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SB 253 and SB 261: What you need to know about new groundbreaking climate disclosure laws in California
California has taken the lead in pushing for corporate climate responsibility through passing groundbreaking legislation which requires large companies that do business in California to report on scope 1,2, and 3 emissions and to disclosure climate-related financial risk. Governor Newsom signed both the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261) into law on October 7, 2023.
Climate Corporate Data Accountability Act (SB 253)
- About this legislation: SB 253 requires certain companies to report direct emissions from operations (scope 1), indirect emissions from energy use (scope 2), and indirect upstream and downstream supply-chain emissions (scope 3 emissions). Reporting should adhere to the Greenhouse Gas Protocol standards, and third-party verification is required.
- Covered entities: Under Bill 253, any company making at least $1 billion a year is obligated to comply. This accounts to approximately 5500 companies.
- Timeline for compliance: Starting in 2026, subject companies will have to report scope 1 and scope 2 emissions. Starting in 2027, subject companies will have to report scope 3 emissions.
- Penalties: Subject companies that fail to comply may face up to $500,000 per year in penalties. Companies will only face immediate financial penalties if they fail to file the report but will not face financial penalties for non-compliance with emissions standards until 2030. Factors impacting the ultimate penalty include whether the company undertook good faith measures to comply, and the company’s past and present compliance.
Climate-Related Financial Risk Act (SB 261)
- About this legislation: SB 261 requires certain companies to prepare and submit climate-related financial reports, describing measures adopted to mitigate and adapt to that risk, in line with the Task Force on Climate-Related Financial Disclosure (TCFD) framework. These reports must be submitted to the California State Air Resources Board and published on the company website.
- Covered entities: Under bill 261, any company making at least $500 million a year is obligated to comply.
- Timeline for compliance: Subject companies need to file every 2 years, with the first report being due in 2026.
- Penalties: Subject companies that fail to report may face penalties of up to $50,000 per year. Factors impacting the ultimate penalty include whether the company undertook good faith measures to comply, and the company’s past and present compliance.
Relevance and Significance
Although the Securities and Exchange Commission (SEC) has introduced its own climate disclosure rules, these rules are still pending finalization. As a result, SB253 marks a significant milestone as the first corporate greenhouse gas emissions disclosure law to be implemented in the United States.
Moreover, there are noteworthy distinctions between the SEC’s proposals and this legislation. While the SEC primarily regulates publicly traded companies, California’s legislation extends its scope to privately traded entities. Additionally, the SEC’s proposals only address scope 1 and emissions, while SB253 encompasses scope 3 emissions as well. Including scope 3 emissions is crucial in painting a complete picture of a company’s emissions; for many businesses, scope 3 emissions account for more than 70 percent of their carbon footprint.
California has long been at the forefront of environmental initiatives. From pioneering fuel efficiency standards for cars to passing these laws, the state sets the bar high for corporate and environmental responsibility. “For companies wondering how to prepare for this legislation, the answer is simple: start now. It is never too early to begin the journey towards transparency and responsibility”, says Senator Scott Wiener.
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