Meeting climate reporting standards has become more stringent and complicated in the past few years. California governor Gavin Newsom signed a number of measures into law, designed to improve transparency on the way that companies approach and handle climate risks, emissions, climate-related governance, and relevant long-term financial impacts. These goals run with other climate requirements aimed at decreasing emissions that contribute to air pollution or climate change.
These laws apply to thousands of businesses that operate in California, including public or private companies and those owned by non-U.S. entities. Since the requirements align mostly with current SEC climate reporting rules, companies doing business in California should plan to align their reporting processes to meet these standards.
Overview of the California Climate Disclosure Framework
The chief goal of California’s recent climate disclosure laws is to increase transparency concerning the way that businesses account for their effects on the environment, specifically emissions as indicated by the U.S. Clean Air Act. The California Air Resources Board is tasked with implementing and enforcing these standards. Although there are a variety of climate-related laws in California, three mandates change reporting requirements:
SB 261: Climate-Related Risk Disclosure Program
AB 1305: Voluntary Carbon Market Disclosure
Applicability depends on the law. For example, SB 253 sets a threshold at $1 billion in annual revenue in California, while SB 261 requires reporting at $500 million in yearly revenue. AB 1305 applies to any company engaging with the voluntary carbon market or making claims about carbon emissions.
These mandates are designed to standardize emissions reporting and provide necessary clarity to investors about the company’s climate governance and strategy. The guidelines generally align with global frameworks, such as the Greenhouse Gas Protocol, Taskforce on Climate-Related Financial Disclosures, or International Sustainability Standards Board.
SB 253: Climate Corporate Data Accountability Act
California SB 253 requires certain U.S. companies to disclose their greenhouse gas emissions in annual reports. Companies doing more than $1 billion in California business each year must make these disclosures, following the GHG Protocol Corporate Standard. These standards involve three scopes with unique filing requirements:
Scope 1 emissions include direct GHG emissions from current owned or controlled assets and must be filed by 2026.
Scope 2 emissions involve indirect GHG emissions, such as electricity or heating for owned or controlled properties, also to be filed by 2026.
Scope 3 emissions relate to other indirect GHG emissions, such as travel or purchased goods and services, and must be filed by 2027.
Although Scope 1 and 2 guidelines align directly with current SEC emissions reporting rules, Scope 3 may not, depending on the expenditures.
SB 261: Climate-Related Risk Disclosure
California’s SB 261 creates a requirement for disclosures of climate-related financial risk. The law obligates companies with $500 million or more in yearly California revenue must issue a report of their financial costs and risks concerning climate change or the need to meet California climate control mandates. The categories for SB 261’s disclosures align with the Task Force on Climate-related Financial Disclosures, including:
Governance
Strategy
Risk management
Metrics and targets
The report must be filed every other year, including analysis on the risk posed to financial statements, operations, supply chain, and long-term planning.
AB 1305: Voluntary Carbon Market Disclosure
Accounting for an increase in companies buying and selling voluntary carbon offsets for their greenhouse gas emissions, California passed AB 1305. This law requires companies operating in California to make specific disclosures if they engage in the voluntary carbon market through the buying, selling, or using of carbon offsets. It also applies to companies that make public claims about their emissions, such as “carbon-neutral” or “net-zero.”
This law is more expansive than other recent climate reporting legislation because it does not have a revenue threshold and can affect marketing and other aspects of business operations. In the report, companies must describe their carbon offset projects, how these projects meet their climate claims, the risks they face in fulfilling those goals, and the progress they make toward those claims. Reporting guidelines are similar to SEC reporting requirements for similar claims.
How These California Mandates Affect SEC Reporting
The best way to ensure compliance with emissions reporting guidelines is to streamline them where possible. There is significant overlap in reporting emissions data to the state of California and the SEC. Specifically, Scope 1 and 2 of SB 253 heavily align with SEC Scope 1 and 2. The climate risk reporting requirements of SB 261 coincide with the SEC climate risk section of Form 10-K. Both sets of guidelines require the following:
Reporting of greenhouse gas emissions
Narrative concerning the company’s climate governance
Assessment and disclosure of climate-related risk
Analysis of the financial impact of climate change or related upgrades
Companies should pay attention to a few distinctions. California reporting requirements may come sooner than SEC deadlines, requiring businesses to speed up their climate reporting processes. SEC filing software requires inline XBRL tagging for these disclosures, while state requirements may not. For many companies, structured data processing provides the best long-term result. Since the SEC’s climate reporting guidelines are currently in flux, getting the most accurate and updated information is key.
Implications for Financial Statements and Investor Reporting
Under current SEC rules, as well as SB 261, companies must include discussion and data related to the climate’s impact on their financials. These impacts might involve:
Capital expenditures to mitigate climate impacts, such as the purchase and use of equipment that runs on renewable energy
Operating costs related to improvements in energy efficiency
Disruptions to the supply chain on account of climate change, such as flooding, landslides, or heavy storms
Changes to the company’s credit risk or insurance requirements due to climate
Impairments to the use of assets, such as a property that cannot be occupied or sold
Providing these details can help to meet investor demand for structured climate data that they can compare to similar companies. To simplify the work of ESG data management, businesses may want to implement robust internal controls for collecting and processing climate data, similar to Sarbanes-Oxley Act compliance for financial information.
Preparing for a New Era of Climate Transparency
The climate affects everyone, and these resolutions reflect a nationwide shift in attitude toward climate change. Specifically, these new laws increase the rigor of ESG reporting for businesses with operations in California. Investors look for companies that respect California’s climate investment and comply with guidelines. Early investment in processes that increase quality of data management and assurance readiness can lower the business’s risk profile and improve investor confidence.
Although SEC enforcement of climate reporting guidelines is changing at present, companies stand to benefit from strengthening their governance and financial clarity on climate issues. This work can help businesses to stand apart from their competition. At DFIN, we specialize in helping companies meet their climate reporting requirements, with ESG reporting solutions and other tools designed to streamline data collection, processing, and report generation. We can assist you in meeting the challenges of evolving regulations with confidence.
