California Raises the Bar for Corporate Accountability as Newsom Signs the Most Sweeping Climate Disclosure Laws in the Nation

On Saturday, October 7, 2023, California Governor Gavin Newsom signed into law two landmark bills—SB 253, the Climate Corporate Data Accountability Act; and SB 261, the Climate-Related Financial Risk Act—that will require large public and privately-held entities doing business in California to comply with sweeping disclosure requirements regarding their direct and indirect greenhouse gas emissions and their climate-related financial risks.

Under these laws, qualifying entities will be required to publicly disclose both their impact on the environment and how climate change is impacting their bottom line. The laws are intended to bring more transparency to the public about the impact big businesses have on climate change and vice versa, and to encourage efforts to reduce emissions.

Climate Corporate Data Accountability Act

California’s Climate Corporate Data Accountability Act (CCDA), Health and Safety Code § 38532, applies broadly to all U.S. businesses with annual revenues over $1 billion that do business in California.

Under the bill, thousands of public and private businesses across the nation will be required to measure their greenhouse gas emissions and begin reporting them in 2026 for the 2025 fiscal year pursuant to regulations to be developed by the California Air Resources Board (CARB). Beginning in 2026, companies are required to report their direct emissions from sources they own or directly control (Scope 1) and indirect emissions from energy consumption (Scope 2). Beginning in 2027, they are required to report all other indirect emissions including, but not limited to, supply chain-oriented emissions, business travel, employee commutes and use and disposal of products (Scope 3). Companies are expected to abide by the Greenhouse Gas Protocol and obtain independent assurance from a third-party assurance provider in order to comply with the CCDA. CARB is authorized to seek administrative penalties of up to $500,000 for noncompliance.

Climate-Related Financial Risk Act

California’s Climate-Related Financial Risk Act (CFRA), Health and Safety Code § 38533, is the first mandatory climate-related risk disclosure law to go into effect in the United States. Under the CFRA, U.S. companies doing business in California with total revenues over $500 million will be required to prepare a biennial climate-related financial risk report, beginning January 2026. The report must publicly disclose the entity’s climate-related financial risks in accordance with the recommended framework of the Task Force on Climate-Related Financial Disclosures and the measures the company is taking to mitigate those risks. Reports that contain a description of an entity’s emissions or voluntary mitigation of those emissions must be verified by an independent third-party. The law requires CARB to promulgate regulations to enforce the requirements and to seek administrative penalties of up to $50,000 for noncompliance.

Governor Newsom Cautions that the CCDA and CRFA May Be Infeasible as Written

Despite signing the bills into law and championing California’s efforts in leading the fight against climate change, Newsom cautioned that the implementation deadlines in the CCDA are likely infeasible and could result in inconsistent reporting across businesses subject to the measure. The law requires CARB to develop and adopt regulations for disclosure by January 1, 2025 and Newsom specifically directed his Administration to work with the bill’s author and the Legislature to address these issues.

As for the CFRA, Newsom cautioned that the deadlines may not provide enough time for CARB to adequately carry out the requirements in the bill and similarly directed his administration to work with the bill’s author and the Legislature to address the issues.

Newsom also expressed concern about the overall financial impact of the CCDA and CFRA on businesses and instructed CARB to closely monitor the cost impact and make recommendations to streamline the programs.

Comparing These Laws to Other U.S. Proposals

Notably, California’s CCDA is more stringent than the U.S. Securities and Exchange Commission’s (SEC) proposed climate disclosure rules in a few ways. The SEC’s proposed rules would only apply to publicly-traded companies, while the CCDA applies to both publicly-traded and privately-held companies. Additionally, the SEC’s proposed rules are narrower with respect to which companies will be required to disclose the broader Scope 3 emissions. See our March 22, 2022 Alert on this here. Under the SEC proposal, companies are only required to report on Scope 3 emissions if they have set Scope 3 reduction targets or if Scope 3 emissions are material. The CCDA does not limit which companies doing business in California making an annual revenue over $1 billion will be required to report their Scope 3 emissions.

However, both the CCDA and CFRA find parallels in the U.S. Federal Acquisition Regulatory Council’s proposal for climate-related disclosures for government contractors, which in addition to disclosure requirements would also set emission-reduction targets for certain contractors, unlike the California laws. See our November 11, 2022 Alert on this here.

Looking Ahead

While these new laws may be subject to refinement and may ultimately face litigation that could delay or even halt their implementation, for now, large companies that do business in California should begin preparing to comply with the significant obligations under the CCDA and CFRA.