California’s Legislature has recently approved two significant climate disclosure bills: SB 253, known as the Climate Corporate Data Accountability Act (CCDAA), and SB 261, the Climate-Related Financial Risk Act (CRFRA). These bills collectively mandate various entities conducting business in the state to assess and divulge their carbon footprint and climate risks.
The Governor has expressed the intention to sign both SB 253 and SB 261 into law. Applicable to both public and private entities, these laws are anticipated to impact over 5,000 businesses.
While these bills primarily target U.S. companies operating in California, they are part of a worldwide trend pushing for strong climate reporting standards. This aligns with the SEC’s proposed climate disclosure rule in the U.S. and the Corporate Sustainability Reporting Directive (CSRD) in the EU. Notably, California, like the EU, is adopting a broad perspective on which companies should comply. Rather than concentrating solely on companies headquartered or conducting the majority of their business in California, the state mandates disclosures from any company with a presence there.
Here’s a breakdown of California’s Climate Accountability Package (CCAD) and The Climate-Related Financial Risk Act:
The Climate Corporate Data Accountability Act (SB 253)
On September 12, 2023, the Climate Corporate Data Accountability Act marked a significant milestone by passing through the state legislature. This act requires large U.S.-based organizations doing business in California, with annual revenue exceeding $1 billion USD, to disclose their greenhouse gas emissions.
According to the policy, companies affected will be required to disclose their complete carbon inventories, encompassing scope 3 emissions. This is critical, given that scope 3 emissions typically contribute to over 90% of an organization’s climate impact and are often challenging to quantify.
The legislation specifies that companies must submit emissions calculations to a digital reporting platform, ensuring that disclosures are easily understandable for residents, investors, and other stakeholders. Moreover, they are obligated to engage independent auditors to verify the reported emissions.
The California Air Resources Board will supervise the reporting process, ensuring data verification through a registry or a third-party auditor with expertise in carbon accounting. Failure to comply with the new regulations could result in civil penalties from the state’s attorney general.
Companies must report their 2025 direct emissions from 2026 and their 2026 indirect scope 3 emissions from 2027. This means that organizations need to establish a plan before the year concludes for the systematic collection of auditable emissions data.
The Climate-Related Financial Risk Act (SB 261)
This bill mandates large corporations with revenues exceeding $500 million, doing business in California, to submit an annual climate-related financial risk report. This report, based on recommendations from the Task Force on Climate-Related Financial Disclosures, discloses climate-related financial risks and mitigation measures. The submissions will be reviewed by the Climate-Related Risk Disclosure Advisory Group. If signed into law, the first round of reports will be due by December 31, 2024.
The bill applies to any corporation or business entity established under California laws, the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the United States. Entities impacted must have total annual revenues exceeding $500,000,000 and engage in business activities in California.
In the climate-related financial risk report, businesses are required to disclose (i) climate-related financial risk, based on the recommendations of the Task Force on Climate-Related Financial Disclosures, and (ii) the measures adopted to mitigate and adapt to the disclosed climate-related financial risk.
Submissions will undergo review by the Climate-Related Risk Disclosure Advisory Group, tasked with identifying inadequate reports and proposing additional policy changes and best practices for disclosure.
SB 261’s goal is to protect consumers and investors from losses resulting from climate-related disruptions to supply chains, workforces, and infrastructure, exacerbated by the effects of climate change.
The bill also addresses the financial risks businesses may encounter if unprepared for the transition toward a low-carbon economy. For example, automobile manufacturers failing to prepare for the shift towards electric vehicles may experience a decline in market share, leading to revenue losses.
The initial round of climate risk disclosure reports is expected by December 31, 2024, provided Governor Newsom signs it into law.
Comparison to SEC’s Proposed Rules
California’s legislation, while aligned with the SEC’s climate proposal, goes further by demanding disclosure of all three types of emissions for any U.S. company with annual revenue exceeding $1 billion USD. Notably, California’s policy targets both public and private companies, potentially influencing the broader market.
Why these bills matter
These bills, covering over 7,000 companies, aim to enhance accountability, reduce carbon footprints, and empower consumers and regulators. For businesses already embracing climate-forward practices, the reporting framework can highlight their initiatives, creating a global push for increased transparency in carbon accounting.
Preparation is the Key
Businesses in California need to gear up for emissions reporting as the state shifts towards a low-carbon economy. With reporting requirements commencing soon, adopting a transparent, repeatable data collection process is crucial.
Platforms like Eugenie offer solutions for target-based emission reduction, ensuring compliance with California’s new regulations. Eugenie’s products offer the provision to track, trace, and reduce emissions to meet regulatory goals. We achieve this using AI-based digital twins. Our digital twins, at both the machine and process levels, monitor performance and resulting emissions.
With real-time emission tracking, we pinpoint the exact machines and processes responsible for emission levels. This provides clarity to CSOs and other stakeholders on specific contributors to overall emissions.
Additionally, we enhance machine and process-level data with satellite imagery for volumetric estimation of environmental emissions. This comprehensive approach positions Eugenie as a reliable partner for CSOs and organizations committed to reducing emissions.
California’s Climate Accountability Package sets a new standard for corporate transparency, promising a ripple effect beyond the state’s borders. As the global market shifts towards sustainability, companies prepared to disclose and mitigate their climate impact stand to benefit.
To prepare for California’s Climate Accountability Package, explore how Eugenie can help set emission reduction targets and achieve operational emission reduction without impacting your business KPIs. Talk to us for more information or write to us at [email protected].