California has become the first American state to enact a climate disclosure regulation, marking a significant shift in the U.S. approach to sustainability. As businesses and investors around the world increasingly focus on environmental, social, and governance (ESG) criteria, California’s acknowledgement of the importance of monitoring sustainability is expected to prompt other states to follow suit.
These regulations have been designed to ensure transparency and accountability in how companies operating within the state address climate-related risks and opportunities. However, the laws have recently been challenged by businesses and agricultural groups operating in California, in a lawsuit that claims that Scope 1, 2, and 3 disclosures violate the First Amendment.
With so many news articles reporting on the lawsuit, we’re cutting through the noise to set out 6 key things you need to know about the new regulations.
The California Climate Disclosure regulations are part of a broader effort to combat climate change and encourage sustainable business practices. They require large companies to disclose their greenhouse gas emissions and their overall carbon footprint, as well as their climate-related financial risks.
Companies must also declare the strategies they plan to implement to mitigate climate risks and capitalise on climate-related opportunities. This move aims to provide investors, consumers, and other stakeholders with clear and comparable information, enabling more informed decision-making.
These regulations will primarily apply to large private or public corporations with annual revenues exceeding $1billion, demonstrating California's focus on entities that have a significant environmental impact.
These large companies will be held accountable for their impact on the planet, pushing them towards more sustainable practices. ESG regulations across the EU have historically begun with large corporations and have gradually included other businesses with lower annual revenue. It is yet to be determined as to whether or not the Californian laws will adopt a similar approach.
In total, the new regulations are made up of 3 laws: Senate Bill 253 (SB 253), Senate Bill 261 (SB 261), and Assembly Bill 1305 (AB 1305).
The Climate Corporate Data Accountability Act (SB 253) specifies that businesses with annual revenues in excess of $1billion must disclose information on their Scope 1, 2 and 3 greenhouse gas (GHG) emissions. The Climate-Related Financial Risk Act (SB 261) specifies that firms must prepare a climate-related financial risk report that reveals:
(1) Any climate-related financial risks that pose a threat to operations (including those that impact their supply chain).
(2) Any measures they have taken to mitigate or adapt to these risks.
California's ESG regulations are designed to align with international reporting standards, such as those developed by the Task Force on Climate-related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI).
The GHG emission requirements in SB 253 conform with the Greenhouse Gas Protocol standards and guidance set out by the World Resources Institute and the World Business Council for Sustainable Development – more commonly known as Scope 3 emissions. The risk reports for SB 261must be in accordance with TCFD guidance.
This alignment ensures that the disclosed information is relevant, reliable, and comparable across different jurisdictions, helping global investors to better assess climate-related risks and opportunities.
The state has put in place mechanisms to enforce compliance with these regulations, including fines for non-compliance and late filing.
Those who don’t disclose data or are late to submit their greenhouse gas disclosures for SB 253 could face a maximum yearly penalty of $500,000. Those who violate SB 261 could be fined up to $50,000.
Many firms will be affected by these new regulations, but fortunately they have plenty of time to prepare, as the new regulations will not come into effect until 2026.
When the disclosures are made public, investors will gain deeper insights into their investments and their associated risks. Companies will need to invest in data management and reporting systems to evidence progress made towards improving sustainability if they want to attract investors.
This shift towards greater transparency is expected to drive more sustainable investment and encourage companies to adopt practices that reduce their environmental impact. However, the results of this lawsuit may change the way these regulations are enforced.
The laws are entirely new, and we’re already seeing state lawmakers in New York and Washington following suit and drafting up their own state regulations. The results of this case are therefore expected to alter not only California’s disclosures, but also the requirements of subsequent states as they draft their own sustainability disclosure laws.
With businesses and agricultural firms weighing in and offering their insights into these rules at such an early stage, the lawsuit will hopefully lead to long-term, actionable regulations that help businesses to make changes, rather than hinder their progress.
KEY ESG’s software helps firms to track their ESG metrics in line with any regulation. Our software is updated as laws are changed, and our experts will be monitoring this case closely as California sets the U.S. precedent for ESG reporting.
If you have any questions about the California Climate Disclosure laws, or you’d like to discuss how KEY ESG could help your firm to track its ESG metrics, reach out to a member of our team.