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October 3, 2023

California About To Adopt Sweeping New Greenhouse Gas Emissions Disclosure and Climate-Related Financial Risk Reporting Requirements: Implications for Companies


Governor Newsom has announced his intent to sign into law the nation’s most extensive greenhouse gas (GHG) emissions disclosure and climate-related financial risk reporting legislation — while acknowledging the need for some cleanup language. There are two bills:

  • SB 253, which requires public and private entities doing business in California with more than US$1 billion in revenue to report direct (Scope 1) and indirect (Scopes 2 and 3) greenhouse gas (GHG) emissions
  • SB 261, which requires companies doing business in California with at least US$500 million in revenue to report on their climate-related financial risks

According to the California Senate Rules Committee, “doing business” in California is broadly defined as “engaging in any transaction for the purpose of financial gain within California, being organized or commercially domiciled in California, or having California sales, property or payroll exceed specified amounts: as of 2020 being $610,395, $61,040, and $61,040, respectively. (Revenue and Tax Code (RTC) § 23101).”

This legislation saw intensive lobbying in the final weeks of the legislative session. While both bills, which were discussed in an earlier Advisory, were amended before final passage, the core of each bill remains intact — and will have sweeping impacts for businesses. Here are some key takeaways from the legislation that public and private companies should consider and a preview of what comes next for implementation of these new laws, including the implications of Governor Newsom’s statement that he will seek “cleanup” language.

Emissions Disclosure Requirements Could Significantly Impact Small and Medium-Sized Businesses – Not Just Businesses With US$1 Billion in Revenue

Senate Bill 253, the California Climate Corporate Data Accountability Act, explicitly applies to companies doing business in California with revenues in excess of US$1 billion; however, its compliance requirements will also reach small- and medium-sized businesses. The inclusion of Scope 3 emissions — indirect upstream and downstream GHG emissions —likely means that small- and medium-sized businesses that supply or contract with large companies covered by the legislation will have to collect, compile, and report data to the larger covered company. Opponents of the legislation have argued that many of these small- and medium-sized companies are unlikely to have the capacity or expertise to accurately collect and compile such data. In the rulemaking process, California’s climate regulator, the California Air Resources Board (CARB), will be tasked with guiding companies as to which methods of calculating Scope 3 emissions are allowable. For example, covered companies may push CARB to broadly allow use of simplifying assumptions in calculating Scope 3 emissions associated with a complex supply chain.

All Scope 3 (Indirect) Emissions Are Included

Senate Bill 253 sets itself apart from the ongoing SEC rulemaking on emissions disclosures and the proposed Federal Acquisition Regulation that would apply to major government suppliers and contractors by including all Scope 3 emissions from private and public entities. Unlike the proposed SEC rule , there is no materiality threshold in the California legislation. Many business groups objected to the inclusion of Scope 3 emissions based not only on challenges that small- and medium-sized businesses may have in collecting and compiling such data, but also from the complexity of compiling a vast array of data points required to make the calculations for indirect emissions up and down their value chain and the accuracy of the results.

As just one example in one industry, the inclusion of Scope 3 emissions could have significant implications for the banking industry. Financial institutions reporting Scope 3 emissions would be required to report the emissions that come from any entity that receives a loan, investment, or other service (such as underwriting) from that institution — in other words, financed emissions across the economy. As such, a bank may have to collect data from entities across numerous sectors including, energy, manufacturing, real estate, and retail. Doing so can be quite complex as differences between sectors and geographies, among other factors, can impact accurate assessment and calculation of Scope 3 emissions. Moreover in the case of the financial sector, reporting Scope 3 emissions may impact lending and underwriting practices.

Revisions to SB 253 made over the course of the past year (since a previous version of the legislation failed in the State Assembly last year) ostensibly seek to address or alleviate concerns regarding the accuracy of submitted Scope 3 data and the workload to collect them:

  • Annual disclosure of Scope 3 emissions is delayed by a year, to 2027. Scope 1 and Scope 2 emissions disclosures begin in 2026.
  • Greenhouse Gas Protocol standards and guidance, including the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard, are explicitly mentioned in the legislation. Such guidance includes, as stated in the bill text, “acceptable use of secondary data sources, including the use of industry average data, proxy data, and other generic data in its Scope 3 emissions calculations.”
  • Reporting entities are permitted to submit reports prepared to meet other international or national reporting requirements, as long as they comply with all requirements of SB 253.
  • Enforcement for Scope 3 emissions is limited only to non-filing between 2027 and 2030.
  • SB 253 includes a safe harbor: no company is “subject to an administrative penalty for misstatements with regard to Scope 3 emissions disclosures made with a reasonable basis and disclosed in good faith.”
  • SB 253 authorizes administrative penalties for non-filing, late filing, and other failures to meet the requirements of the bill for Scope 1 and Scope 2 emissions reporting.

While such provisions are helpful in some cases, impacted companies and other stakeholders will be looking for more specific guidance and direction from CARB, which is charged with developing and adopting implementing regulations by January 1, 2025. More on the CARB rulemaking process is discussed below.

SB 261 Establishes the First Climate-Related Financial Risk Disclosure Requirement in the United States

With SB 261, California becomes the first jurisdiction in the United States to establish a requirement for climate-related financial risk disclosures. Climate-related financial risk is defined as “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.”

The California disclosures must be reported in accordance with the Final Report of Recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and the report must also include measures the company takes to reduce and adapt to such climate-related financial risk. Like SB 253, SB 261 will impact thousands of companies — in fact, many more will be covered by SB 261 given the lower threshold of US$500 million in revenues. Also, like SB 253, SB 261 saw intense engagement this year, including on concerns about compliance challenges. Many revisions and amendments were made to SB 261 over the course of this session that intend to ease compliance burdens:

  • The effective date of the legislation was moved from the end of 2024 to the beginning of 2026.
  • The reporting requirement was changed from an annual report to a biennial report.
  • Language was added to allow covered companies to explain any gaps in reporting and describe how such gaps will be closed in order to submit complete reports by December 31, 2029.
  • New language added to the bill states that climate-related financial risk reports can be consolidated at the parent company level. Even if a subsidiary alone qualifies as a covered entity (US$500 million in revenue and conducting business in California), the subsidiary would not be required to file a separate report.
  • SB 261 now acknowledges a covered entity complies with the legislation if it issues a public report with climate-related financial risk disclosure information pursuant to another law or regulation issued by a regulated exchange or governmental entity, including the federal government, that is consistent with the requirements of SB 261 or that is voluntarily disclosed using a framework consistent with SB 261.
  • The cap on administrative penalties was lowered from $500,000 to $50,000 in a reporting year. Note, SB 261 directs CARB to develop regulations to seek such administrative penalties from a covered entity that fails to report or insufficiently reports as required. The bill directs CARB to account for the violator’s past and present compliance, as well as whether the violator took “good faith measures” to comply.

As in the case of SB 253, the recent revisions and amendments to SB 261 are instructive; however, additional guidance from CARB will provide a more complete picture of the requirements and CARB’s approach to enforcement.

Implementation: CARB Guidance and Rulemaking Process

Following the governor’s signature of SB 253 and SB 261, CARB will begin a process of developing implementing regulations, as directed in each bill. The rulemaking process typically includes a direct agency engagement with stakeholders, as well as public workshops and public comment periods. This process will offer additional opportunity for stakeholders, including environmental organizations, community groups, and businesses, to shape the final implementation of the legislation. In particular, there are several important elements to watch in the rulemaking process.

1.  Clarity on covered entities.

While SB 253 and SB 261 specify that they cover businesses with revenues in excess of US$1 billion and US$500 million, respectively, CARB’s rulemaking could provide additional clarity as to how the revenue figures are to be calculated (e.g., gross or net revenue) and whether or not revenues from subsidiaries or affiliates count towards that figure. CARB could also provide guidance for how a privately held company will be determined to have met the threshold if it does not publicly disclose financial records.

Additionally, while the legislature’s bill analyses define “doing business” in California, that definition is not included in the bill language. Specifically, as discussed above, California Senate Rules Committee Senate Floor Analysis of SB 253 defines “doing business” in California as “engaging in any transaction for the purpose of financial gain within California, being organized or commercially domiciled in California, or having California sales, property or payroll exceed specified amounts: as of 2020 being $610,395, $61,040, and $61,040, respectively. (Revenue and Tax Code (RTC) § 23101).” CARB may wholly adopt this definition or attempt to further clarify the scope of “doing business” in California as relevant to these laws.

2.  Clarity on reportable (Scope 3) emissions.

The Greenhouse Gas Protocol standards and guidance provides detailed guidance for the reporting of Scope 3 emissions, including specific categories of emissions and calculation tools and methods. However, the protocol also includes optional reporting elements and choices for reporting companies. How CARB treats the optional elements in the protocol and the choices it offers will be imperative for covered companies to understand. Additionally, different industries and sectors require distinct analyses — any sector-specific guidance from CARB will be of interest as well.

3.  Alternative Standards for Disclosures

The Greenhouse Gas Protocol standards are widely used and underpin many other frameworks and standards, but there are alternatives — and SB 253 does grant CARB the authority, beginning in 2033, to “survey and assess currently available greenhouse gas accounting and reporting standards.” Stakeholders will be interested in guidance from CARB as to the framework and criteria for such a survey and assessment, as well as the process for adopting an alternative standard. For example, many large emitters already report Scope 1 emissions to EPA and CARB pursuant to EPA’s GHG Reporting Program (GHGRP) and state regulations related to AB-32. CARB could allow submittal of these existing reports in lieu of requiring new reporting procedures for such parties.

4.  Emissions Reporting Organization and the Reporting Program

SB 253 directs CARB to “contract with an emissions reporting organization to develop a reporting program to receive and make publicly available disclosures.” CARB’s rulemaking may provide additional detail as to the criteria for and the role of the emissions reporting organization, as well as guidance and direction to the emissions reporting organization regarding the development of the reporting program.

5.  Assurance

SB 253 requires reporting companies to obtain an assurance engagement provided by a third-party assurance provider. The assurance engagement for Scope 1 and 2 emissions is required at a limited assurance level beginning in 2026 and at a reasonable assurance level beginning in 2030. The bill also directs CARB, in 2026, to review and evaluate trends in third-party assurance requirements for Scope 3 emissions — and may establish an assurance requirement for third-party assurance engagement of Scope 3 emissions on or before January 1, 2027, while further directing that “assurance engagement for Scope 3 emissions shall be performed at a limited assurance level beginning in 2030.” CARB’s rulemaking may address not only the criteria a third-party assurance provider may have to fulfill, but also the framework for its review and evaluation of trends in third-party assurance requirements for Scope 3 emissions.

6.  Enforcement

SB 253 and SB 261 direct CARB to develop and adopt regulations to seek administrative penalties. Enforcement will be of keen interest to reporting companies and other entities, particularly any additional details related to the safe harbor included in SB 253 for Scope 3 reporting as well as how CARB will define “good faith” attempts to comply.

Governor Newsom Is Seeking Cleanup Language

While announcing his intent to sign SB 253 and SB 261, Governor Newsom mentioned the need for cleanup language, but did not elaborate as to what changes he sought. Given the Governor’s signal, it is reasonable to expect new legislation will be introduced for the 2024 session that will amend or supplement SB 253 and SB 261. It is not possible to predict the full extent of this effort, but we expect that any such legislation will be the subject of intense lobbying on the issues raised above, as well as other issues (e.g., the enforcement mechanisms).


California has long sought to maintain a leadership role on climate regulation and the new requirements for GHG emissions and climate risk disclosures are another far-reaching example. Thousands of companies will be impacted by this legislation and other jurisdictions across the country may decide to follow suit — not to mention the pending SEC and Federal Acquisition Regulation (FAR) rulemakings discussed in these Advisories (SEC Proposal; FAR Council Proposal). Moreover, given the current national politics around climate change disclosure in particular, and ESG issues in general, California’s legislation may well be met with political opposition and even countervailing legislation from other states.

We will continue to monitor these developments and provide updates. For questions or additional information, please reach out to the authors of this Advisory or your Arnold & Porter contact.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.