On October 7, 2023, California Governor, Gavin Newsom, signed into law the Climate Corporate Data Accountability Act (SB 253) climate disclosure and the Climate-Related Financial Risk Act (SB 261) financial reporting legislation. Collectively, these are referred to as the Climate Accountability Package. These new laws impose reporting requirements on large U.S. public and private companies doing business in California, such as:
- Disclosure of Scope 1 and Scope 2 greenhouse gas (GHG) emissions beginning in 2026 and Scope 3 emissions in 2027.
- Submission of biennial (every other year) climate-related financial risk reports to the California Air Resources Board (CARB) beginning in 2026.
We recently released an analysis of SB 253 but this article will focus on SB 261 and the financial disclosure requirements.
Who is Covered?
Under the new law, U.S. based entities with $500 million or more in annual revenues that do business in California must prepare biennial reports disclosing climate-related financial risk, and the measures adopted to reduce and adapt to that risk. Although it is not explicitly defined in the regulation, existing law defined “doing business” in California as companies actively engaged in any transaction for financial or economic gain, or profit within California, regardless of whether the company is domiciled in the state. The entity’s revenue the previous year will be the basis for determining whether the revenue threshold is met.
What are the Requirements?
The climate risk report to CARB must disclose the entity’s climate-related financial risks in accordance with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), and the measures adopted to reduce and adapt to climate-related financials risks. If the entity is unable to complete a report with all the required information, it must provide a recommended disclosure to the best of its ability, describing in detail any reporting gaps and steps prepared to complete the disclosures. Additionally, the climate-related financial risk report must be available to the public on its corporate website.
The Task Force on Climate-Related Financial Disclosures was created by the Financial Stability Board (FSB). The purpose of the TCFD is to develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters with appropriate assessment and pricing risks specific to climate change.
When Do I Need to Comply?
The current law requires that all covered entities prepare reports and have them available on their websites no later than January 1, 2026, and CARB will adopt implementing regulations by January 1, 2025. There are no phase-in requirements based on factors such as the size of the entity, but some of the proposed legislation may delay the effective date and/or change some of the requirements.
What Can I Do Now?
California is not the first government entity to propose climate disclosure obligations. The Securities Exchange Commission (SEC) proposed rules, requiring registrants to include certain climate-related disclosures in their registration statements and period reports. This includes information about climate-related risks that are reasonably likely to have a material impact on their business operations and financial condition. The European Union and the United Kingdom also proposed their own reporting requirements for entities that do business in these areas (including those based in the U.S.) to report on relevant information about their impact on people and the environment.
Although the effective dates for many of these laws seem far off, if you are responsible for maintaining your company’s compliance with new laws and regulations, you know that these effective dates sneak up quickly. Below, we detail three steps you can take to prepare for these regulations:
- Take a look at what you are reporting on now: If you are already voluntarily reporting on climate and other ESG risks, view the gaps between current disclosures and what will be required by California. If these gaps are significant, you will want to begin amending disclosure for compliance. If you aren’t currently reporting in this area, start developing an understanding of the language of climate risk, such as the greenhouse gas protocols and the TFCD framework.
- Evaluate how the new laws affect your operations: The TCFD structures its recommendations around operational elements of an organization, such as governance, strategy, risk management, and metrics/targets. Preparation of the disclosures may uncover impacts that climate risk has on operations, such as lack of involvement from your board, or how it identifies and assesses climate-related risk.
- Start interviewing assurance firms and advisers as needed: Some of these new laws require assurance of climate-related information. So, does your current firm have this expertise, or is a new firm required with carbon accounting professionals to assist with the collection of emissions data and preparation of disclosures?
CARB is responsible for developing and adopting specific rules and regulations related to the laws in Climate Risk Accountability Package. It is important to monitor these developments as they may alter requirements or scope. Given the attention that climate-related activities received over the past few years, it is unlikely that this is the last of the regulations that will require an entity to account for their ESG program.
How Can Wolf Help?
At Wolf, we offer services ranging from materiality and gap assessments, to carbon accounting, risk management, and more. Our industry-focused expertise surrounding climate and sustainability programs positions us to address the complex and evolving assurance requirements in this space.
If you are a company seeking a trusted partner to assist you in your disclosures, please reach out to a member of our team today.
