On October 7, 2023, California Governor Gavin Newsom signed California’s Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261) into law, both of which will require large public and private companies operating in California to detail and disclose their greenhouse gas emissions.
SB 253 and SB 261 are part of the larger California Climate Accountability Package. The California Climate Accountability Package, particularly through SB 253 and SB 261, seeks to transform corporate transparency around climate impacts.
- SB 253 demands that large public and private companies operating in California detail their greenhouse gas emissions, inclusive of scopes 1, 2, and 3. This becomes imperative from 2026, with Scope 3 reporting starting in 2027.
- SB 261, on the other hand, necessitates the reporting of climate-related financial risks, in line with global recommendations, to ensure investors and stakeholders are well-informed of potential vulnerabilities.
Both legislations aim to align business operations with larger climate goals, ensuring environmental sustainability while bolstering economic resilience.
Understanding the New Climate Legislation: California SB 253 & SB 261
Navigating the intricate landscape of new legislation often feels overwhelming, especially when it holds significant implications for businesses. With the recent signing of SB 253 and SB 261 into law as part of the broader California Climate Accountability Package, there’s a lot to unpack. To make sense of this new legislation and understand its direct impact on business operations, let’s delve deeper and succinctly break down each bill’s key components and requirements.
SB 253 — The Climate Corporate Data Accountability Act
The Climate Corporate Data Accountability Act expands upon the California Global Warming Solutions Act of 2006. It enforces stricter requirements on larger corporations and business entities in California to report and verify their greenhouse gas emissions with transparency.
The bill targets partnerships, corporations, limited liability companies, and other business entities that have total annual revenues exceeding $1 billion and operate within California.
- Starting 2026: Reporting entities must disclose their scope 1 and scope 2 greenhouse gas emissions.
- Starting 2027: Disclosure extends to scope 3 greenhouse gas emissions.
- The State Air Resources Board will re-evaluate the timeline in 2029 to potentially update the deadlines based on observed trends.
TRANSPARENCY & VERIFICATION
- Emissions data should be presented in a manner easily understandable to California residents.
- Third-party auditors must independently verify these public disclosures.
The State Air Resources Board, when developing these regulations, will collaborate with various stakeholders, including the Attorney General, investors, environmental justice interests, and reporting entities known for their leadership in greenhouse gas emissions accounting and disclosure.
CENTRALIZED REPORTING PROGRAM
The State Air Resources Board will partner with an emissions reporting organization. This organization will be responsible for creating a platform to receive, store, and publicly display the required disclosures.
REVIEW & RESEARCH
- By July 1, 2027: The State Air Resources Board must commission a detailed report on the disclosures made. This could be undertaken by academic institutions like the University of California or the California State University.
- This report will be hosted on a digital platform managed by the emissions reporting organization and will also be presented to relevant legislative committees.
FEES & FUND CREATION
- Reporting entities are obligated to pay an annual fee (capped at $1,000) to offset the regulatory costs incurred by the State Air Resources Board.
- The “Climate Accountability and Emissions Disclosure Fund” will be established, where these fees will be deposited. Funds will be used exclusively for the purposes of this bill.
The State Air Resources Board will have the authority to impose administrative penalties on entities that violate the provisions of this bill.
SB 261 — Climate-Related Financial Risk Reporting
SB 261 supplements the California Global Warming Solutions Act of 2006, introducing stringent financial risk reporting related to climate change for specified entities within California.
The bill targets partnerships, corporations, limited liability companies, and other business entities that have total annual revenues exceeding $500 million and operate within California.
FINANCIAL RISK REPORTING
- From December 31, 2024, and annually thereafter: Covered entities are mandated to compile a climate-related financial risk report.
- This report should detail the organization’s financial risks tied to climate change and describe measures undertaken to minimize and adapt to these risks.
TRANSPERANCY & PUBLIC DISCLOSURE
- Covered entities must host a copy of this report on their official website, ensuring it is publicly accessible.
- Additionally, these entities are required to submit a statement to the Secretary of State, asserting that their report genuinely discloses climate-related financial risks. Notably, this affirmation is not bound by the penalty of perjury.
STATE OVERSIGHT & ANALYSIS
- The State Air Resources Board is tasked with collaborating with a designated ‘climate reporting organization’.
- This organization is responsible for generating an annual public report that contains:
- A review of select publicly available climate-related financial risk reports.
- An analysis focusing on the systemic and sectoral climate-related financial risks confronting California.
PENALTIES & COMPLIANCE
- The State Air Resources Board will introduce regulations permitting it to impose administrative penalties on covered entities. Violations can stem from:
- Failure to make the report publicly available on the entity’s website.
- Publishing a report that is deemed inadequate or insufficient.
Immediate Impacts on Business Operations
With the global economy transitioning towards sustainability, California’s move is indicative of a broader shift that businesses globally will soon reckon with. Companies operating within the state, which has a massive economic footprint, will be the first wave of enterprises facing these rigorous reporting challenges.
Here’s what it means for the companies it will apply to.
The Effect of Mandatory Reporting
A significant segment of the corporate landscape in California is now on the clock. Currently, both mandates combined will affect more than 10,500 companies that will need to disclose their emissions and financial risks associated with climate change.
These aren’t mere tick-the-box disclosures. The bills demand comprehensive reporting on greenhouse gas emissions across all scopes, as well as financial risks tied directly or indirectly to climate change. This could range from liabilities linked to environmental damages to disruptions in the supply chain caused by extreme weather events.
The disclosures are set to become key reference points for investors, customers, and other stakeholders. Companies will be gauged not just on their current environmental impact but on their strategies for future mitigation. This could influence investment decisions, partnership opportunities, and brand perception.
Data Collection Challenges
Accurate reporting necessitates meticulous data collection across the entire business operation and supply chain.
Reporting isn’t limited to just direct operations of a company. SB 253’s emphasis on including Scope 3 emissions means businesses need to have an oversight of their entire supply chain — from raw material sourcing to end-of-life product management.
Many companies might lack the current infrastructure or tools to comprehensively capture all required data. This could mean potential overhauls in internal IT systems, training personnel, or even hiring new talent to manage these new reporting demands.
Given the dynamic nature of business operations and supply chains, the data collection process will need to be iterative and adaptable. Changes in vendors, operational processes, or business strategies will all have implications on data integrity and accuracy.
Reports aren’t just about self-disclosure. They will need validation, emphasizing the need for third-party assurance to ensure accuracy.
Self-disclosure, while a step forward, may sometimes lack the impartiality and rigorous validation that third-party assurance can provide. Stakeholders, especially informed investors, are more likely to trust data that has been independently verified.
Finding the right partners could prove difficult. Not all third-party auditors are equipped to validate the multifaceted data that these bills demand. Companies will need to invest time and resources in identifying partners who have the expertise in both data collection, environmental science and corporate operations.
Assurance comes at a price. While it’s an investment in building trust, businesses will need to account for these additional costs in their operational budgets. Furthermore, should discrepancies arise during validation, companies might incur further costs in rectifications and potential penalties.
Although the reporting requirement does not begin until 2026 for 2025 data, companies are starting to calculate their Scope 1, 2 and 3 emissions now. Most companies do not want 2025 to be the first year they see their carbon metrics. Instead, they are starting with 2023 or 2024 as their baseline years, so that they have time to address data collection challenges, analyze results, start to build a narrative and risk mitigation strategies based on the results, and begin to form third party verification relationships. In some cases, companies are getting 2024 data third-party verified, to understand the process a year in advance.
In other words, companies do not want to be caught off guard or face negative PR and non-compliance if they wait until the last minute.
How SustainaBase Can Assist
At SustainaBase, we recognize the challenges that come with these regulatory demands. Our platform is designed to alleviate these burdens.
Understanding the intricacies of SB 253 and SB 261 is the first step. Ensuring compliance in a manner that is efficient and beneficial for your business is the challenge that follows. This is where SustainaBase steps in.
Streamlined Data Collection
Easily integrate data from various sources to build a comprehensive emissions inventory.
Our team works with your carbon accounting champion to demystify data collection. Our GHG Protocol data collection process integrates with your current operations, ensuring that every facet of your business, from energy consumption to supply chain operations, is tracked. This not only aids in Scope 1 and 2 reporting but also simplifies the more intricate Scope 3 disclosures.
Robust Reporting Tools
Generate GHG Protocol-compliant reports, the globally recognized standard in carbon accounting, ensuring you’re always ahead of the curve.
With built-in tools and processes tailored to the specifications of the GHG Protocol, generating reports becomes a streamlined process. Additionally, the platform facilitates third-party validation, allowing a third-party verifier to more easily determine whether your disclosures are accurate.
Develop investor-grade, assurance-ready calculation, ensuring that your reports are accurate and ready for reporting under California’s new law.
SB 261’s financial risk disclosures necessitate a deep dive into your company’s strategic planning. SustainaBase’s analytics provide insights into potential vulnerabilities and opportunities, aiding in informed decision-making.
Conclusion & Call-to-Action
As the world pivots to prioritize the climate, businesses are at the forefront of this change. Ensuring compliance isn’t just about meeting regulatory demands, but about leading in a world that values sustainability. Let SustainaBase assist you in this transition. Explore our platform and ensure your business is compliant, efficient, and a leader in the green revolution.
Frequently Asked Questions — FAQs
CA SB 253 & SB 261 apply to?
SB 253 applies to U.S.-based partnerships, corporations, limited liability companies, and other entities with $1 billion or more in annual revenues that do business in California —an estimated 5,400 “reporting entities.”
SB 261 applies to U.S.-based partnerships, corporations, limited liability companies, and other entities with $500 million or more in annual revenues that do business in California — estimated to be over 10,000 “covered entities.”
What does “doing business in California” entail?
The specifics are yet to be fully defined. However, preliminary criteria include engaging in transactions for financial gains, having organizational roots in California, or significant sales, property, or payroll in the state.
When is the first reporting deadline under SB 253 & SB 261?
Companies need to report scope 1 and 2 emissions for the 2025 fiscal year by 2026. Scope 3 emissions reporting begins in 2027 for the 2026 fiscal year.
First climate-related financial risk report is due under SB 261 on January 1, 2026. Reports are required biennially thereafter.
How can I ensure my company’s data is accurate for reporting?
This is where platforms like SustainaBase come in. Our comprehensive carbon accounting platform ensures accurate data collection, aggregation, and reporting in line with the new requirements. We already have proven experience in reporting to entities such as the CDP, ISSB and other stringent reporting frameworks.
What are the penalties for non-compliance?
Companies might face civil actions and penalties up to $500,000 for violations of the act, especially if there’s no reasonable basis for any misstatements about their emissions.