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New California Climate Disclosure Rules: Practical Takeaways and Next Steps


8 minute read | October.17.2023

On October 7, 2023, California Governor Gavin Newsom signed the most comprehensive corporate climate disclosure laws in the United States to date. The three new laws—Senate Bill 253 (SB 253), Senate Bill 261 (SB 261), and Assembly Bill 1305 (AB 1305)—have broad application and are relevant to any large private or public company doing business in California, as well as any company that is pursuing net zero or carbon neutral goals, including buying or selling voluntary carbon offset credits.

The Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (261)

Orrick recently published a client alert that provided an overview of the key components of SB 261 and SB 253—that client alert can be accessed here, and a summary of the requirements under the two laws is provided below.

Summary of the Climate Corporate Data Accountability Act (SB 253)

Scope

Requires disclosure of greenhouse gas (GHG) emissions in conformance with the Greenhouse Gas Protocol (GHG Protocol) standards and guidance developed by the World Resources Institute and the World Business Council for Sustainable Development, including the disclosure of indirect GHG emissions from the value chain (also known as scope 3 emissions).

Form of Disclosure

Disclosure must be made to an “emissions reporting organization” engaged by the state to develop a reporting program to receive these disclosures and make them publicly available on a digital platform.

Applicability

Applies to all businesses with annual revenues in excess of $1 billion and doing business in California, including both private and public companies.

Effectiveness

Requires the California Air Resources Board (CARB), by Jan 1, 2025, to develop and adopt regulations.

Annual reporting will commence in 2026 for the prior fiscal year for scopes 1 and 2; and in 2027 for scope 3 (180 days after publication of scope 1 and 2).

Assurance

Assurance engagement performed by independent third-party assurance provider with certain experience and competency requirements.

Phased requirements for limited (2026) and reasonable (2030) assurance for scopes 1 and 2; scope 3 assurance requirement (at the limited assurance level) takes effect in 2030.

Liability

There are administrative penalties for non-filing, late filing, or not meeting requirements. The maximum yearly penalty is $500,000. However, misstatements of scope 3 emissions cannot give rise to a penalty through 2030, and even afterward, a reporting entity cannot be subject to penalties for good-faith disclosure.

 

Summary of the Climate-Related Financial Risk Act (SB 261)

Scope

Covered entities are required to prepare a climate-related financial risk report that discloses (1) their climate-related financial risks (including both physical and transition risks in corporate operations and the supply chain), and (2) measures they have taken to reduce and adapt to the climate-related financial risk disclosed in the report.

Reports must be in accordance with the recommended framework of the Task Force on Climate-Related Financial Disclosures (TCFD).

Form of Disclosure

Biennial reports must be publicly available on the company’s website.

CARB is required to contract with a nonprofit climate reporting organization to prepare a biennial public report on the climate-related financial risk disclosures made during that period and identify any inadequate or insufficient reports.

Applicability

Applies to all businesses with annual revenues in excess of $500 million and doing business in California, including both private and public companies.

Effectiveness

Biennial reporting beginning January 1, 2026.

Assurance

If a report contains a description of an entity’s GHG emissions or voluntary mitigation of those emissions, the state may consider those claims if verified by an independent third party.

Liability

Entities that CARB finds to be in violation of SB 261 can be subject to administrative penalties of up to $50,000 in a reporting year.

The reporting requirements under both of these laws begin January 1, 2026. When signing these bills, Governor Newsom recognized that the implementation deadlines were aggressive in both timing and scope, and would have a significant fiscal impact on companies. As a result, it is widely expected that the California legislature will consider amendments to each bill during the next legislative session. And the agency tasked with implementing these laws—the California Air Resources Board (CARB)—will be developing further regulations to clarify the bills and ensure their consistency with the final climate reporting rules that the Securities and Exchange Commission (SEC) is expected to adopt.

The Voluntary Carbon Market Disclosures Act (AB 1305)

AB 1305, known as the Voluntary Carbon Market Disclosures Act, imposes various disclosure requirements on companies that make net zero, carbon neutrality, or similar claims, including through the use of voluntary carbon offsets. It also establishes disclosure requirements for companies that market or sell voluntary carbon offsets in the state. A summary of the requirements under the two laws is provided below. AB 1305 is effective January 1, 2024.

Summary of the Voluntary Carbon Market Disclosures Act (AB 1305)

Covered Companies

Required Website Disclosure

If a company markets or sells voluntary carbon offsets in California:

Must publicly provide information regarding the applicable carbon offset project, the accountability measures in place, and the data and calculation methods, including:

  • the specific protocol used;
  • the type of project;
  • whether there is independent third-party verification;
  • annual emissions reduced or carbon removed; and
  • what actions the company will take if emissions reductions do not materialize.

If a company makes claims regarding the achievement of net zero emissions, carbon neutral claims or claims regarding reduction of greenhouse gas emissions:

Must publicly provide all information documenting how such a claim was determined to be accurate or actually accomplished, and how interim progress toward that goal is being measured, including:

  • disclosure of independent third-party verification;
  • identification of science-based targets; and
  • disclosure of the relevant sector methodology.

This requirement only applies to companies that operate within or make claims within California.

If a company makes the claims described above and purchases or uses voluntary carbon offsets:

In addition to the information described above, companies must publicly provide information regarding the applicable project and offsets, including:

  • the offset registry or program;
  • the offset project type;
  • the specific protocol used; and
  • whether there is independent third-party verification.

This requirement only applies to companies that operate within or purchase or use voluntary carbon offsets sold within California.

Companies are subject to civil penalties of up to $2,500 per day for each day that information is not available or is inaccurate on a company’s website, for each violation, not to exceed $500,000. The disclosure required under AB 1305 must be updated at least annually.

Practical Takeaways for All Covered Companies

There are many similarities between the new California climate disclosure laws and the SEC proposed climate rule, including the disclosure of GHG emissions using the GHG Protocol, the disclosure of climate-related risks using the TCFD framework, and the disclosure of progress towards climate-related goals. As a result, there are key steps that companies can take now to develop their climate programs that will enable them to comply with both the new California climate-related disclosure laws and the SEC proposed climate rule (if adopted substantially as proposed):

  1. Get started now – the first reporting year under SB 253 is 2025 (with disclosures required in 2026), and the disclosures under SB 261 are required by January 1, 2026. Companies should consider gearing up now to conduct a “dry run” during 2024 to prepare for the initial 2025 reporting year. In addition, as noted above, the AB 1305 disclosure requirements are effective January 1, 2024.
  2. Develop a climate oversight structure at both the board level and the management level. This may include the delegation of oversight of climate-related matters to a board-level committee and the creation of a management-level ESG Steering Committee and Climate Working Group.
  3. Develop a Climate Playbook that sets forth the various actions the company will take to ensure it complies with the climate-related requirements set forth in the California climate laws and the SEC-proposed climate rule.
  4. Prepare a Greenhouse Gas Inventory Management Plan to establish a control environment for measuring GHG emissions, drive consistency in future emissions disclosures, and record changes in relevant data collection processes and estimates.
  5. Engage a consultant or leverage a software platform to conduct a GHG emissions inventory in conformance with the GHG Protocol, with oversight provided by the ESG Steering Committee and Climate Working Group.
  6. Conduct a climate-related risk and opportunities assessment using the TCFD framework and leverage third-party expertise as necessary, and incorporate the results into the company’s ERM processes.
  7. Review the company’s use of net zero, carbon neutral, and similar claims and the disclosure controls and procedures used to substantiate these claims, and prepare the disclosure required under AB 1305.
  8. Prepare for Third-Party Assurance by enlisting a consultant to conduct a pre-assurance assessment for alignment with the GHG Protocol. Additionally, initiate preliminary discussions to secure a final third-party verifier, as mandated by the California climate laws.
  9. Assess the FTC’s Green Guides, and the proposed potential amendments to those guides, as well as state-level consumer protection and marketing laws when reviewing sustainability-related claims under AB 1305 to ensure the company is taking into account all relevant requirements.
  10. Conduct due diligence regarding the carbon offsets the company purchases to ensure additionality, accountability, and project monitoring, and prepare the disclosure required under AB 1305 regarding the company’s purchase and use of carbon offsets.

Please join Orrick partners Patrick Ferguson, Ashley Walter, and J.T. Ho as well as Orrick’s Climate Advisor, Avani Panchal, for a webinar on Thursday, October 19 that will take a closer look at the following topics:

  • Key features of the new laws.
  • Interplay with the SEC’s proposed climate rule.
  • How California will likely approach enforcement.
  • Steps companies should take now to prepare.

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