The state of California has signed into law two bills introducing new climate-related reporting and disclosure requirements.
The two bills, Senate Bill (SB) 253 ‘Climate Corporate Data Accountability Act’, and SB 261 ‘Greenhouse gases: climate-related financial risk’, expand the amount of information that needs to be disclosed by companies operating in the state of California. A summary of the requirements and who they apply to is set out below.
Summary of requirements
- SB 253 directs the California State Air Resources Board to develop and implement regulations that require reporting entities to publicly disclose their scope 1, scope 2 and scope 3 greenhouse gas (GHG) emissions. This reporting will be required annually, beginning in financial years commencing in 2025 for scope 1 and 2 emissions, and financial years commencing in 2026 for scope 3 emissions.
- SB 261 requires covered entities to publicly disclose a “climate-related financial risk report” which details the climate-related financial risks that an entity is exposed to, as well as measures taken to mitigate these risks. This report will be required biennially, with the first report being required to be made public on or before 1 January 2026.
Entities in scope
The new bills introduce two similar concepts of a reporting entity (in the case of SB 253) and a covered entity (in the case of SB 261). The definitions of these types of entities are similar but differ in the revenue threshold applied:
- Reporting entity – Any 'corporation, partnership, limited liability company, or other business entity formed under the laws of this state [California], the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the United States' that is doing business in California with total annual revenues exceeding USD1 billion
- Covered entity - Any 'corporation, partnership, limited liability company, or other business entity formed under the laws of this state [California], the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the United States' that is doing business in California with total annual revenues exceeding USD500 million. The definition of a covered entity specifically excludes insurance businesses.
In both cases, the concept of ‘doing business in California’ is key. Although this term is not defined in either bill, California’s Franchise Tax Board includes the following guidance on its website:
We consider you to be ‘doing business’ if you meet any of the following:
- engage in any transaction for the purpose of financial gain within California
- are organised or commercially domiciled in California
- your California sales, property or payroll exceed the following amounts for 2022:
- California sales tax USD690,144
- California real and tangible personal property exceed USD69,015
- California payroll compensation exceeds USD69,015.
Our thoughts
These bills are another example of increasing climate reporting requirements around the world. For reporting entities in scope these bills will require significant work to collect and present data and information that companies may not have dealt with before, and as such will need careful planning to meet the requirements. Reporting of scope 3 GHG emissions in particular can be challenging as reporting entities will need to consider their whole value chain, both up and downstream.
Although the bills do not include non-US entities, it is likely that international businesses with legal entities operating in California will be caught by the requirements if they meet the revenue thresholds. We would therefore encourage all reporting entities to carefully consider whether they are in scope for these requirements. And if they are, to establish comprehensive climate reporting programs to enable them to meet these requirements and future requirements, as the climate and sustainability reporting landscape continues to evolve.
