In the dynamic realm where finance, governance, and environmental stewardship intersect, California has emerged as a beacon with the introduction of SB253 and SB261. These legislative actions are not merely regulatory mandates; they represent a significant stride towards redefining how companies approach ESG reporting and compliance.
Unveiling a New ESG Reporting Era
The innovation brought forth by SB253 and SB261 is unmistakable. SB253 narrows in on the quantifiable aspects of environmental impact—specifically greenhouse gas emissions—while SB261 expands the vista to encompass the broader tapestry of ESG factors.
Here's what's on the horizon:
SB253 mandates comprehensive emissions reporting for both public and private entities crossing the billion-dollar revenue mark in California. Starting in 2026, these organizations will need to report their direct and indirect emissions, ensuring these figures are corroborated by third-party validation.
SB261 obliges larger corporations with annual revenues over $500 million to disclose their climate-related financial risks and the strategies they are implementing to mitigate these risks, commencing in 2026.
These regulations epitomize a proactive approach, prioritizing forward-looking analysis over retrospective reporting. Specifically, SB261 invites companies to disclose their societal impact within California, fostering a more localized and nuanced view of ESG performance.
SB253: Climate Corporate Data Accountability Act
SB253 pulls climate risks into the limelight, demanding transparency that aligns with the Greenhouse Gas Protocol standards. Starting in 2026, emissions reports will become a fixture of corporate responsibility, with the California Air Resources Board (CARB) ensuring adherence through potential fines for non-compliance.
Any company with total revenues in excess of $1 billion that does business in California will be required to make the prescribed disclosures.
Reports to follow the Greenhouse Gas Protocol (GHG Protocol) standards and guidance developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD).
Scope 1 and Scope 2 emissions reporting to begin in 2026 using prior fiscal year emissions.
Scope 3 emissions reporting to begin in 2027 using prior fiscal year emissions.
All reported emissions must be verified by a third-party auditor with expertise in carbon accounting.
Responsibility for enforcement will fall under the jurisdiction of the California Air Resources Board (CARB)
Will have the authority to fine up to $500,000 a year for violations of the bill’s provisions.
SB261: Climate-Related Financial Risk Act
SB261 broadens the scope, targeting large corporations for biennial reporting on climate-related financial risks. This act is a nod to the intricate relationship between environmental stewardship and financial stability, encouraging businesses to weave ESG considerations into the fabric of their strategic planning.
SB261 is applicable to any corporation or business entity established under California law or the laws of any other state with total annual revenues > $500MM.
Requires disclosure surrounding the following categories:
Governance: how the company manages climate-related risks and opportunities
Strategy: How the company’s climate-related risks and opportunities affect its business strategy and financial planning
Risk Management: How the company identifies, assesses, and manages climate-related risks
Metrics & Targets: How the company measures and reports on its climate-related risks and opportunities
Reporting to be consistent with the recommendations of the Task Force on Climate-Related Disclosures (TCFD)
To the extent a report contains a description of an entity’s GHG emissions or voluntary mitigation of those emissions, such claims must be verified by an independent third-party verifier.
First reporting to begin in 2026.
A Comparative Glance at the SEC Climate Rule
When juxtaposed with the SEC's proposed climate rule, both similarities and distinctions emerge: Both sets of regulations prioritize ESG and climate risks, advocating for transparency and underscoring the heightened demand from stakeholders for comprehensive disclosure.
However, while the SEC’s climate rule would potentially impact public companies nationwide, California's SB253 and SB261 zero in on companies “doing business” within the state, with specific revenue thresholds defining their reach.
1. Jurisdiction and Applicability:
SEC Regulations: These would apply to all public companies registered with the SEC across the United States.
California SB253 and SB261: SB253 applies to public and private companies doing more than $1 billion in revenue and operating in California, while SB261 applies to any private or public company that does business in California with total annual revenues greater than $500 million.
2. Scope of Disclosure:
Both the SEC and SB253 require Scope 1 and Scope 2 emissions to be reported.
SEC Regulations: The proposed rules could require disclosures of Scope 3 emissions only if company has set Scope 3 reduction targets or if scope 3 emissions are material.
SB253 requires all Scope 3 emissions to be reported.
3. Enforcement:
SEC Regulations: Non-compliance with SEC rules could lead to enforcement actions by the federal regulator, including fines and penalties.
California Regulations: Enforcement would be carried out by state regulatory bodies and could include state-specific penalties for non-compliance.
The Implications for Business and Strategy
The integration of these regulations into business operations is not a mere compliance exercise. It signifies a deeper shift towards integrating climate consciousness into all facets of business strategy.
As businesses brace for the SEC Climate Proposal and the EU’s Corporate Sustainability Reporting Directive, California's legislation marks a significant step towards a global movement for sustainable and responsible investment. It is an acknowledgment that financial decisions carry the potential to drive transformative change beyond mere profit and loss statements.
As ESG awareness grows, so does the legislation around it. California's SB253 and SB261 are signposts for what may soon become common practice: investments that seek returns while building a better world. It's a reminder that in today's interconnected reality, our financial decisions have weight, carrying the potential to drive change beyond the balance sheet.
Proactive Steps for Companies
Develop Carbon Accounting Acumen: It’s imperative for businesses to become conversant with climate regulations and reporting mandates. Those under the purview of SB253 should become proficient in the Greenhouse Gas Protocol, including Scope 1, 2, and 3 emissions.
Collaborate with Carbon Accounting Experts: Engage with seasoned professionals to assist in emissions data collection and disclosure preparation, ensuring compliance with California’s regulations.
Implement Rigorous Internal Controls: As mandatory reporting becomes the norm, internal controls must be tightened to uphold the integrity of emissions reporting, much like financial data.
Stay Engaged with CARB’s Rulemaking: The rulemaking process offers a chance for businesses to engage with regulatory bodies, providing feedback and ensuring that the final regulations are workable and clear.
Board and Committee Oversight: With new compliance obligations, it’s crucial for company boards to assure effective oversight and adapt committee responsibilities accordingly.
Conclusion
As we transition from voluntary to regulated ESG reporting, the emphasis on controls and transparency becomes more pronounced. Companies must not only report with confidence but also demonstrate the veracity of their data.
In this burgeoning era of carbon accounting, disclosure, and reduction mandates, staying informed and proactive is key. For those navigating these changes, I am here to provide guidance and insights into climate-related data collection, reporting, and disclosures.
California’s bold steps are reshaping the ESG reporting landscape, and I'm committed to helping you understand and navigate these developments effectively. If you need further information or have questions, please feel free to reach out. Let's forge a path toward a sustainable future, together.
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I hope this blog post provides clarity and actionable. As we collectively move towards a more sustainable business model, staying ahead of the curve on regulations like SB253 and SB261 is not just good practice—it’s essential for the future of business in California and beyond.
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