Navigating the Rapidly Changing World of Climate-Related Disclosures Part 2: The California Climate Accountability Package
April 4, 2024
By: Karl Lany
The California Climate Accountability Package is intended to promote emission quantification, awareness of financial risk, and planning to counter climate-related risks to the economy. The package consists of two legislative bills, SB 253 and SB 261, that were signed into law in October 2023.
SB 253
The Climate Corporate Data Accountability Act requires both private and public companies that have annual revenue more than $1 billion and that are domiciled in California or do business in California to report Scope 1, 2 and 3 greenhouse gas (GHG) emissions to the State.
SB 261
The Climate-Related Financial Risk Act requires companies with annual revenues of $500 million or more to identify, assess, and biennially report on climate-related physical and transition risks, including the financial impacts of those risks.
A Closer Look at SB 253
Applicability of SB 253 is not limited to publicly traded corporations, nor is it limited to companies based in California. It applies to any business entity that has been formed under the laws of a U.S. state or act of Congress. Additionally, the $1 billion applicability threshold applies to a company’s total annual revenue, rather than revenue earned in California. While the concept of “doing business in California” includes de minimis applicability thresholds, they are relatively low. For example, a company with as little as $700,000 from California sales that also meets the $1 billion total revenue threshold would be subject to emission reporting. A much lower de minimis threshold of approximately $70,000 applies to employment compensation and taxes paid in California.
The number of affected businesses has been estimated from 5,000 to 10,000 companies. Additionally, we anticipate significant indirect impacts on companies within the supply chain and value chain of those companies required to report.
Implications of Reporting Scope 1, 2 and 3 Emissions
While some companies already report Scope 1 and 2 GHG emissions via various regulatory programs, regulatory applicability tends to be based upon emission thresholds. SB 253 applicability is based upon financial thresholds, so even low emitters will be affected.
Perhaps more significantly, the inclusion of Scope 3 emissions presents additional challenges in data availability (internally and externally) and accuracy, as well as potentially coordinating with diverse vendors that are not familiar with GHG emissions quantification and reporting programs.
A Closer Look at SB 261
SB 261 considers climate-related financial risk to include any material risk or harm to immediate and long-term financial outcomes, including risk to business operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, financial standing of borrowers, shareholder value, consumer demand, financial markets, and economic health. Companies must assess both physical risk and transition risk, as well as quantify the actual or potential financial impacts of those risks.
This reporting program comes on the heels of several voluntary programs (e.g., the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, now incorporated in the International Financial Reporting Standards (IFRS) Foundation’s S2 Climate-related Disclosures standard), industry-sponsored standards, and government accountability programs. However, unlike many of those programs, reporting in the new California programs will be mandatory. Reporting exemptions are granted only if an entity already reports biennially pursuant to other laws or voluntary reporting programs that meet standards specified in the bill.
Independent Review and Enforcement Penalties
Scope 1 and 2 emissions will need to be independently verified, at the reporter’s expense, starting in 2026 (limited assurance), with reasonable assurance required by 2030. Scope 3 emissions will need to be verified to the limited assurance level starting in 2030.
The program also includes maximum penalties of $500,000 for violations of SB 253 and $50,000 for violations of SB 261.
Tight Rule Development Schedule with Budget Obstacles and Litigation
The California Air Resources Board (CARB) is charged with developing and adopting regulations to implement both bills by January 1, 2025. Reporting would begin in 2026, but CARB has authority to establish an alternative initiation date.
CARB rulemaking has not yet begun due to state budget constraints in 2024. Additionally, several business groups have sued CARB to block program implementation based upon authority to regulate GHG emissions beyond California borders, impacts on interstate trade, and freedom of speech. So far, courts have not prevented CARB from initiating rulemaking while the lawsuit is being considered.
Next Steps
Business owners, executive leadership teams, and Boards of Directors should not take much comfort in CARB’s delayed rulemaking process. A delay in rulemaking may lead to less debate and analysis that typically accompanies CARB rulemaking, with little impact to the anticipated rule effective dates. Companies may want to arrange for technical representation in the rule development process to ensure that compliance can be reasonably achieved.
Companies that do not already quantify GHG emissions should get started now. You will not want your first year of regulatory reporting to be the first year of calculations; getting started early will help identify data gaps, data quality issues, etc. Deep understanding of supply chain and value chain relationships is also needed to better understand sources of GHG emissions and potentially identify how to share information across companies. Furthermore, the process for identifying, assessing, and quantifying the financial impact of climate-related risks is one that involves many stakeholders and will take time to execute.
The takeaway? As we advised for those impacted by the U.S. SEC climate rules – it’s not too early to start preparing your GHG inventories and your climate-related disclosures! If you would like a trusted advisor to guide you through this process, we are here to help. We pride ourselves on meeting our clients where they are and on teaching our clients along the way, rather than simply doing.
Our air quality, sustainability, and GHG verification experts are adept at developing compliance programs and reporting GHG emissions. As one of the nation’s largest emissions testing company, we are also positioned to both scrutinize emission reporting practices and establish alternative emission factors that may be unique to client operations. Finally, we have a long history of representing clients in the California rule development process through technical working groups, agency negotiations, and formal hearing testimony.
P.S. Unsure on what Scope 1, Scope 2, and Scope 3 even mean? No worries! Reach out and our team can give you a quick, personal GHG emissions/climate impact/climate risk overview via a video call! Let us boil things down for you – no need to sit in on a generic webinar and try to learn all this on your own!
Click here to read Part 1: SEC Climate Rules
Karl Lany
Principal – District Manager, Environmental Permitting and Compliance Services
Karl manages the environmental regulatory compliance services consulting group, serving clients with air, water, and hazardous materials management and regulatory development guidance. Prior to joining Montrose, Karl held regulatory and financial roles at the South Coast Air Quality Management District. His areas of expertise include environmental compliance, permitting, consulting, impact assessments, regulatory development and policy. His team of professionals provides GHG quantification, reporting and verification services to a variety of industries. He holds a bachelor’s degree in civil engineering technology and business administration / finance from Colorado State University – Pueblo and a master’s in environmental studies from California State University – Fullerton. Karl is a Certified Permitting Professional as well as a California Certified Lead GHG Verifier, and resides in Orange County, California.
