In the face of pressing global challenges related to climate change, environmental degradation and social inequality, the imperative to prioritize sustainability has come to the forefront. This heightened awareness is driven by the realization that these issues are interconnected and demand collective action. The urgency of addressing these issues underscores the need for a comprehensive and concerted global effort. In response to this call, not only are individuals becoming more conscious of the impact of their choices on the environment and society, but also simultaneously, an increasing number of organizations are actively pursuing the integration of sustainable practices across various facets of their existence. 

In addition, local, state and federal governments are recognizing the crucial role that they play in promoting sustainability and legislating various adherence guidelines, so that the organizations are transparent and accountable with their emissions profile and have a path toward decarbonization. 

California leading the way

Making headlines worldwide is California's enactment of corporate climate accountability legislation named SB 253 and SB 261, which are in par with European Union’s Corporate Sustainability Reporting Directive (CSRD) and the US Securities Exchange Commission’s (SEC) Climate Disclosure Rule.

This legislative development in California is particularly noteworthy considering California's position as the world's largest sub-national economy, often referred to as the 4^th largest economy in the world. With a substantial gross domestic product (GDP) of $3.89 trillion as of 2023, the state's commitment to addressing climate issues through legislative measures is making waves on the international stage. The significance of this move extends beyond regional boundaries, reflecting California's influential role in shaping discussions and actions related to corporate responsibility and environmental sustainability at the global stage.

California’s climate accountability legislation

In October 2023, Governor Gavin Newsom of California approved the enactment of two significant pieces of legislation: SB 253, known as the Climate Corporate Data Accountability Act, and SB 261, titled The Climate-Related Financial Risk Act. These legislative measures were introduced in response to an increasing awareness of the pressing need to confront the physical, human, and financial risks linked to climate change.

Senate Bill (SB) 253: Climate Corporate Data Accountability Act:  SB253 mandates that US businesses, whether public or private, with revenues exceeding $1 billion, and operating within the state of California, must provide:

1. Comprehensive greenhouse gas emissions report in accordance with GHG protocol from Scopes 1, 2 and 3, with a specific emphasis on disclosing all Scope 3 emissions, known for their complexity and difficulty in measurement and often constitute more than 90% of an organization's overall climate impact. This direct emission reporting requirement comes into effect from 2026, covering data for the year 2025 and 2026 indirect scope 3 emissions starting in 2027.
2. Mandate companies to engage independent auditors possessing expertise in carbon accounting to verify their reported emissions.
3. Compel companies to submit their emission calculations to a digital reporting platform, ensuring that the disclosed information is easily understandable to residents, investors, and other stakeholders, in accordance with California Air Resources Board (CARB), who will develop and oversee a reporting registry.

Approximately 5400 companies operating in California will be affected by SB253.

Senate Bill (SB) 261: Climate-Related Financial Risk Disclosure: The provisions of SB 261 extend to any US corporation doing business in California with annual revenue of $500 million. Entities falling within this category are required to submit a climate-related financial risk report in alignment with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) framework.

This report should comprehensively outline the physical and transitional threats arising from climate change and the measures being undertaken to mitigate and adapt to these risks. Consider the scenario of traditional energy companies unprepared for the growing demand for renewable energy sources. These companies may face reduced market relevance and potential revenue declines due to the shift towards sustainable energy alternatives. The initial report under this legislation must be compiled by January 1, 2026, with subsequent reporting occurring every two years thereafter.

Approximately 10,000 companies in California will be within the prevue of SB 261 legislation.

Compliance to SB253/261 in the context of global climate regulations 

Let's analyze these regulations within the broader context of two significant global climate regulations: the EU's CSRD and the SEC's CDR. Additionally, we'll explore the benefits for companies that will adhere to the California regulations, in the broader global context.

1. California and the EU's CSRD share a common mandate for reporting climate risks encompassing Scope 1, 2 and 3, along with the stipulation for third-party assurances. Nevertheless, a significant difference emerges in the CSRD, which extends its requirements beyond climate risks to include the disclosure of a comprehensive set of sustainability metrics. This encompasses over 100 indicators across environmental, social, and governance dimensions.
2. In comparing California to the SEC's 'Climate Disclosure Rule,' – which has just been released, although scaled back from the original proposal, both share substantial similarities, with two notable distinctions. The SEC's regulation applies exclusively to 'publicly traded' companies (who’s revenue exceeds $1.2B), while California's legislation extends to both 'public' and 'private' companies. The second difference pertains to the reporting of Scope 3 emissions, where the SEC has confirmed that it will not require Scope 3 reporting, whereas California provides clear guidelines for such reporting.

So, as it seems, adhering to SB 253 and SB 261 not only ensures companies' alignment with California's regulations but also strategically positions them favorably within the framework of other significant global regulations.

What’s at stake for companies doing business in California?

In essence, Senate Bills 253 and 261 mark a significant advancement in the battle against climate change, urging businesses to adopt transparency and take resolute steps toward environmental sustainability.  With the shift from a voluntary reporting setting to a regulated one, emissions data will now undergo thorough internal financial and legal examinations, coupled with third-party assurance, resembling the scrutiny that is applied to financial data. As the norm now includes increased financial, legal and third-party assurance of emissions data, companies now need to instill confidence in their reporting practices.  And the clock has already started ticking for the preparation to report direct emissions in California, which will take effect in 2026, encompassing data for the year 2025.