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Home » Blog » ESG Fundamentals » Understanding California SB 253: A Comprehensive Guide for CSOs

Understanding California SB 253: A Comprehensive Guide for CSOs

SB 253

What is SB 253?

California Senate Bill 253 (SB 253), also known as the Climate Corporate Data Accountability Act, represents a significant shift in the legislative landscape regarding environmental, social, and governance (ESG) issues. This law mandates extensive disclosure of pollution and greenhouse gas (GHG) emissions data from companies operating within California, reflecting a global trend towards increased transparency in ESG reporting, similar to the EU’s CSRD requirements.

How Does SB 253 Work?

SB 253 requires companies with annual revenues exceeding $1 billion to disclose their direct and indirect GHG emissions (Scopes 1, 2, and 3). The bill mandates that these disclosures start in 2026 for Scopes 1 and 2 emissions and in 2027 for Scope 3 emissions. These reports must be updated annually and verified by third-party auditors to ensure accuracy and completeness.

Why is SB 253 Important?

The introduction of SB 253 aims to enhance the accountability and transparency of corporate contributions to climate change. By mandating detailed emissions reporting, the bill helps stakeholders, including investors and regulatory bodies, better understand the environmental impact of significant corporations and facilitates informed decision-making regarding sustainability practices.

For Whom Does SB 253 Apply?

SB 253 applies to over 5,000 businesses that operate within California’s borders, regardless of where they are headquartered. This wide scope ensures that any significant economic player contributing to the state’s economy is part of California’s aggressive climate goals .

Compliance Timelines and Requirements

Compliance Timelines and Requirements

Companies must begin reporting Scope 1 and 2 emissions in 2026 and Scope 3 emissions starting from 2027 based on data from 2026. This phased approach allows businesses adequate time to establish the necessary reporting infrastructure and processes.

The California Climate Accountability Package: Consists of SB 253, SB 252, and SB 261

California’s Climate Accountability Package is a landmark set of bills designed to address climate change. Here’s a breakdown of what each bill aims to achieve:

SB 253: The Climate Corporate Leadership and Accountability Act

  • Focus: Transparency and accountability in corporate environmental impact.
  • Action: Mandates large businesses operating in California (with revenue exceeding $1 billion) to publicly report their greenhouse gas emissions (Scopes 1, 2, and 3). This includes direct emissions from their operations (Scope 1), indirect emissions from purchased electricity (Scope 2), and emissions across their entire value chain (Scope 3).
  • Benefits: Provides stakeholders (investors, regulators) with a clearer picture of a company’s environmental footprint, encouraging more sustainable practices.
  • Impact: Similar to the EU’s CSRD requirements, SB 253 sets a precedent for global ESG reporting standards.

SB 252: Fossil Fuel Divestment

  • Focus: Divestment from fossil fuel companies by California’s public pension funds.
  • Action: Requires the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to divest their holdings in fossil fuel companies by a set deadline (originally 2030, with a potential extension).
  • Benefits: Aims to reduce financial risk associated with fossil fuels and redirect investments towards clean energy solutions.
  • Impact: Sends a strong signal to the market about California’s commitment to renewable energy and could influence investment trends nationwide. (Note: As of today’s date, April 9, 2024, the status of SB 252’s passage is unclear)

SB 261: Climate Financial Risk Act

  • Focus: Assessing and disclosing climate-related financial risks by businesses.
  • Action: Mandates companies with a revenue exceeding $500 million doing business in California to prepare and submit annual reports on climate-related financial risks. These risks could include physical damage from extreme weather events or the potential for stranded assets (fossil fuel investments that become worthless as the world transitions to clean energy).
  • Benefits: Increases transparency and helps companies better manage climate-related risks, potentially improving long-term financial stability.
  • Impact: Encourages businesses to consider the financial implications of climate change and promotes more sustainable practices within their operations.

These three bills, collectively, represent a significant step towards a more sustainable future for California and potentially the entire nation by influencing national and global trends around ESG reporting and climate action.

Global Implications and Comparisons

Though SB 253 is a state law, its effects resonate well beyond California due to the state’s massive economic influence. Companies outside the US, especially those with substantial business dealings in California, will need to consider how this law intersects with other international regulations, such as the EU’s CSRD. This alignment stresses the growing importance of a unified global approach to ESG reporting and the necessity for platforms that can navigate these complex requirements effectively.

The Role of Software in Compliance

Given the complexity and the extensive data requirements of SB 253, utilizing a robust software platform can significantly simplify compliance. Software solutions can help manage and automate the vast amount of data collection, processing, and reporting needed to meet the law’s requirements efficiently and accurately.

For CSOs and sustainability officers, understanding the nuances of SB 253 is crucial for strategic planning and ensuring that their organizations align with new regulatory environments proactively. As global ESG standards evolve, being ahead in compliance can provide substantial competitive and operational advantages.

For a deeper dive into the specific requirements and how they compare to other international standards, you can refer to the detailed resources provided by entities such as EY and other compliance-focused publications (EY Assets).

Why ESG is Becoming Increasingly Important in the US: A Regulatory Deep Dive

California’s SB 253 is a powerful example of a growing trend in the US – a regulatory push for Environmental, Social, and Governance (ESG) transparency and accountability. This focus on ESG isn’t limited to California, and here’s why it’s becoming increasingly important for businesses across the nation:

  • Investor Demand: Studies show a growing preference for ESG-conscious companies among investors. A 2020 Morgan Stanley report found that sustainable funds attracted $50 billion in net inflows globally during the first quarter, highlighting investor interest in aligning their portfolios with positive environmental and social impact. [ESG Investor Survey 2020, Morgan Stanley]
  • Risk Management: ESG factors can pose significant financial risks to businesses. Climate change, for instance, can disrupt supply chains, damage infrastructure, and lead to higher insurance costs. Strong ESG practices can help companies mitigate these risks and build resilience.
  • Regulatory Landscape: SB 253 is just one example. The US Securities and Exchange Commission (SEC) is also considering new ESG disclosure rules, and other states may follow California’s lead. Proactive companies that embrace ESG best practices will be better prepared to navigate this evolving regulatory landscape.
  • Competitive Advantage: Consumers are increasingly making purchasing decisions based on a company’s social and environmental responsibility. A 2022 Cone Communications survey found that 83% of global consumers would switch brands based on their social and environmental impact. [Cone Communications Sustainability Survey 2022] Demonstrating strong ESG performance can be a differentiator in a competitive market.

Beyond California: A Look at National Trends

While SB 253 is a state law, its impact is far-reaching. Here’s a glimpse into the national landscape:

  • Federal Regulations: The SEC is currently considering new rules on mandatory climate-related disclosures from publicly traded companies. These disclosures would likely cover greenhouse gas emissions, climate-related risks, and a company’s board oversight of climate issues.
  • State-Level Initiatives: Several other states, including Massachusetts, New Jersey, and Washington, are considering or have already implemented ESG-related legislation. These laws often focus on areas like sustainable procurement or diversity, equity, and inclusion (DE&I) practices.

The Takeaway: Proactive Compliance is Key

The increasing focus on ESG in the US presents both challenges and opportunities for businesses. By understanding and complying with emerging regulations, companies can mitigate risks, attract investors, and gain a competitive edge. Investing in robust software solutions can streamline data collection, reporting, and ensure compliance with complex regulations like SB 253.

For CSOs and sustainability officers, staying ahead of the curve is crucial. Resources from organizations like EY can provide valuable insights into navigating the evolving ESG landscape and international ESG standards like the EU’s CSRD requirements. By proactively embracing ESG best practices, companies can ensure long-term success in a world increasingly focused on sustainability and social responsibility. Book a demo today!

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