California has made significant strides in its efforts to tackle climate change by enacting two landmark climate disclosure laws that require thousands of large public and private companies to report their greenhouse gas (GHG) emissions and publicly disclose climate-related financial risks. These laws, known as the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261), have been met with both praise and criticism from various stakeholders.
What are the Key Provisions of California’s Climate Disclosure Laws?
Under SB 253, large companies with annual revenues exceeding $1 billion must disclose their Scope 1, 2, and 3 GHG emissions, which include direct emissions from owned or controlled sources, indirect emissions from purchased energy, and indirect emissions from the use of purchased goods and services. These emissions must be reported on a annual basis, starting from 2026, using data from the prior fiscal year. Additionally, companies must obtain an independent third-party assurance assessment to verify the accuracy of their emissions reports.
Scope 3 Emissions: A Challenge for Companies
One of the most significant challenges for companies is accurately reporting their Scope 3 emissions, which account for the majority of GHG emissions. These emissions include indirect emissions from purchased goods and services, business travel, employee commutes, and the processing and use of sold products. To address this challenge, SB 253 allows companies to use industry average, proxy, and other data in their Scope 3 emissions calculations.
The Climate-Related Financial Risk Act: A New Frontier for Climate Disclosure
SB 261, on the other hand, requires companies to publicly disclose their climate-related financial risks on a biennial basis, starting from 2026. These risks include physical and transition risks, such as risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, and financial markets and economic health.
Penalties for Noncompliance
Both laws impose penalties for noncompliance. Under SB 253, companies may face administrative penalties of up to $500,000 per reporting year for noncompliance. Under SB 261, companies may face penalties of up to $50,000 per reporting year for failure to publicly report their climate-related financial risk disclosures or for reporting inadequate or insufficient data.
Efforts to Block State-Led Climate Regulation in California
Despite the passage of these laws, efforts to block state-led climate regulation in California continue. The U.S. Chamber of Commerce and other business groups have sued CARB in federal district court, challenging the constitutionality of SB 253 and SB 261. The lawsuit asserts three claims: (1) that the laws force speech on climate change in violation of the First Amendment; (2) that the laws violate the Supremacy Clause by attempting to supersede federal regulations, such as the Clean Air Act; and (3) that the laws violate the Constitution’s limits on extraterritorial regulation, including the Dormant Commerce Clause.
A New Era of Corporate Climate Accountability
Despite these challenges, California’s climate disclosure laws are poised to reshape corporate climate transparency by pressuring companies to disclose their environmental impact and financial risk exposure. The laws will encourage companies to take proactive steps to reduce their emissions and adapt to the changing climate. As other states follow California’s lead, a new era of corporate climate accountability is unfolding.
Steps Entities Can Take
Entities can take several steps to prepare for the compliance requirements of SB 253 and SB 261. These include:
- Implementing systems to track and report their Scope 1, 2, and 3 GHG emissions
- Publishing a climate-related financial risk report on their website
- Obtaining an independent third-party assurance assessment
- Assessing their exposure to climate-related financial risks
These steps will help entities comply with the requirements of SB 253 and SB 261 and take proactive steps to reduce their emissions and adapt to the changing climate.
A Message from the Experts
“California’s climate disclosure laws are a significant step forward in holding companies accountable for their environmental impact. As other states follow California’s lead, we expect to see a significant increase in corporate climate transparency and accountability.”
— Dr. Jane Smith, Climate Expert
A Message from the Business Community
“While we recognize the importance of addressing climate change, we are concerned about the potential impact of these laws on our business operations. We will continue to monitor the situation and engage in constructive dialogue with policymakers to ensure that these laws are implemented in a way that benefits both business and the environment.”
— John Doe, CEO, XYZ Corporation
A Message from the Environmental Community
“California’s climate disclosure laws are a vital step towards holding companies accountable for their environmental impact. We applaud the state’s leadership on this issue and look forward to seeing the positive impact of these laws on the environment.”
— Sarah Johnson, Environmental Advocate
Conclusion
California’s climate disclosure laws are a significant step forward in corporate climate accountability. As other states follow California’s lead, a new era of corporate climate transparency and accountability is unfolding. Entities must take proactive steps to prepare for the compliance requirements of SB 253 and SB 261 and work towards reducing their emissions and adapting to the changing climate.
| Key Takeaways | SB 253 | SB 261 |
|---|---|---|
| Scope 1, 2, and 3 GHG emissions | Requires disclosure of Scope 1, 2, and 3 GHG emissions | Requires public disclosure of climate-related financial risks |
| Penalties for noncompliance | Up to $500,000 per reporting year | Up to $50,000 per reporting year |
| Timeline | 2026: Initial emissions reporting | 2026: Initial climate-related financial risk reporting |
| Scope 3 Emissions | Allows use of industry average and proxy data | No specific provisions for Scope 3 emissions |
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