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by
Alexander Olding
- September 21, 2023
California Governor, Gavin Newsom, recently announced his commitment to signing Senate Bill 253, known as the Climate Corporate Data Accountability Act, set to require large companies to disclose their full value chain greenhouse gas (GHG) emissions. As it stands, the signing of this legislation would put California ahead of every other state in the United States and federal regulators when it comes to disclosing corporate climate-related emissions. [1]
In his statement, Newsom acknowledged the profound and immediate societal consequences of climate change, urging us to “sharpen our expectations”. California serves as a stark example of this, grappling with severe climate conditions in recent years. Despite its economic strength, the state is currently challenged by rising sea levels and coastal flooding, which are damaging agricultural lands; the diminishing Sierra Nevada snowpack and dwindling water resources; and an increased risk of forest fires due to hotter and drier summers. [2] More recently, the landfall of Hurricane Hilary, becoming the first storm of its kind to enter California since 1997 reflects how anthropogenic factors are exacerbating climate change effects leading to the increased intensity and frequency of meteorological phenomena. [3]
Newsom also acknowledged the pushback to the bill which would require companies earning more than USD1bln a year and operating in the state to measure categories of emissions from all scopes, including direct emissions (Scope 1), emissions from purchase and use of electricity (Scope 2), and indirect emissions, including those associated with supply chains, business travel, employee commuting, procurement, waste, and water usage (Scope 3).
Dozens of business individuals have argued the bill would be too costly and cumbersome and increase costs and paperwork for firms. Opponents in the fossil fuel industry include the Western States Petroleum Associate and the California Fuels and Convenience Alliance. Wells Fargo and the burger chain In-N-Out have also expressed their distaste towards the new legislation. [4]
Pushback to Environmental, Social, and Governance-associated policies in the U.S. are not uncommon. Having become a more polarized topic in recent years with the rise in efforts by supporters to push forward legislation to better the ESG landscape, divided opinion has even seen certain states like Florida and Texas proposing to pass bills to straight out ban any ESG policy. Most recently, at the federal level, Congress voted to adopt a resolution that would block a recent rule set by the Department of Labor (DoL) to allow private employer-sponsored pension plans to consider ESG and climate factors. [5]
Regardless of the opposition to the California bill, its introduction comes at a convenient time as the SEC is also poised to release its final version of its own climate-related disclosure requirements for U.S. companies. This comes after its initial proposed rules on mandating climate-related disclosure for listed companies in March 2022 which would include disclosure of Scope 3 emissions, carbon offsets, and climate-related risks for relevant companies. Having both the release of the Climate Corporate Data Accountability Act and the SEC’s climate-related disclosure rules could work favorably in reducing significant opposition from Republican lawmakers, who have argued completely against a climate disclosure requirement in any form. [6]
Effective from 2026 for Scopes 1 and 2 emissions, and in 2027 for Scope 3 emissions the Climate Corporate Data Accountability Act declares that current corporate disclosures lack the transparency California citizens and financial markets need to fully grasp climate-related risks. As part of the requirements, entities will therefore be expected to conform to the Greenhouse Gas Protocol (GHG Protocol) standards and guidance as well as obtaining an assurance engagement, performed by an independent third-party assurance provider, of the public disclosure.
Within the realm of assurance, limited assurance will be the baseline level where an independent auditor acquires suitable and relevant evidence, focusing this assurance on specific reporting elements. Meanwhile, reasonable assurance represents the pinnacle of assurance, demanding a rigorous and thorough examination of evidence to affirm that the reporting is devoid of significant misstatements and irregularities. All of this expected to be overseen by the California Air Resources Board who will develop and adopt regulations implementing this new disclosure regime on or before, January 1st, 2025. Moreover, any company that fails to file the required report, or that fails to make adequate disclosures in a filed report, could be expected to face fines upwards of USD500,000. [7]
California’s SB 253, if enacted, will affect around 5,400 companies in the state, marking a pioneering move in the United States by mandating greenhouse gas emissions disclosures from businesses. This state-first legislation is expected to set a precedent for similar actions in other states, such as New York, where the proposed New York Assembly Bill A4123 also seeks climate corporate accountability. [8]
If SB 253 becomes law, both public and private companies operating in California will need to swiftly enhance their reporting capabilities to avoid non-compliance. It’s worth noting that many reporting entities may also fall under the wide-ranging Corporate Sustainability Reporting Directive (CSRD), which encompasses over 50,000 companies, including 10,000 non-EU firms, and encompasses Scope 3 emissions. [8] These regulations, in conjunction with global counterparts, send a clear message that regulators, investors, and stakeholders now demand transparency regarding companies’ environmental and climate impact. Consequently, companies unprepared for these shifts must begin their preparations without delay. [9]
Sources
[2] https://oag.ca.gov/environment/impact
[6] https://www.esgtoday.com/republican-lawmakers-attack-sec-climate-disclosure-rule-in-any-form/
[8] https://sphera.com/spark/california-lawmakers-pass-the-climate-corporate-data-accountability-act/
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