances, leverage available resources, and start building a robust climate disclosure strategy today. Proactive action is the key to transforming climate disclosure from a compliance burden into a springboard for a more sustainable and successful future. Book a demo today!

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