Climate action in California has repercussions around the globe; the state has the fifth-largest economy in the world, and is forecast to become the fourth sometime this year. That's why the state's expected passage of the "California Climate Accountability Package" is making global news.
Three separate bills are bundled into the Climate Accountability Package: SB 252, 253, and 261. They all share common goals: improving corporate transparency and standardizing corporate disclosures regarding carbon emissions; aligning public investments with climate goals; and raising the bar on corporate action to address the climate crisis. These bills will require thousands of companies doing business in California to disclose their scope 1, 2, and 3 greenhouse gas emissions and climate-related financial risk information. The first disclosures will be due in 2026. “Business in California” is a lower threshold than companies might expect; the state defines it here.
Though these bills focus on US companies that do business in California, they are part of a global movement towards legislation that requires robust climate reporting from companies, including the SEC’s proposed climate disclosure rule in the US, and the Corporate Sustainability Reporting Directive (CSRD) in the EU. And, like the EU, California took an expansive approach to capturing companies; instead of focusing on companies with headquarters or the majority of their business in California, the state will require disclosures from any company with business there.
The first California bill, SB 252, applies only to two California state pension funds, so for the purposes of this article, we will focus on the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261).
What does SB 253 require?
SB 253 requires large public and private companies doing business in California to disclose their scope 1, 2, and 3 emissions, beginning in 2026. Scope 1 emissions are those that result directly from a company’s activities, while scope 2 are those released indirectly, for example, from electricity purchased and used by the company. Scope 3 encompasses all indirect emissions produced from a company’s entire supply chain. Scope 3 emissions reporting would not be required until 2027 on 2026 data.
Emissions disclosures would have to be independently verified and would be housed on a new publicly available digital registry administered by an organization contracted by the California State Air Resources Board (CARB). This registry would enable users to review individual reporting entity disclosures and analyze underlying data elements in a variety of ways.
Who is impacted by SB 253?
The bill compels public and private companies doing business in California with annual revenue in excess of $1 billion to disclose their emissions as outlined above. Over 5,000 companies doing business in California will be required to make disclosures.
What are the liability implications of SB 253?
The bill authorizes the State Board to bring civil actions against subject companies and seek civil penalties for violations of the act, with a maximum fine of $500,000. Amendments in the Assembly have scaled back the liability for scope 3 emissions via the introduction of a safe harbor. Under the amended bill, businesses would not be subject to administrative penalty for misstatements about scope 3 emissions made with reasonable basis.
Will disclosures under SB 253 require assurance?
Assurance on emissions will be introduced in the first year of disclosure. Specifically, scope 1 and 2 emissions disclosures will require limited assurance, beginning in 2026, then moving to reasonable assurance in 2030. For scope 3 disclosures, limited assurance will begin in 2030 subject to a review by CARB in 2027.
What does the Climate-Related Financial Risk Act (SB 261) require?
The Climate-Related Financial Risk Act, or SB 261, requires certain entities doing business in California to prepare and submit climate-related financial risk reports that cover climate-related financial risks consistent with recommendations from the Task Force on Climate-Related Financial Disclosure (TCFD) framework. For example, businesses would have to disclose whether they’ve budgeted for increased compliance and insurance costs and quantified potential opportunities and strategic priorities. The first report is required to be prepared by December 31, 2026, with reporting then taking place biennially.
Who is impacted by SB 261?
SB 261 requires US entities that do business in California with total annual revenue of at least $500M to prepare and submit climate-related financial reports as outlined above.
What are the liability implications of SB 261?
In addition to submitting these climate-related financial reports risk reports to the California State Air Resources Board, subject companies will need to make the reports available on their websites. Companies subject to regulation by the California Department of Insurance or that are in the business of insurance in any other state would be excluded.
What do these bills mean for companies doing business in California?
Thousands of companies doing business in California need to disclose their scope 1, 2, and 3 greenhouse gas emissions and/or climate-related financial risk information.
Notably, the financial threshold of SB 261 ($500M in revenue) is lower than that of SB 253 (>$1B in revenue). Therefore, some companies that are not required to report their emissions under SB 253 would still have obligations to report their climate-related financial risk under SB 261.
Watershed can help companies prepare disclosures for both bills end-to-end, measuring and validating your data, preparing your filing, and ensuring your disclosures are vetted and audit-ready. We'll also help you set targets and take concrete steps to reduce your emissions and mitigate climate risk. We're here to help companies meet all levels of regulatory requirements – just get in touch.
