Emissions disclosure mandates are coming, thanks to new California laws

The list of companies that will need to start calculating and reporting their emissions is growing rapidly thanks to two new California climate disclosure laws. Governor Gavin Newsom has indicated that he will sign into law what is known as the “Climate Accountability Package”—two bills that will require large companies to disclose Scope 1, 2, and 3 emissions as well as climate-related financial risks.

In signing these bills into law, California is the first state in the nation to make emissions reporting mandatory. This is especially significant, considering the fact that, as the fifth largest economy in the world, California has considerable influence to drive transparency in corporate emissions. But the requirements aren’t the first of their kind to be proposed: The Securities and Exchange Commission (SEC) and the Federal Acquisition Regulatory Council (FAR Council) have proposed similar rules. 

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Summary of the Climate Accountability Package laws 

SB 253 – Climate Corporate Data Accountability Act

Requires companies with total annual revenues in excess of $1 billion that do business in California to publicly disclose their Scope 1, Scope 2, and Scope 3 greenhouse gas emissions annually. The regulations will be developed by the California Air Resources Board (CARB) by 2025, with reporting requirements set to start in 2026.

SB 261 – Greenhouse Gases: Climate-related Financial Risk

Requires companies with total annual revenues in excess of $500 million that do business in California to prepare a report disclosing their climate-related financial risk and measures adopted to reduce and adapt to climate-related financial risk. The bill would require those companies to make a copy of the report available to the public on its own website.

Overlap with SEC & FAR rules

These requirements closely resemble the proposed rules from the Securities and Exchange Commission (SEC) and the Federal Acquisition Regulatory Council (FAR Council). The SEC rule, as proposed, would require publicly traded companies to disclose their greenhouse gas emissions, identify climate-related risks, and share mitigating actions. The final SEC rule is not expected until October 2023, and we anticipate there will be challenges to the rule that push out the effective date. 

Two major differences between the SEC proposal and the California climate bills stand out: 

1. The SEC proposal only applies to publicly traded companies, while the SB 253 will apply to both public and privately held companies that do business in the state as long as their revenues are greater than $1 billion. 

2. The SEC rules include a “materiality” threshold for Scope 3 emissions, allowing companies leeway in determining which emissions to report. The SEC would only require Scope 3 emissions disclosure when “material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.” The California law, in contrast, is much more straightforward and will require thorough reporting of Scope 3 emissions.

Similar to the SEC rule, the federal government proposed updates to the Federal Acquisition Regulation (FAR) that would apply to some government contractors. The updates would require entities with more than $7.5 million in government contracts to measure and disclose their Scope 1 and Scope 2 emissions; those with more than $50 million in government contracts would also have to disclose their Scope 3 emissions, discuss their climate-related risks, and set science-based targets to bring down emissions. The FAR updates are significant in that, according to 2021 data, around 56% of the affected organizations are small businesses, based on the American Industry Classification System.  

California’s widespread impact on climate reporting 

California’s new laws will make climate reporting mandatory for a wide range of public and privately held companies, as the scale of businesses that operate and sell goods and services in California is extensive. But the requirements are likely to become even more widespread, should similar emissions reporting and climate risk disclosure bills, already being considered in Colorado, Connecticut, Illinois, Massachusetts, Minnesota, New York, Oregon, and Washington become law. 

Emissions reporting impacts on smaller businesses

Early state and federal government policy proposals like the SEC and FAR rules have been aimed at only the biggest companies. This makes it all too easy to assume that these climate disclosure policies will overlook smaller organizations. The broader reach of California’s laws shows why that would be a mistake: We expect that future legislation will expand emissions reporting rules further to mid-sized and even smaller firms.  

Learn more: Navigate Climate Disclosure Mandates > 

We also note that, even if California laws don’t directly require small firms to track and report emissions, the law’s Scope 3 requirements will likely pull smaller suppliers into the fold. Large companies are likely to ask or require suppliers to report Scope 1 and 2 emissions, develop mitigation plans, and/or set greenhouse gas reduction targets as part of their own Scope 3 emissions reporting and reduction strategies. The net takeaway for organizations of all sizes is this: To compete in tomorrow’s sustainable economy, emissions reporting will be mandatory for companies of all sizes.