California Leads Nation With Introduction of Ambitious Climate Disclosure Bill in State Legislature
Last week, California Senate Bill (SB) 260, the Climate Corporate Accountability Act was introduced in the California state legislature. If enacted, large corporations doing business in the state of California would be required to disclose their greenhouse gas (GHG) emissions to the California State Air Resources Board (CARB) beginning in 2024. Large corporations would also be required to set and disclose a science-based emissions reduction target aimed at reducing their carbon footprint, beginning in 2025.
- If enacted into law, SB 260 would require covered corporations to both report GHG emissions and set targets for reducing those emissions, which would be subject to CARB review.
- Required disclosures would encompass both direct and indirect emissions, including Scope 1, 2, and 3 emissions, making it one of the first mandatory reporting schemes to include supply chain, waste, and other types of indirect GHG emissions.
- Under SB 260, CARB would be tasked with developing two sets of regulations implementing both the GHG disclosure and target requirements of the proposed legislation. The law also would establish an “expert panel” to advise CARB on rule development.
- The proposed law would aid California in meeting its own GHG reduction objectives, and also could pave the way for California to achieve compliance with targets under the Paris Agreement.
Emissions Disclosure Requirements
On or before January 1, 2023, CARB would be required to develop and adopt regulations requiring a “covered entity” (defined as a publicly traded domestic or foreign corporation with annual revenues in excess of one billion dollars that does business in California) to verify and annually report defined categories of direct and indirect GHG emissions to CARB. Covered entities would be required to file their first annual public disclosure on or before January 1, 2024.
Significantly, covered entities would be required to annually disclose their GHG emissions for Scope 1, 2, and 3 emissions. This means that covered entities will need to calculate and report Scope 3 emissions for their entire supply chain, as well as travel, waste, water, and other indirect emissions sources.
The bill’s definitions of Scope 1, 2, and 3 emissions are generally aligned with the definitions developed by the Task Force for Climate-Related Financial Disclosures. Scope 1 emissions are defined as including all direct GHG emissions that come from sources that the entity owns or directly controls, and Scope 2 emissions include indirect GHG emissions from electricity purchased and used by the entity. Scope 3 emissions are defined to mean indirect GHG emissions, other than Scope 2 emissions, from activities associated with sources that the entity does not directly control, such as the entity’s supply chain, business travel, employee commutes, procurement, waste, and water usage.
The emissions disclosure regulations developed by CARB must also:
- Require emissions data to be reported in a manner that is “easily understandable and accessible to residents of the state.” This likely will require reporting on a public-facing online platform. The regulations implementing the legislation will specify the platform(s) that may be used to comply with this statutory requirement.
- Require a covered entity to disclose all trade names, brand names, fictitious names and logos used by the covered entity.
- Require covered entities to independently verify their annual disclosures through a third-party auditor that is approved by CARB and has expertise in GHG emissions accounting.
Science-Based Emissions Target Disclosure Requirements
On or before January 1, 2024, CARB also would be required to develop and adopt regulations requiring covered entities to set and publicly disclose science-based GHG emissions targets. Emissions targets would be based on the entity’s reported emissions.
The bill defines a “science-based emissions target” to mean a GHG emissions reduction target that is in line with the scale of reductions required to keep global warming at or below 1.5 degrees Celsius above preindustrial levels and includes an entity’s Scope 1, 2, and 3 emissions.
Similar to the GHG emissions disclosure requirements described above, the emissions target disclosure regulations developed by CARB must also specify that:
- Covered entities must make their disclosures in a manner that is “easily understandable and accessible to residents of the state;” and
- The disclosures must be independently verified by a third-party auditor that is approved by CARB and has expertise in GHG emission accounting.
Before adopting the above set of regulations, the legislation would require that CARB convene and consult a panel of experts in climate science and corporate carbon emissions accounting, as well as representatives from relevant state agencies, public interest stakeholders, and covered entities that are “leaders” in collecting, reporting and setting targets to reduce their carbon footprint. The panel would be tasked with developing standards and protocols for collecting data on scope 3 emissions and setting science-based emissions targets.
SB 260 is broadly drafted and would require large corporations doing business in California to publicly disclose their direct and indirect GHG emissions and, ultimately, set and disclose emissions reduction targets aimed at reducing their carbon footprint. SB 260 is the first, but likely not the last, ambitious climate-related disclosure mandate that will be introduced in the United States this year.
Although some larger corporations have already opted into a voluntary climate disclosure scheme, operating under a mandatory compliance scheme will present new technical, legal, and reputational risks for all corporations within the scope of SB 260, even for those companies that already have robust ESG and GHG reporting measures in place. Competing disclosure mandates and methodologies may also prove challenging as other disclosure initiatives gain momentum in the US and elsewhere.
The introduction of SB 260 also may bolster California’s ambition to enforce the Paris Agreement on its own accord. This has potentially significant implications, as it could also impact how the state negotiates with others on climate issues going forward.
Beveridge & Diamond’s Air and Climate Change practice group helps private and municipal clients navigate all aspects of compliance with Clean Air Act regulations for criteria pollutants, hazardous air pollutants, greenhouse gases, and permitting processes. Our Product Stewardship, Global Supply Chains, and Sustainability, ESG practices advise companies on all aspects of sustainable supply chain and product stewardship management, including responsible sourcing, human rights due diligence and disclosure, product compliance, and reuse and recycling. We help the legal, corporate, communications, and environmental, health, & safety teams at large and small companies to identify, understand, and comply with the complex regulatory requirements impacting the hyper-competitive and evolving consumer goods market. With an office in San Francisco, clients benefit from B&D’s deep understanding of the interplay between California’s complex statutes and regulatory programs and federal environmental regulations and enforcement. For more information, please contact the authors.