The State of California has taken a significant step toward corporate sustainability by passing climate bills SB 253 and SB 261. Known as the "California Climate Accountability Package," these bills will mandate transparency in reporting corporate carbon emissions and climate risks.

Understanding the California Climate Bills

California faces a high risk of extreme weather events, including droughts, wildfires, and rising sea levels. SB 253 and SB 261 aim to assess and mitigate the environmental impact of businesses operating within the state.

These bills provide crucial insights for California’s communities, citizens, investors, and stakeholders regarding corporate contributions to climate challenges.

What Companies Need to Know About SB 253

GHG Emissions Scope

SB 253 requires you to report the scopes of emissions, which are split into Scope 1, 2, and 3:

• Scope 1: Direct emissions from owned or operated sources, like manufacturing facilities and corporate vehicles.
• Scope 2: Indirect emissions from the energy a company purchases to power, heat, or cool its premises.
• Scope 3: Indirect emissions from a company’s entire value chain, including supplier manufacturing and product end-of-life disposal.

Key Requirements

• Starting in 2026, companies must disclose Scope 1 and 2 emissions for the previous year.
• Starting in 2027, companies must also disclose Scope 3 emissions.
• The bill aligns with the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and the GHG Protocol’s Scope 3 Standard.
• Verification by a third party becomes compulsory for limited assurance in 2026 for Scope 1 and 2, reasonable assurance for Scope 1 and 2 by 2030, and limited assurance for Scope 3 by 2030.

Penalties for Non-Compliance

Failure to comply could lead to substantial financial penalties, up to $500,000 per year. However, the state will consider a company’s history of compliance and sincere efforts to adhere. Notably, there are protections for inadvertent misreporting of Scope 3 data from 2027 to 2030, provided good faith efforts are made.

What Companies Need to Know About SB 261

Key Requirements

• By 2026, businesses must publicly disclose climate-related risks and mitigation plans, with updates every two years.
• Disclosures must be comprehensive, following the TCFD’s Recommendations and covering governance, strategies, risk management, and metrics. The ISSB Standards are also an acceptable framework.
• If full disclosure isn’t possible, companies must provide a rationale, detail discrepancies, and schedule full disclosure.
• A state-commissioned body will synthesize a public report every two years to evaluate reported financial risks associated with climate change.

Penalties for Non-Compliance

Entities failing to comply will incur fines of up to $50,000 annually, with leniency considered for those demonstrating a consistent compliance effort.

Eligibility Criteria for Compliance with California's Climate Bills

Entities that must comply with SB 253 and SB 261 include:

• Entities engaged in commercial activities that profit within California
• Entities based or commercially headquartered in California
• Entities surpassing certain thresholds in California-based sales, property, or payroll, or if these constitute at least a quarter of the overall totals:

Detailed Obligations:

• SB 253: Targets corporations generating over $1 billion globally, affecting approximately 5,400 entities.
• SB 261: Targets non-insurance companies with global revenues exceeding $500 million, impacting around 10,000 entities.

The Far-Reaching Implications of California's Climate Legislation

SB 253 and SB 261 are expected to impact over 10,000 U.S. companies. The influence extends beyond these entities, affecting entire supply chains and prompting widespread data gathering and reporting.

• Scope 3 emissions can be up to 11.4 times greater than Scope 1 and 2 emissions. Financial institutions, whose financed emissions are typically 700 times larger than Scope 1 and 2, will need extensive data from their investment and loan networks.
• Climate-related risks along supply chains under SB 261 will require data contributions from all entities within those chains, even if they are not directly reporting.

The ripple effect of these bills will impact companies across every U.S. state, regardless of size or public/private status.

Charting Your Path to Compliance with California's Climate Bills

Despite ongoing litigation, it is likely that these bills will be adopted, with the first reporting due in 2026. The intervening years are critical for businesses to adapt to these new environmental reporting requirements.

Our firm is here to support you every step of the way. From reporting to implementation, we will guide your organization on its path toward a sustainable future.