California’s Climate Legislation: SB253 & SB261

California has long been at the forefront of progressive legislation, and its latest bills are no exception. The California Climate Corporate Data Accountability Act (CCDAA), also known as SB 253, and the Climate-Related Financial Risk Act (CRFRA), SB 261, were signed into law on October 7, 2023, by Governor Gavin Newsom; they aim to address the lack of transparency surrounding corporate data and environmental disclosures and its impact on climate change. This groundbreaking legislation requires corporations to publicly disclose their carbon emissions and climate financial risk, making California the first state in the nation to take such bold climate action. In this blog post, we will take a closer look at the California Climate Corporate Data Accountability Act and Climate-Related Financial Risk Act, and the importance of disclosure in addressing the pressing issue of climate change.

Understanding the California Climate Corporate Data Accountability Act (SB 253)

The California Climate Corporate Data Accountability Act, or Senate Bill 253, is a breakthrough piece of legislation that intends to address the lack of openness surrounding business data and its influence on climate change. These new laws are broader than the proposed SEC climate-disclosure rules, which were first proposed in March 2022 and are not yet finalized. This California law is the first of its kind in the nation, setting a groundbreaking precedent for other states to follow.

The CCDAA requires corporations to publicly disclose their carbon emissions in accordance with the Greenhouse Gas Protocol (GHG Protocol) standards and guidance. This means that companies will have to provide detailed information about their direct and indirect greenhouse gas emissions.

But the California legislature didn’t stop there. It also passed the Climate-Related Financial Risk Act, or Senate Bill 261, which mandates that companies disclose their climate-related financial risks, such as the potential impacts of climate change on their business operations, assets, and supply chains. This is crucial because it allows investors, consumers, and other stakeholders to make informed decisions based on the climate risks associated with a company’s activities. In addition to required disclosures, the act also includes provisions for third-party assurance. This means that companies will be required to obtain independent verification of their emissions data and climate-related financial risk disclosures. This adds an extra layer of credibility to the reported information, assuring investors and other stakeholders that the data is accurate and reliable.

The California Climate Corporate Data Accountability Act also promotes Environmental, Social, and Governance (ESG) reporting. ESG reporting, also called sustainability reporting, provides investors with a comprehensive view of a company’s sustainability performance, including its environmental impact, social policies, and governance practices. By integrating climate-related financial risk reporting into ESG reporting, the regulation ensures that companies are considering climate change in their overall business strategy.

Furthermore, the act encourages companies to evaluate and disclose their emissions throughout the value chain, not just within their direct operations. This means that companies will need to consider the emissions associated with their supply chains, distribution networks, and other business activities outside of their direct control or oversight. While Scope 3 emissions will not be required until 2027, it is a huge step towards network-wide participation in emissions reduction efforts. This holistic approach to emissions reporting is crucial for understanding the true impact of a company’s activities on the environment.

Compliance and the Scope 1, 2, and 3

Who is required to comply, and what are the 3 scopes of the California Climate Corporate Data Accountability Act? 

Unlike the pending SEC climate disclosure rule that would require only public companies to provide greenhouse gas emissions data, the California Climate Corporate Data Accountability Act applies to both public and private companies operating in California with total annual revenues greater than $1 billion. The new law aims to address the lack of transparency surrounding corporate data and its impact on climate change. Starting in 2026, reporting companies must provide public disclosures for Scope 1 and Scope 2 emissions data, and must report Scope 3 emissions beginning in 2027. The act requires companies to publicly disclose their carbon emissions to provide stakeholders with the information they need to make informed decisions.

Scope 1 Emissions

The act consists of three key sections. The first section focuses on Scope 1 emissions, which refers to direct emissions from a company’s day-to-day operations. This includes emissions from manufacturing processes, transportation, and on-site energy use. By disclosing these emissions, companies can better understand and manage their carbon footprint, and strategically implement measures to further reduce their footprint, identify cost-savings opportunities, and enhance operational efficiency. Scope 1 emissions are the easiest to control and reduce at a company level.

Scope 2 Emissions

The second section of the act addresses Scope 2 emissions, which are indirect emissions from the generation of purchased electricity, heat, or steam. This includes emissions from power plants and other sources of energy that a company relies on. By disclosing these emissions, companies can take steps to reduce their reliance on fossil fuels and transition to cleaner energy sources. With the emergence of Net Zero and Carbon Neutral corporate promises, Scope 2 emissions are crucial to meeting these goals and can be reduced by developing a stronger renewable energy portfolio onsite. 

Scope 3 Emissions

The third section of the act deals with Scope 3 emissions, which are not produced by the company and instead occur as a result of a company’s activities (but are not owned or controlled by the company itself). This includes emissions from the extraction and production of raw materials, transportation and distribution, and the use and disposal of products by the end-user or consumer. By disclosing these emissions, companies can gain a more comprehensive understanding of their environmental impact as it relates to their upstream and downstream activities and impacts, and identify areas for improvement throughout their value chain. Scope 3 emissions are generally the largest chunk of a complete GHG emissions report; by publicly disclosing this data, it encourages companies to look at the full lifecycle of their products, from raw material extraction to disposal, and work within their supply chain partnerships to reduce emissions throughout the value chain.

In summary, the California Climate Corporate Data Accountability Act requires an estimated 5,400 companies to disclose their emissions accounting across all three scopes, providing stakeholders with a comprehensive view of a company’s carbon footprint, and their operational awareness of their impact. This transparency enables investors, consumers, and other stakeholders to make more informed decisions and encourages companies to take responsibility for their impact on climate change.

Understanding California’s Climate-Related Financial Risk Act (SB 261)

SB 261, or the CRFRA, requires specific entities to report their climate-related financial risks in alignment with the Task Force on Climate-Related Financial Disclosure (TCFD) framework as of January 1, 2026. Reporting entities include US-based companies that do business in California and exceed a $500,000,000 gross revenue threshold with the exclusion of insurance companies who are already held to climate-related financial reporting structures. SB 261 acknowledges major corporations are facing escalating climate risks that influence their financial viability and strategic decision-making. These entities need to identify, assess, and share these climate-related financial risks and the efforts they are taking to mitigate them. This transparency will result in improved decision-making for policymakers, investors, and shareholders. It will also provide more knowledge in creating meaningful solutions to address the burdens of climate change on our global economy. 

What are the Reporting Requirements?

The California Climate Corporate Data Accountability Act brings significant changes to reporting requirements for corporations operating in California. The law aims to promote transparency and accountability in addressing climate change by mandating that companies publicly disclose their carbon emissions and climate-related financial risks. This comprehensive approach ensures a holistic understanding of a company’s environmental impact, including emissions from its operations, supply chains, and distribution networks.

To ensure accuracy and credibility, companies are also required to obtain third-party verification of their emissions data and align their climate-related financial risk disclosures with the TCFD framework. This independent verification adds an extra layer of assurance for investors and stakeholders, enhancing trust and comparability in the reported information.

In addition to reporting requirements, the act mandates that companies follow clear guidelines and standards established by the California Air Resources Board (CARB). These guidelines will provide guidance and recommendations on emissions reporting, ensuring consistency and fairness across all reporting entities (such as the Task Force on Climate-Related Financial Disclosures, SASB, MSCI, and more).

Failure to comply with the reporting requirements can result in administrative penalties, such as fines or the suspension of privileges or permits. These penalties send a strong message that transparency and accountability are essential for companies in the transition to a low-carbon economy. By creating uniform reporting standards, the act ensures that all reporting entities are held to the same level of accountability, and stakeholders can compare data sets and company performance across industries more easily.

Overall, the reporting requirements set forth by the CCDAA (California Climate Corporate Data Accountability Act) will enable stakeholders to make more informed decisions, while also driving companies to evaluate and reduce their environmental impact throughout their value chains. This holistic approach to reporting fosters a greater sense of responsibility and provides a foundation for meaningful action in the fight against climate change.

The Impact on Corporations: Transparency and Responsibility

The California Climate Corporate Data Accountability Act and the Climate-Related Financial Risk Act are poised to have a significant impact on corporations operating in the state. With a focus on transparency and responsibility, this groundbreaking legislation is sending a clear message that companies must be held accountable for their role in addressing climate change and becoming part of the wider solution.

One of the primary ways CCDAA will impact corporations is through emissions disclosure requirements. Under the new law, companies will be required to publicly disclose their carbon emissions, including both direct and indirect emissions. This means that corporations will need to provide detailed information about the greenhouse gasses they emit, whether it’s from their operations or their supply chains. This level of transparency will enable stakeholders, such as investors and consumers, to make informed decisions about a company’s environmental impact.

Furthermore, the CRFRA, also mandates that companies disclose their climate-related financial risks. This means that corporations with annual gross revenue exceeding $500M must also assess and disclose the potential impacts of climate change on their business operations, assets, and supply chains. This information is crucial for socially responsible investors who want to understand the risks associated with climate change and how they might impact a company’s financial performance. By including climate-related financial risk reporting, the act aligns with broader efforts to promote Environmental, Social, and Governance (ESG) reporting through the TCFD framework, providing investors with a comprehensive view of a company’s sustainability performance.

Corporations that fail to meet the reporting requirements face administrative penalties, ranging from fines to the suspension of certain privileges or permits. These penalties send a strong message that transparency and accountability are not optional, but necessary for the transition to a low-carbon economy. By enforcing compliance with the act, the state of California is setting an example for other states and sending a signal to corporations that they must take climate change seriously.

In addition to promoting transparency and accountability, the California Climate Corporate Data Accountability Act encourages companies to evaluate and disclose their emissions throughout the value chain. This means considering the emissions associated with their supply chains, distribution networks, and other business activities. By taking a holistic approach to emissions reporting, companies can gain a better understanding of their overall environmental impact and identify opportunities for improvement.

The impact of this legislation extends beyond just individual corporations. By requiring emissions disclosure and climate-related financial risk reporting, the act will generate valuable data that can inform policy decisions, research, and the development of climate goals. It will enable regulators, policymakers, and researchers to better understand the scale of emissions and the potential risks associated with climate change. This information is vital for developing effective strategies to mitigate and adapt to the impacts of climate change.

Diving Deeper: Unseen Aspects of the Corporate Data Accountability Act and the Climate-Related Financial Risk Act

While California’s new climate disclosure laws are groundbreaking in their transparency requirements for corporations, some unseen aspects deserve further exploration. This section will dive deeper into these aspects to provide a comprehensive understanding of the implications of the act.

One aspect to consider is the assembly of the emissions data under CCDAA. The act requires companies to disclose their carbon emissions, both direct and indirect, which can be a complex project to undertake. Corporations will need to gather data from various sources within their organization, including operations, supply chains, and distribution networks. This assembly of data may require significant time and resources, especially for larger corporations with complex operations. However, this process is essential for accurately assessing a company’s emissions and understanding its environmental impact.

Another unseen aspect is the potential role of the Securities and Exchange Commission (SEC) in overseeing climate-related financial risk reporting. While the act focuses primarily on emissions disclosure, the packaged Climate-Related Financial Risk Act mandates that companies disclose their climate-related financial risks. The SEC has been increasingly emphasizing the importance of climate risk disclosures, and the commission will likely play a role in enforcing these requirements. This alignment between the act and the SEC’s initiatives reinforces the significance of climate-related financial risk reporting and the need for companies to integrate it into their overall reporting practices.

The arguments in opposition to the Climate-Related Financial Risk Act claim this bill is premature, noting activity at the federal level for new climate regulations, which would supersede state and local regulations, such as SB 253 and SB 261. These imminent actions, and expected SEC climate regulations, would nullify California’s new climate disclosure laws, making it a premature choice to pass these bills before federal action is taken. It should also be noted that the SEC delayed its target date for the climate disclosure proposal yet again; the new date falls in April of 2024. 

Administrative penalties for non-compliance are another aspect that should not be overlooked. The act includes provisions for penalties that can be imposed on companies that fail to meet the reporting requirements. The severity of these penalties underscores the seriousness with which California is approaching the issue of corporate transparency and accountability. It serves as a strong deterrent for companies that may be tempted to disregard their reporting obligations.

Furthermore, the act mandates disclosure of emissions and climate-related financial risks for the prior fiscal year. This requirement ensures that companies provide up-to-date and relevant information to stakeholders. By disclosing the previous reporting year’s data, companies can demonstrate their commitment to ongoing monitoring and improvement in their environmental practices. It also allows stakeholders to track a company’s progress over time and hold them accountable to their climate-related goals, such as Net Zero or Carbon Neutral promises, for any inconsistencies or lack of progress.

One often unseen aspect of the act is the impact on companies’ bottom lines. The disclosure of emissions and climate-related financial risks can have significant financial implications for corporations. Investors and consumers increasingly consider environmental performance when making investment and purchasing decisions. By disclosing their emissions and climate-related financial risks, companies can position themselves as leaders in sustainability and attract socially responsible investors. Failure to disclose or report high emissions and significant climate risks could have adverse effects on a company’s reputation and long-term financial standing.

Finally, it is worth noting the potential long-term consequences and benefits for the environment. The California Climate Corporate Data Accountability Act and Climate-Related Financial Risk Act are not just about corporate transparency; they are about addressing the pressing issue of climate change. By requiring companies to disclose their emissions, the act generates valuable data that can inform policy decisions, research, and the development of climate solutions. It allows regulatory bodies, policymakers, and researchers to better understand the scale of emissions and the potential risks associated with climate change. This information is vital for developing effective strategies to mitigate and adapt to the impacts of climate change and ultimately work towards a more sustainable future.

The Future Outlook: Long-Term Consequences and Benefits for the Environment

The California Climate Corporate Data Accountability Act and Climate-Related Financial Risk Act hold tremendous promise for the future. By requiring corporations to publicly disclose their greenhouse gas (GHG) emissions, this groundbreaking legislation sets the stage for significant long-term consequences and benefits for the environment.

First and foremost, the act’s focus on GHG emissions disclosure will provide a wealth of data that can inform climate change mitigation efforts. By understanding the scale of emissions and identifying the major contributors, policymakers and researchers can develop targeted strategies to reduce carbon footprints and combat climate change. This information is crucial for making informed decisions and allocating resources effectively.

In addition, the act’s emphasis on disclosure can incentivize corporations to take proactive measures to reduce their emissions and mitigate climate-related risks, rather than reactionary steps based on industry trends or broader demand. The public nature of the disclosures means that companies will face increased scrutiny and accountability for their environmental performance. This can create a competitive landscape where corporations strive to demonstrate their commitment to sustainability, thereby fostering innovation and driving the development of new low-carbon, or carbon-negative, technologies and practices.

The long-term benefits of the act extend beyond environmental impact. The disclosure of GHG emissions can also have significant implications for companies’ bottom lines. Investors and consumers are increasingly prioritizing sustainability and looking to support business entities that align with their values. By disclosing their emissions and demonstrating their efforts to manage climate risks, companies can enhance their reputation, attract socially responsible investors, and capture a growing market for sustainable products and services. Conversely, failure to disclose or report high emissions and significant climate risks could result in reputational damage and financial repercussions.

Moreover, the act’s requirements can spur a shift towards more sustainable and resilient business practices. As companies assess their emissions and climate risks, they may uncover opportunities for improvement and develop strategies to reduce their environmental impact. This can include measures such as energy efficiency upgrades, transitioning to renewable energy sources, and implementing sustainable supply chain practices. By adopting these measures, companies can not only reduce their carbon footprint but also enhance their long-term resilience in the face of climate change.

The outlook for the California Climate Corporate Data Accountability Act and Climate-Related Financial Risk Act is promising. By creating transparency and accountability, this legislation drives progress towards a more sustainable and climate-resilient economy. It empowers stakeholders with the information they need to make informed decisions, promotes responsible business practices, and catalyzes innovation. The impact on corporations, the environment, and society as a whole will continue to evolve as companies adapt to the new reporting requirements and stakeholders leverage the disclosed information to drive change. Ultimately, the act represents a critical step forward in addressing the urgent challenge of climate change and lays the foundation for a more sustainable future.

What’s Next for Reporting Companies?

Acquiring financial risk information and Scope 1, 2, and 3 emissions data is a huge undertaking. Here are some initial steps for reporting companies to get started:

1. Evaluate your current GHG and ESG reporting procedures. Where does your company store this kind of data? Who are key contacts who will play large roles in this upcoming requirement? 
2. Discover how the new laws will affect your current reporting procedures and operations. This may require some foresight into budget allocation decisions, increased personnel through an internal ESG team or outsourced consultants, and even an educational push to onboard employees for new procedures. 
3. Identify pain points in your current reporting procedures, and consider leading software and digital platforms to ease the transition process and annual accounting project. Risk oversight and management software can play a crucial role in streamlining the reporting process, collecting, and analyzing data, and ensuring compliance with the proposed climate disclosure rules. By utilizing ESG software, companies can efficiently track and manage their emissions, assess climate-related financial risks, and make data-driven decisions to reduce their environmental impact. This software conserves labor, time, and capital resources; embracing technology will not only help companies meet their obligations but also demonstrate their commitment to transparency and sustainability.

Get started early. Don’t wait to implement new procedures and software – get ahead of any speed bumps toward progress by seeking digital solutions now. Auditboard has been proven to improve business outcomes by increasing efficiency, enhancing compliance, and boosting confidence in decision-making. Get started today.