In 2023, California legislators passed a series of laws requiring businesses to increase the detail and quality of their emissions reporting to the state. These laws, including California SB 253: Corporate Climate Data Accountability Act, are designed to improve transparency, increase investor confidence in climate risk reporting and accelerate climate mitigation efforts in companies doing business in California.
The state of California has the fifth largest economy in the world, behind the entire U.S., China, Germany and Japan. With more than $4 trillion in gross domestic product annually, California has influence to shape national practices and attitudes. Senate Bill 253 requires certain U.S. businesses with a presence in California to provide disclosures about their greenhouse gas emissions. The bill uses the Greenhouse Gas Protocol as a guide for reporting standards and fits into global trends toward mandatory disclosure of emissions. With this guide, you will understand how this legislation could affect your next climate disclosure.
What SB-253 Requires Companies to Report
SB 253 requires businesses to prepare an annual report of GHG emissions. The California Air Resources Board is responsible for issuing rules and guidance concerning SB 253 reporting. They specify that companies should provide data according to three scopes aligned with the GHG Protocol:
Scope 1: Direct emissions related to operations that the company owns or controls
Scope 2: Indirect emissions concerning services related to operations, such as purchased heating or cooling for a commercial building owned by the company
Scope 3: Emissions related to other services, like business travel or purchased goods
Given the complexity, Scope 3 emissions tracking likely requires an improvement to governance, measurement, and estimation methodologies.
For the first two scopes, companies should prepare disclosures in 2025 to submit in 2026. Scope 3 emissions reporting requirements start in 2027, although guidelines may update over time. Businesses must submit the emissions disclosure to a third-party emissions reporting organization, making that data available publicly.
Who Must Comply With SB-253?
Simply put, any business with a presence in California may be required to submit climate reporting under this law. Precisely, companies with more than $1 billion in annual revenue must file the disclosure each year even if they are not headquartered in California. Unlike SEC climate disclosure guidance, which issues rules to public companies, private companies are also subject to the filing requirements of SB 253.
Having a presence in California requires clarification, that is, any company that does business in California may be required to meet these rules. Doing business involves:
Online transactions
Sales
Payroll
Property
Distribution centers
Beyond the income threshold, the state board does not acknowledge exemptions, applying rules to subsidiaries and parent companies. Businesses that do not meet the reporting requirements, with late or inaccurate filings, may face administrative penalties.
How Companies Should Prepare for SB-253
Since this law significantly increases the reporting guidelines for eligible companies, advance preparation is key. Businesses should consider taking the following steps:
Conduct an analysis to discover gaps in company emissions reporting for all three scopes.
Assess the existing infrastructure for ESG data management, identifying gaps in collection or processing.
Identify responsible owners of data sources across departments, teams and suppliers.
Design and implement governance structures, which include internal controls and processes to review data management and reporting.
Create methodologies for estimation and calculation of emissions that align with GHG Protocol.
Choose a technology platform that provides supreme workflow, auditing, version control and disclosure management services.
It may take months to implement and refine processes to ensure that data is accurate and complete by the reporting deadline. Starting early can increase the quality of details and improve overall audit readiness.
Technology and Workflow Solutions for SB-253 Compliance
For most businesses, using manual processes will be insufficient to meet the requirements of these climate disclosures. Manual data entry, processing and management introduce human error. Companies that rely on human workers to individually collect and process data increase the risk that faulty data will transmit to other business units with little recourse. Manual processing also takes much longer, especially with data siloes and other problems common to businesses using obsolete data management systems.
By comparison, ESG reporting solutions can simplify the work and increase overall accuracy. A centralized system for emissions data management can ensure that every responsible owner has access to the same data. Automation promotes an efficient workflow and complete audit trails with data lineage tracking. This technology can also provide secure collaboration and document sharing, while aligning templates with GHG Protocol. The right solution saves time, expands detail for investor disclosures and reduces the likelihood of audits by an external reporting entity.
Common Challenges Companies Face Under SB-253
Given the increase in scope, companies may face a number of challenges to fill gaps in data collection and improve the quality of reporting. These obstacles may include:
Complication in collecting data for Scope 3 emissions
Siloed systems that require human transfer of data from one department to another, which increases the likelihood of errors
Lack of internal expertise in ESG standards and requirements
Inconsistency in data collection or processing methodologies across teams
Difficulties finding the resources to complete the additional work
To solve these problems, businesses can work to streamline their data management and internal processes using a technology-enabled reporting workflow. Engaging early with suppliers can provide the necessary time to fill gaps in data collection. Implementing a standardized data framework with robust governance and internal controls can ensure that every relevant party has access to the same information at a touch. Creating systems for cross-functional collaboration can minimize conflict between teams in the leadup to the reporting deadline.
Building a Confident Path to SB-253 Compliance
Although SB 253 only applies to certain businesses with a presence in California, the bill indicates a shift in the way that the U.S. approaches corporate emissions reporting. Many states may choose to adopt similar reporting protocol to reflect greater global interest in climate mitigation.
Early preparation is a key aspect of compliance, but it also promotes strength in governance and a higher dedication to building stakeholder trust. DFIN’s SEC filing software and ESG solutions can help you streamline your data capture, manage your risk and submit accurate, audit-ready disclosures. Our tools can assist you in assessing your climate-related financial risk and improve your carbon accounting. Speak with DFIN to learn more about our ESG reporting, climate disclosures and compliance solutions.
