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California ESG Regulations Showcase Development of Wider Regulations in U.S.

California ESG Regulations Showcase Development of Wider Regulations in U.S.

In October 2023, California became the first state to pass regulations for reporting greenhouse gas emissions (GHGs). The regulations are outlined in two bills, the Climate Corporate Data Accountability Act (SB-253) and the Climate-Related Financial Risk Act (SB-261). These laws apply for both private and public U.S. companies that do business in California (not just those with a physical presence in California).

Climate Corporate Data Accountability Act SB-253

SB-253 applies to all U.S. companies doing business in California with over $1 billion in total annual revenue, not just revenue from California, with no exclusions. This law will require disclosures on Scope 1, 2, and 3, greenhouse gas emissions (GHG). For reporting on Scope 1 and 2, data from FY 2025 will be used to report in 2026. Reporting on Scope 3 will be effective as of 2027, reporting on FY 2026 data. Reporting is required annually using a digital reporting platform.

Penalties will be handed down for late filing or non-filing of up to $500,000 in a reporting year. Between 2027 and 2030, penalties related to scope 3 disclosures will only apply for non-filers; and on an ongoing basis there will be no penalties for any misstatements related to scope 3 disclosures made with a reasonable basis and disclosed in good faith.

Under SB-253, GHG emissions are required to be reported under the GHG protocol.

The following definitions are relevant to GHG emissions reporting.

  • Scope 1. All direct GHG emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including but not limited to fuel combustion activities.
  • Scope 2. All indirect GHG emissions from consumed electricity, steam, heating, cooling purchased or acquired by a reporting entity, regardless of location.
  • Scope 3. Indirect upstream and downstream GHG emissions other than scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.

Greenhouse Gases: Climate-Related Financial Risk Act (SB-261)

SB-261 applies to all U.S. companies doing business in California, excluding insurance companies, with over $500 million in total annual revenue, not just revenue from California,. This law requires biennial disclosures (every two years) at the company’s websites on climate-related financial risks and measures adopted to reduce and adapt to such risks using the Task Force on Climate-related Financial Disclosures (TCFD) framework. TCFD is currently being sunset and the IFRS is taking over. The IFRS is responsible for the ISSB Standards, which will be accepted as an alternative.

Reporting for SB-261 will be required on or before January 1, 2026 which will be before SB-253. Penalties will be handed down for late filing or non-filing of up to $50,000 in a reporting year.

Impact of California regulations on ESG adoption

Companies that do business in California will be on the leading edge of ESG compliance, beginning with data monitoring and collection in 2025 for reporting in 2026, and may be better prepared for greater ESG reporting. Even companies not doing business in California and won’t be impacted should pay attention because the SEC climate disclosure rule is expected to be finalized soon.*

Just as companies without a physical presence in California will be required to collect and report climate and emissions data, small to mid-sized businesses are being, and will continue to be, impacted “indirectly” by ESG regulations for larger companies. Larger companies, like public companies, are subject to ESG regulations if they have business in the European Union, which is further ahead in the era of responsible business. Suppliers to these larger companies are being asked for data so that they can comply with ESG standards for their businesses. The middle market will eventually be required to monitor and collect this data, and it would be wise to begin planning for impending regulations.

 

*As of March 6, 2024, the SEC has released the climate disclosure rules. We will share more information on the impact of these rules as we learn more about the new requirements.

 

Written by Crystal Li and Venus Wu. Originally published by Finextra.

Read further coverage on this topic in CPA Practice Advisor.

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