California’s latest move on climate change is expected to bring “national and global repercussions.” Once signed (Gov. Gavin Newsom announced his intention to do so), Senate Bill 253, the Climate Corporate Data Accountability Act, would be the first comprehensive greenhouse gas emissions (“emissions”) disclosure requirement for large companies in the United States. Disclosure of emissions includes all those related to a business’ full supply chain. Brownstein previously wrote about the context and drivers for Sen. Scott Wiener’s bill here and here.
What is the latest status?
The bill was enrolled on Sept. 14, 2023, and is now in Gov. Newsom’s hands for signature (until the Oct. 14 deadline).
So what’s the big deal about a disclosure anyways?
The drive behind disclosures and public access to this information is evidence that once a negative externality is known, companies will act quickly to stay competitive. Sen. Wiener references findings demonstrating that mandatory disclosures could drastically cut emissions. Why? “[O]ne rationale is that disclosure will provide information on material risks to investors, making it evident which firms are most exposed to future climate policies. In addition, some believe that reporting will galvanize pressure from companies’ key stakeholders … leading them to voluntarily reduce their emissions.” The bill itself asserts, “ensuring public access to the data in a manner that is easily understandable and accessible, will inform investors, empower consumers, and activate companies to improve risk management in order to move towards a net-zero carbon economy.”
What are the key takeaways from SB 253?
- Requires any U.S.-based business (public or private) with annual revenues exceeding $1 billion that does business in the state of California (“reporting entities”) to annually report to the California Air Resources Board (CARB) the full range of emissions attributable to their business operations and supply chain.
- Includes disclosure of all the reporting entity’s Scope 1, Scope 2 and Scope 3 emissions (direct, indirect and supply-chain related, respectively).
- Requires a reporting entity to work with an independent third-party assurance provider.
- Goes beyond the Federal Securities and Exchange Commission proposed measure that would only apply to public companies.
- Covers approximately 5,400 companies.
- By Jan. 1, 2025: CARB must develop and adopt regulations to require a reporting entity to annually disclose to the emissions reporting organization and verify the reporting entity’s Scope 1, 2 and 3 emissions.
- Starting in 2026: reporting entities must publicly disclose their Scope 1 and Scope 2 emissions.
- Starting in 2027: reporting entities must disclose Scope 3 emissions.
- California-based companies must start reporting in 2026; all other applicable companies commence reporting in 2027.
- The inclusion of Scope 3 emissions is notable, given that:
- 1. They encompass indirect, upstream and downstream supply chain emissions, and often make up the lion’s share of a company’s total emissions. This category includes things like employee commuting, business travel, purchased goods and services, and leased assets.
- 2. The implications of reporting emissions associated with purchased good and services extends to non-reporting entities as noted previously. Consider a corn or strawberry farmer selling produce to any billion-dollar food company; they will be required to provide data on the associated emissions from growing and delivering that product.
- It should also be noted that a late amendment outlined that “a reporting entity shall not be subject to an administrative penalty… for any misstatements with regard to scope 3 emissions disclosures made with a reasonable basis and disclosed in good faith … Penalties assessed on scope 3 reporting, between 2027 and 2030, shall only occur for nonfiling.”
Who’s saying what?
- Support: Big tech and some major brands. Some of these businesses ultimately supported the bill following late amendments, including that reporting entities would not be subject to penalties for Scope 3 misstatements as outlined above.
- Against: California Chamber of Commerce, noting the bill is a “costly mandate that will negatively impact businesses of all sizes … and will not directly reduce emissions”; several utilities and trade groups.
- Mixed: Some thought leaders shared their ambivalence given the limitations of disclosure. Stanford’s Managing Director for the Sustainable Finance Initiative Alicia Seiger noted: “… I worry California will drive revenue for carbon counting software companies, consultants, and lawyers while doing very little to remove the headwinds keeping investment in decarbonization from reaching #speedandscaleor to mitigate #climaterisk.”
Once the bill is signed, the regulatory process will begin next year with CARB, at which time stakeholders will have another opportunity to provide input before final regulatory adoption.
In the meantime, companies should evaluate whether they “do business in California” (which is not defined in the bill) to inform whether they would be considered a reporting entity. Given California’s view on this in other regulations, and national and global dominance (~the fourth-largest global economy), one may be hard-pressed to find a company that meets the $1 billion threshold that is exempt. Moreover, the impacts undoubtedly trickle out and down, as reporting entities push data gathering and reporting requirements through supply chains. First comes the significant task of getting a handle on creating an inventory of their emissions and understanding the verification process. This link provides a list of CARB-accredited verification bodies. This task will be a big lift—surveys find that ~32% of U.S. organizations do not report or track emissions. The next big lift will be prioritizing strategies and emission reduction tactics to keep pace with peers and consumer demand for climate action.
Setting aside the pains of regulatory compliance, the pains of climate change and environmental risks are here and amplifying. A recent Global Supply Chain report finds that “companies are facing up to US$120 billion in costs from environmental risks in their supply chains within the next 5 years.” Prioritizing understanding, managing and mitigating these environmental and regulatory risks is increasingly essential to remaining competitive and relevant.