New California Laws Mandate Climate Disclosures For Both Private and Public Companies

As expected, in the last couple years the ESG disclosure frameworks, including climate-related disclosures, have been moving from voluntary to mandatory. While some standard setters are seeking to streamline reporting, legislative efforts in the United States and abroad are increasing the number of disclosure frameworks with which companies must comply. This month, California, as the world's fourth largest economy, joined other jurisdictions by requiring companies doing business within its borders to report greenhouse gas (“GHG”) emissions and climate-related financial risks. California’s reporting requirements will start in 2026.

In the United States, increased disclosure requirements are being adopted at both the federal and state level. As summarized in our alert in 2022, the SEC proposed rules requiring specific climate-related disclosures for foreign and domestic public companies. While the SEC’s proposed rulemaking is pending issuance, states have passed laws with specific climate disclosures targeting certain industries that play a material role in the ESG investment ecosystem. For example, Illinois and Colorado enacted laws requiring certain public pension and retirement investment funds or fund managers to report on climate-related investment considerations and risks. Similarly, Minnesota focused its attention on banks with more than $1 billion in assets requiring a climate risk disclosure form be submitted to the state.

While we await the SEC’s final climate regulation, private and public companies alike, will need to navigate California’s newly enacted climate laws which mandate certain climate-related disclosures and financial risk reporting for thousands of public and private companies “doing business” within the state. Precipitated by extreme weather events that have impacted California’s “communities and economy,” California enacted the laws to continue its role as a “global leader in addressing climate risk through state policy.” This alert discusses the scope of the California laws with a compare to the SEC’s proposed climate disclosure regulations.

California’s Climate Disclosure Laws

In mid-September 2023, California’s state congress passed Senate Bill 253, the Climate Corporate Data Accountability Act, (“SB 253”) and Senate Bill 261, the Greenhouse gases: climate-related financial risk (“SB 261”), which require certain companies doing business within the state to make climate disclosures, including reports relating to GHG-emissions and climate-related financial risks. California Governor Gavin Newsom signed the bills into law on October 7, 2023. Together, the legislation is referred to as the Climate Accountability Package.

The California laws are broader than the proposed SEC rules in a number of key ways, as summarized below. California’s laws apply to both private and public companies with certain dollar thresholds while the SEC rules apply to domestic and foreign public companies.

Both focus on the disclosure of the three scopes of GHG emissions with a different requirement for Scope 3. California defines Scope 1, 2 and 3 as follows:

Scope 1: “all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.”
Scope 2: “indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.”
Scope 3: “indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.”

SB 253 requires all private and public companies[1] with an annual revenue of more than $1 billion and “doing business” in California (“covered entities”) to publicly disclose all three scopes of GHG emissions. Disclosure of Scope 3 under the California law is broader than the SEC rule, as the SEC rule only requires reporting if Scope 3 emissions are material or the company set a GHG emissions goal for Scope 3 emissions. In California, Scopes 1 and 2 disclosures need to be made by some time in 2026 and Scope 3 disclosures by some time in 2027, with annual reporting thereafter.

Reporting entities will need to retain an independent third-party assurance provider to review/assure each public disclosure under SB 253. Assurances for Scopes 1 and 2 emissions would need to be performed at a limited assurance level beginning in 2026 and a reasonable assurance level starting in 2030. The state board is required to establish an assurance level for Scope 3 disclosures by January 1, 2027.

SB 261 has a broader application than SB 253 because it applies a lower revenue threshold for climate-related financial risk reporting. Specifically, SB 261 requires all private and public companies with an annual revenue of more than $500 million and “doing business” in California to publicly disclose their material climate-related risks and measures adopted to reduce the same. By January 1, 2026, each covered entity must file its first report with the California Air Resources Board and also make a copy publicly available on its website. Covered entities will need to disclose biennially thereafter.

The California Air Resources Board decides any penalties under SB 253 and 261 after an administrative hearing. The penalties cannot exceed $500,000 in a reporting year for SB 253 or $50,000 in a reporting year for SB 261. Covered entities are also required to pay an annual fee for the California Air Resources Board’s actual costs of administering the laws.

A detailed summary of the requirements of the laws as compared to the proposed SEC rule, is included in the chart available here.

Unknowns and Looking Forward

Private Companies and Disclosures: As noted above, the California laws apply to both public and private corporations. Private entities accordingly are not immune from ESG reporting requirements. Indeed, under several international and state regulations private companies – like their public counterparts – are already required to report on the diversity of their boards.

A private organization’s industry and where it operates within the value chain dictates its exposure to and scope of reporting – whether publicly and directly or indirectly by reporting to relationship partners who are directly subject to more robust reporting requirements. For example, the European Union’s (“EU”) Corporate Sustainability Reporting Directive (“CSRD”) goes into effect in 2024 for certain companies located in or conducting business in the EU to report on sustainability matters. In July 2023, the EU Commission adopted the first set of European Sustainability Reporting Standards, for use in compliance with the EU CSRD. The ambit of the CSRD extends to non-EU companies as the EU seeks to set the global standards for sustainability reporting and can impact how private multi-national United States companies interact with reporting regulations and frameworks. Private, domestic companies should therefore stay up to date on the quickly evolving ESG landscape and analyze how any new regulations may affect them.

Ambiguous Language: There are several terms within the California laws that are undefined and, therefore, raise questions as to applicability and compliance. Chief among them is that the laws do not define what it means to be “doing business” in California. If the California legislature does not clarify this term, there could be future litigation and regulatory action regarding company non-adherence. As another example, companies may struggle to identify downstream and upstream emissions as required by Scope 3 disclosures under SB 253. California appears to recognize these uncertainties with Scope 3 disclosures by prohibiting penalties for Scope 3 disclosures through 2029 and prohibiting penalties for disclosures made in good faith thereafter.
Disclosure Related Litigation Risks: As discussed in a prior blog, the general increase in disclosures (whether mandatory of voluntary) has led to an uptick in litigation. These lawsuits generally fall into two categories: (1) securities fraud claims under federal law, or (2) consumer protection or consumer fraud claims under federal or state laws. As such, companies publishing disclosures under these new regulations should be extremely cautious to ensure such disclosures are factually accurate and are consistent with other ESG statements made publicly by the company. For more detail on how to manage litigation risks related to ESG disclosures, please see our prior blog post here, as well as our feature article here.
Multiple Reporting Requirements: Because the trend is towards increased ESG disclosure mandates, certain companies may be subject to multiple reporting requirements in the future. Interoperability is a key theme where different jurisdictions impose their requirements according to differing legislative goals. The California laws appear to recognize this and address duplicative reporting issues. SB 261 provides that a company can satisfy its reporting requirements thereunder by: (1) reporting “pursuant to a law regulation or listing requirement issued by any regulated exchange, national government, or other governmental entity, including a law or regulation issued by the United States[;]” or (2) reporting using a framework that satisfies the International Financial Reporting Sustainability (IFRS) Standards.[2] Similarly, SB 253 provides that a covered entity may satisfy its reporting requirements by submitting “reports prepared to meet other national and international reporting requirements, including any reports required by the federal government, as long as those reports satisfy all of the requirements of [SB 253].” To the extent that companies are required to file multiple disclosures, they should ensure that all such disclosures are consistent.
Anticipated Legal Challenges: It is expected that the California laws and the SEC regulation will likely face legal challenges, including challenges as to whether California and the SEC have authority to require such disclosures. Indeed, some state attorney generals have already indicated their intent to challenge the SEC regulation should it go into effect, arguing that “[e]nvironmental regulation is outside the [SEC]’s area of expertise.”

Despite these challenges, climate disclosures along with other ESG-related disclosures continue to be enacted and companies need to equip themselves to respond. Disclosure – whether voluntary or mandatory – is an output that should reflect an organization’s internal governance, risk appetite, operational goals and metrics. The requirements and frameworks can be leveraged to assess a company’s trajectory on numerous ESG topics. If you have questions, please reach out to the authors and the Seyfarth Impact & ESG team for assistance.

[1] SB 253 and SB 261 define companies to include a “partnership, corporation, limited liability company, or other business entity formed under the laws of [California], the laws of any other state of the United States or the District of Columbia.”

[2] The IFRS issues its International Sustainability Standards Board (ISSB) standards and has purview over the Sustainability Accounting Standards Board (SASB) standards. These standards remain voluntary and are focused on financial materiality.