From air pollution control to tailpipe emissions standards for cars, the state of California, which is on track to become the fourth-largest economy worldwide, has consistently led America in environmental matters, with many of its innovative policies being adopted at the federal level. The state's environmental leadership also extends to climate change mitigation policy. 2013 witnessed the launch of the state's economy-wide greenhouse gas (GHG) emissions trading system, the first in the U.S. In 2011, enforcement began of the state's low-carbon fuel standard, the world's first.
In October 2023, California Governor Gavin Newsom cemented California’s status as a climate leader when he ushered in three landmark pieces of legislation: Senate Bill (SB) 253, Climate Corporate Data Accountability Act, SB 261, Greenhouse Gases: Climate-Related Financial Risk, and Assembly Bill (AB) 1305, Voluntary Carbon Market Disclosures.
These sweeping laws mirror and go beyond efforts at the federal level. They require the disclosure of climate-related information by most public companies in the U.S. and update the guidance to companies on the claims they can make about the goods and services they sell on the American market. In this article, we'll summarize each new law as well as outline the likely impact on businesses.
SB 253: Climate Corporate Data Accountability Act
The common phrase in the GHG accounting world “you can't measure what you can't track" underlines the fact that decarbonization action starts with GHG emissions accounting. SB 253 requires all businesses with revenues exceeding $1 billion operating in California to annually disclose their Scope 1 and 2 emissions, starting in 2026. It will also require the disclosure of Scope 3 emissions starting in 2027 for the prior fiscal year, in accordance with guidance provided by the GHG Protocol. SB 253's mandatory Scope 3 disclosure requirement goes beyond the Securities and Exchange Commission (SEC)'s proposed climate-related financial disclosure rule, which would potentially require Scope 3 reporting based on materiality or a Scope 3 reduction target. (Read here for a simple breakdown of what Scope 3 GHG emissions are.)
Under SB 253, Scope 1 and 2 emissions will initially be subject to limited assurance from the first year of disclosure in 2026 and reasonable assurance starting in 2030. Scope 3 assurance requirements will be determined by the California Air Resources Board (CARB) in 2027. The bill specifically notes that emissions reporting is deliberately structured to minimize the reporting burden on the companies already aligning with other national and international reporting. Overall, companies impacted by the bill should take action now, gather their emissions data, and accelerate their journey towards assurance-ready GHG emissions reporting.
SB 261: Greenhouse Gases: Climate-Related Financial Risk
The financial impact of climate change is a growing area of concern, and California's economy is among the hardest hit. Acute and chronic physical climate risks facing California range from heatwaves to persistent drought, and a seemingly never-ending fire season. As the first mandatory climate risk disclosure statute for private companies in the U.S., SB 261 requires businesses with revenues exceeding $500 million to issue a climate-related financial impact report biennially starting in 2026, for the prior fiscal year.
Within the report, businesses will need to disclose climate-related financial disclosures in line with the TCFD recommendations. The bill also requires disclosure on adopted measures to reduce and adapt to climate-related risks. SB 261 does not go so far as to require climate-related financial impact to be integrated into financial filings, which is a key distinction from other global climate risk reporting frameworks like the International Financial Reporting Standards (IFRS) S2 Climate-Related Disclosures and the SEC's proposed climate-related financial disclosures rule. The bill supports the interoperability of global climate risk reporting by allowing entities that already report to Corporate Sustainability Reporting Directive (CSRD) or align with IFRS to comply.
The influx of TCFD-aligned reports will supply stakeholders and state decision-makers with consistent and comparable climate-risk data points. Investors, lenders, and insurance underwriters aided with this data will be able to more appropriately assess and price climate-related risks and allocate capital more effectively. For the state, this information will allow policymakers to identify the macro trends of sector-wide climate risks within California in order to execute a more proactive, targeted climate strategy going forward.
AB 1305: Voluntary Carbon Market Disclosures
For its part, AB 1305 will impose new disclosure requirements on companies - public and private, of all sizes - that make net-zero GHG emissions, GHG emissions neutrality, or similar claims. Due to take effect on January 1, 2024, AB 1305 will mandate that companies operating in California publish and regularly update information to support their climate claim. This information could include an independent third-party entity's verification of the company's GHG emissions or information on their science-based target. For claims underpinned, at least in part, by the purchase of carbon offsets, companies will have to provide the following information:
- the type(s) of project(s) generating the offsets used to make the regulated claim;
- basic information about the project(s) from which the offsets derive, such as the carbon offset standard(s) issuing the carbon offsets and the name(s) of the project(s) from which the offsets derive; and
- the permanence of the GHG emission reductions or GHG removals represented by the offsets, among other pieces of information.
The requirement to disclose this information should not deter companies from making use of offsets on their climate journey. Recent studies have shown that 78% of customers consider a brand's social and environmental actions when making a purchase, a trend that continues to grow year after year. But claims made must be accurate and compliant.
South Pole recently announced a new Paris-aligned corporate claim called “Funding Climate Action" that builds on the SBTi's beyond value chain mitigation (BVCM) guidance. We recommend that companies take immediate action above and beyond their science-based targets to contribute to reaching global net-zero through climate action beyond their value chain. This transparent and robust claim mitigates the risk of greenwashing or greenhushing, in conjunction with the “Funding Climate Action" label. South Pole's recent “Mastering Climate Claims" report dives deeper into how corporations can better understand the complex climate action claims landscapes.
Getting ahead of regulatory compliance
The urgency of the climate crisis requires transformative action from all actors in society: consumers, governments, and businesses alike. The three pieces of legislation recently enacted mark an important moment for California - and the entire U.S. - by joining the global movement of mandatory climate-related disclosures and taking advanced strides to shift toward a net zero-compatible economy. With so many moving parts, navigating the complex and evolving climate policy and carbon markets landscape can prove challenging. South Pole's dedicated team of experts can help companies make sense of this landscape as they progress on their decarbonization journey.