On October 7, 2023, California passed a new set of far-reaching climate legislation in the form of SB 253, the Climate Corporate Data Accountability Act (CCDAA), and SB 261, the Climate-Related Financial Risk Act (CRFRA) (collectively). , the “California Climate Accountability Regime”). Due to the sheer size of the California market – the fifth largest economy in the world – the new legislation will effectively reshape the debate about environmental, social and governance (“ESG”) and climate transparency far beyond state borders.
Under the CCDAA, companies operating in California with annual revenues of more than $1 billion must begin publicly reporting their greenhouse gas (“GHG”) emissions, including indirect emissions impacts resulting from their operations, beginning in 2026. Under the CRFRA, companies operating in California with annual revenues of more than $500 million must publish climate-related financial risk reports every two years through January 1, 2026, disclosing both climate-related financial risks and measures to reduce and adapt to those risks become. Covered companies covered by both bills will have to pay an annual fee, namely the corresponding amount of which is to be determined.
California’s Comprehensive Climate Responsibility Regime: Setting an Aggressive New National Standard
California has now surpassed the U.S. Securities and Exchange Commission, which previously proposed a climate rule in March 2022 that would require publicly traded companies to disclose certain climate-related information in their annual reports and registration statements. And California potentially covers even more companies because the California Climate Accountability Regime applies to both public and private companies that exceed certain revenue thresholds. Given the size of the California market, these new state regulations could actually set a new national standard.
CCDAA
The CCDAA requires public and private companies that “do business” in California and whose total annual revenue was more than $1 billion in the previous fiscal year to publicly report their direct and indirect greenhouse gas emissions. The bill does not define “doing business,” but it seems likely that it will be interpreted broadly by stakeholders. For example, the California tax code defines “doing business” as “actively engaging in a transaction for financial or monetary gain,” and regulators appear poised to apply an equally broad definition here.
The CCDAA categorizes greenhouse gas emissions by scale and requires companies to publicly disclose Scope 1 and 2 emissions beginning in 2026 and Scope 3 emissions beginning in 2027. Area 1 emissions come from sources owned or directly controlled by the Company, regardless of location, including but not limited to fuel combustion activities. Scope 2 emissions are indirect greenhouse gas emissions from consumed electricity, steam, heating or cooling that a company buys or acquires regardless of location. Scope 3 emissions are indirect upstream and downstream greenhouse gas emissions, excluding Scope 2 emissions, from sources that the company does not own or directly control. This may include, but is not limited to, purchased goods and services, business trips, employee commutes, etc. Processing and use of the products sold. Scope 3 emissions essentially encompass everything along a company’s value chain – a broad category with varying opinions and practices regarding the nuances.
The measurement and reporting of greenhouse gas emissions must comply with the standards of the Greenhouse Gas Protocol (“GHG Protocol”) and follow the guidelines developed by the World Resources Institute and the World Business Council for Sustainable Development. Covered entities must also obtain independent third-party verification of their public disclosures. Scope 1 and Scope 2 emissions must be verified with “limited certainty” from 2026 and with “reasonable certainty” from 2030. Safety for Scope 3 emissions will be verified with limited certainty from 2030. On or before January 1, 2025 The California State Air Resources Board will develop and adopt regulations to oversee the disclosure requirements of the CCDAA.
Failure to comply with legal requirements may result in an administrative penalty of up to $500,000 per reporting year.
CRFRA
The CRFRA requires public and private companies that “do business” in California and whose annual revenue exceeds $500 million to prepare a climate-related financial risk report every two years. The report must disclose the company’s (1) climate-related financial risk and (2) the measures taken to reduce and adapt to climate-related financial risk. “Climate-related financial risk” is defined in the bill as a material risk of adverse effects on immediate and long-term financial outcomes due to physical and transition risks. These include risks to company operations, the provision of goods and services, supply chains, the health and safety of employees, capital and financial investments, institutional investments, the financial condition of loan recipients and borrowers, shareholder value, consumer demand and the financial markets and the economic health.
Starting January 1, 2026, affected companies must publish their report on the company’s website. Failure to include required disclosures in the report may result in an administrative penalty of up to $50,000.
Compliance: Interaction with the SEC’s proposed climate rule and the EU Sustainability Reporting Directive (“CSRD”)
While California’s draft legislation is similar to the SEC’s proposed rule on climate-related disclosures, there are key differences.
First, the California Climate Accountability Regime applies to both public and private companies, while the SEC’s proposed regime applies only to public companies that report to the SEC.
Second, the CCDAA requires disclosures for Scope 1, 2, and 3 GHG emissions, while the SEC’s proposed rule, perhaps recognizing the difficulty in quantifying Scope 3 emissions, requires disclosure of Scope 3 emissions from upstream and downstream downstream activities only if (1) greenhouse gas emissions are “significant” or (2) if the registrant has established a greenhouse gas emissions target or a target that includes Scope 3 emissions. California’s law essentially forces covered companies to request greenhouse gas emissions data from non-covered companies (i.e., non-California companies or those with less than $1 billion in revenue) in their supply chain, significantly expanding the reach of the CCDAA first catches the eye.
Companies required to comply with the CSRD adopted by the EU will not find that the California Climate Accountability Regime imposes significant new burdens. The CSRD also applies to all companies doing business in Europe above a certain turnover threshold (public or private, even if they are not based in the EU) and imposes comparable disclosure obligations.
Endnotes
2 The notice and comment period ended in November 2022. The regulation is expected to be finalized in the fall of this year. Securities and Exchange Commission, Climate Change Disclosure (3235-AM87), Fall 2022, https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202304&RIN=3235-AM87; Press Release, SEC Proposes Rules to Improve and Standardize Climate-Related Investor Disclosures (March 21, 2022),
As with other targeted disclosure requirements, such as cybersecurity incident reporting, companies face the challenge of complying with both federal and state requirements. Many companies also must comply with international standards and requirements in multiple states in which they do business. These reporting systems sometimes overlap but require the issuer to calibrate its disclosures to meet requirements prescribed by multiple regulatory authorities. Once the SEC finalizes its regulations, affected companies will have to deal with compliance with both regulations. However, a sound preemption analysis cannot be done until we see the wording of the SEC regulations. (go back)
7TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES, https://www.fsb-tcfd.org/publications/ (last visited October 4, 2023). The report itself must comply with the recommended framework and disclosures contained in the final report of the Climate-Related Financial Disclosures Task Force Recommendations or an equivalent reporting requirement. (back)
10These include recommendations from the Task Force on Climate-Related Financial Disclosures and parts of the GHG Protocol. See Directive 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34 /EU, relating to corporate sustainability reporting, 2022 OJ (L 322) 15, 29.(back)
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