Alice Roberts, Amy Malick, Abby Kirchofer

October 10, 2023

California climate legislation: a primer for companies doing business in California

California has a long history of shaping US and global public policy, particularly in the areas of environmental and climate policy. The state’s recent climate legislation is expected to also extend far beyond its borders – affecting companies globally, galvanizing other states to take similar action, and inspiring more ambitious climate action at the national level.

The California Legislature passed two bills (SB 253 and SB 261) as part of the state’s landmark Climate Accountability Package. These bills will require thousands of companies doing business in California to disclose their global greenhouse gas (GHG) emissions and/or climate-related financial risk starting in 2026. These bills would have a broader reach than the Securities and Exchange Commission's (SEC) proposed climate disclosure rule and a significant alignment with the European Union's (EU) Corporate Sustainability Reporting Directive (CSRD).
SB 253: Climate Corporate Data Accountability Act
Senate Bill (SB) 253, the Climate Corporate Data Accountability Act, applies to any US-based company doing business in California with annual gross revenue exceeding $1 billion.1 The revenue threshold includes revenue generated within and outside the US. This includes both public and private companies, parent companies located outside of California with some operations in California, and subsidiaries of non-US-based companies that meet the revenue threshold.2 It is estimated that 5,400 companies will be subject to this regulation.3
Starting in 2026, SB 253 would require companies to annually disclose their global direct (scope 1) and indirect (scope 2) GHG emissions for the prior fiscal year (FY2025) in accordance with the GHG Protocol, with the addition of value chain (scope 3) emissions in 2027 for (FY2026).4 There are requirements for third-party assurance of GHG emissions for all reported years, starting in 2026, the first reported year. Limited assurance of annual scope 1 and 2 emissions disclosure is required starting in 2026, with reasonable assurance of scope 1 and 2 and limited assurance of scope 3 required starting in 2030 at the latest.5 CARB would govern the disclosures, and reporting requirements under SB 253 would be separate from reporting requirements under California's current mandatory GHG emissions reporting program.
SB 261: Climate-Related Financial Risk Act
SB 261, or the Climate-Related Financial Risk Act, requires US companies (with the exception of insurance companies) doing business in California with annual gross revenue greater than $500 million to prepare and submit climate-related financial risk reports consistent with the Task Force on Climate-Related Financial Disclosures (TCFD) framework, starting on or before January 1, 2026, and biennially thereafter.6 This expands the group of companies required to submit climate disclosures to a California emissions registry from 5,400 to over 10,000.7
Comparison to the SEC’s proposed rule
Both SB 253 and SB 261 go beyond the SEC's proposed climate disclosure rule:
  • The SEC’s rule only applies to public companies, while SB 253 applies to both public and private companies.
  • While the SEC’s proposed scope 3 emissions reporting requirements are dependent on a materiality test and/or whether scope 3 targets have already been set, there is no materiality test for SB 253’s scope 3 emissions requirement.
  • The SEC’s rule also exempts smaller reporting companies from scope 3 emissions disclosure requirements, while SB 253 would require all reporting entities to report scope 3 emissions.
  • Both SB 253 and the SEC proposed rule include a phase-in period for disclosure of scope 3 emissions. The SEC’s proposed rule also allows for a phase-in period for independent assurance for scopes 1 and 2, with reasonable assurance required in later years; however, no assurance is required for scope 3.8
  • Financial disclosure of material risks are required by the SEC’s proposed rule similar to SB 261, however, reporting transition plans, scenario analysis, and climate-related opportunities are optional and dependent on a company’s strategy and prior disclosures,9 whereas these items are included in the TCFD framework used by SB 261.10
Comparison to CSRD
SB 261 is similar in many ways to the ESG disclosures required under the EU's CSRD; however, the scope of the CSRD is much more expansive as it includes disclosures on social factors, governance, other environmental issues such as pollution and biodiversity, as well as due diligence regarding supply chain sustainability. Additionally, the CSRD has a lower threshold (€40 million EU net turnover) as a key factor in determining the applicability of the regulation. The CSRD applies to EU companies, including companies headquartered elsewhere but with EU subsidiaries. Most large companies (including EU subsidiaries that meet the compliance threshold) must comply starting in fiscal year 2024 or 2025.11
SB 253, the CSRD, and the International Sustainability Standards Board (ISSB) all require disclosure of scope 3 emissions in accordance with the GHG Protocol. The California legislation would promote a broader global trend of mandating scope 3 emissions disclosures, even if the SEC does not implement similar regulations at the federal level.
Momentum in other states
Similar bills are proposed in other states. New York proposed SB 897A which mirrors the requirements of SB 253, requiring disclosure and assurance of scopes 1, 2, and 3 GHG emissions by companies doing business in the state with annual revenue over $1 billion.12
Impact of the California legislation
These bills will impact many more companies than the approximately 10,000 companies required to disclose. Scope 3 emissions, or value chain emissions, are typically the vast majority of emissions and on average can account for 11 times scope 1 and 2 GHG emissions combined.13 Financed emissions are even greater and for financial companies, scope 3 emissions could be more than 700 times scope 1 and 2.14 Companies that are required to disclose emissions and risks may ask suppliers in their value chain to prepare climate-related disclosures in order to comply with this legislation. As such, many companies that do not operate in California and/or do not meet the revenue threshold may still need to start reporting on their scope 1, 2, and possibly 3 emissions and climate-related risks and opportunities.
How companies should prepare
Preparing for California's climate legislation is essential for businesses operating in the state. To position your company for success in the face of upcoming climate legislation in California, consider the following steps:
  • Monitor and stay up to date with California’s climate change legislation developments
  • Understand interoperability (ability to use material prepared for one disclosure to satisfy the requirements of another) with various disclosure requirements
  • Engage with stakeholders including employees, customers, and investors to develop climate initiatives
  • Conduct a comprehensive assessment of your organization’s current operational and value chain emissions and climate-related risks and identify areas for improvement
  • Implement robust data collection systems to track emissions, energy usage, and other key performance indicators that are auditable
  • Establish climate goals and targets that align with California’s climate objectives
  • Publish annual sustainability reports that disclose your progress toward meeting climate goals and compliance with climate legislation, and demonstrate your commitment to environmental stewardship and corporate responsibility
By taking proactive steps to prepare for California's climate legislation, your organization will be positioned for success in a rapidly changing regulatory landscape while contributing to the state's broader environmental goals. Moreover, aligning with climate regulations can enhance your reputation, reduce risks, and create opportunities for innovation and growth.
Ramboll can help
Mandatory reporting for the new California bills, the proposed SEC rule, CSRD, and others require careful navigation of the risk assessments, disclosure requirements, and opportunities for interoperability amongst various disclosure requirements. Our experts from across Ramboll provide guidance both internally and directly to clients, offering the services clients will require to prepare for these regulatory changes.
Reach out to Alice Roberts, Amy Malick, and Abby Kirchofer for support with climate disclosure and GHG emissions accounting, Corey Barnes-Covenant for climate transition risk, and Ross Beardsley for physical climate risk.

Want to know more?

  • Alice Roberts

    Managing Consultant

  • Amy Malick

    Principal

    +1 415-796-1940

  • Abby Kirchofer

    Principal

    +1 415-426-5013

Notes
1California SB253: 2023-2024: Regular session. LegiScan. (2023, September 14). https://legiscan.com/CA/text/SB253/2023#:~:text=SB%20253%2C%20as%20introduced%2C%20Wiener,enforce%20compliance%20with%20the%20act. 2Ibid 3Pineda, D. (2023, September 12). California lawmakers pass groundbreaking greenhouse gas emissions disclosure bill. Los Angeles Times. https://www.latimes.com/california/story/2023-09-12/california-lawmakers-pass-emissions-disclosure-bill4California SB253: 2023-2024: Regular session. 5Ibid 6California SB261: 2023-2024: Regular session. LegiScan. (2023b, September 15). https://legiscan.com/CA/text/SB261/20237Gerrard, M., Orts, E. W. (2023, August 8). New California legislation would be a major step forward for climate disclosure. Climate Law | A Sabin Center Blog. https://blogs.law.columbia.edu/climatechange/2023/08/08/new-california-legislation-would-be-a-major-step-forward-for-climate-disclosure/8Securities and Exchange Commission. (2022, March). The Enhancement and Standardization of Climate-Related Disclosures for Investors. Sec.gov | home. https://www.sec.gov/files/rules/proposed/2022/33-11042.pdf 9U.S. Securities and Exchange Commission. (2022, March 21). SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors. https://www.sec.gov/news/press-release/2022-4610TCFD Recommendations. Task Force on Climate-Related Financial Disclosures. (2023). https://www.fsb-tcfd.org/recommendations/11Chin, K., Stehl, K., Ng, L., & Feehily, M. (2022, August 23). EU Corporate Sustainability Reporting Directive-what do companies need to know. The Harvard Law School Forum on Corporate Governance. EU Corporate Sustainability Reporting Directive—What Do Companies Need to Know (harvard.edu)12New York Senate. (2023, January 9). 2023-S897A. NYSenate.gov. https://www.nysenate.gov/legislation/bills/2023/S897/amendment/A13Engaging the chain: Driving speed and scale - CDP. CDP. (2022, February). https://cdn.cdp.net/cdp-production/cms/reports/documents/000/006/106/original/CDP_SC_Report_2021.pdf?1644513297. 14Finance sector’s funded emissions over 700 times greater than its own. CDP. (2021, April 28). https://www.cdp.net/en/articles/media/finance-sectors-funded-emissions-over-700-times-greater-than-its-own