New California Legislation Adds to Growing Global Climate Disclosure Requirements for Public and Private Enterprises

On October 7, 2023, California Governor Gavin Newsom signed two landmark climate-related bills—SB 253 and SB 261—that significantly expand environmental and climate-related disclosure requirements for public and private entities that do business with the state of California. Taken together, these new rules, which apply to companies with defined global revenue limits with even minimal business ties to the world’s fifth largest economy, will meaningfully transform climate disclosure policy for domestic and foreign businesses operating in California and may set a precedent for future climate disclosure policy in the U.S. and abroad.

What are the new rules?

SB-253 Climate Corporate Data Accountability Act

Who?
Applies to public and private “reporting entities,” defined as businesses with total annual revenues in excess of $1 billion (based on prior fiscal year) that do business in California

What?
Public disclosure of, and assurance on, direct emissions (Scope 1), indirect emissions from energy consumption (Scope 2) and other indirect upstream and downstream emissions (Scope 3)

Payment of an annual fee to be set by the State Air Resources Board and payable to a new Climate Accountability and Emissions Disclosure Fund

How?
Annual greenhouse gas (GHG) emissions must be calculated in conformance with the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) developed by the World Resources institute and World Business Council for Sustainable Development.

Assurance over public disclosures must be performed by an independent third-party assurance provider.

Where?
Public disclosures must be provided to a state reporting agency as well as easily understood and accessible to consumers, investors and other stakeholders. For most businesses, publishing annual GHG emissions on their website will meet this requirement.

A copy of the complete assurance provider’s report must be provided to the state emissions reporting agency.

When?
For Scope 1 and 2, annual reporting must begin in 2026 for the prior fiscal year (2025). Limited assurance must be obtained beginning in 2026, and reasonable assurance must begin in 2030.

For Scope 3, annual reporting must begin in 2027 for the prior fiscal year (2026) and no later than 180 days after Scope 1 and 2 emissions are reported. On or before January 1, 2027, the state board may establish an assurance requirement for Scope 3 emissions. Limited assurance must be obtained beginning in 2030.

SB-261 Climate-Related Financial Risk Act

Who?
Applies to public and private “covered entities” with total annual revenues in excess of $500 million (based on prior fiscal year) that do business in California

What?
Public disclosure of (a) climate-related financial risks and (b) measures taken to reduce and adapt to the related financial risks

Payment of annual fees to be set by the State Air Resources Board and payable to the Climate-Related Financial Risk Disclosure Fund

How?
Material climate-related physical and transition risks must be reported in line with the recommended framework and disclosures contained in the Final Report of Recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) (or an equivalent standard), including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.

Alternatively, the requirement is met if the covered entity voluntarily or mandatorily discloses climate risks under the International Finance Reporting Standards (IFRS) Sustainability Disclosure Standards as issued by the International Sustainability Standards Board (ISSB).

Where?
A copy of the climate-related financial risk report must be made available on the covered entity’s own website.

When?
Reporting must begin on or before January 1, 2026, and biennially, thereafter. If unable to report, covered businesses must explain any gaps and steps that the business will take to make complete disclosures.

Broader Context

The two bills are part of a broader effort by the state of California to qualify and quantify its own GHG emissions and climate-related risks. In signing the bills, the governor did note the ambitious timelines and scale of the new requirements, requesting that the State’s Air Resources Board monitor the cost impact of the new rules on businesses. The legislation also sets out requirements for a new state reporting agency that will, among other matters, create a publicly accessible digital platform that collates and provides reported emissions data, including disclosures for individual reporters under California law. California recognizes that the current approach to GHG emissions and climate risks, which is largely voluntary, lacks “full transparency and consistency needed by residents and financial markets to fully understand these climate risks."¹

The Climate Corporate Data Accountability Act (SB-253) is expected to apply to over 5,300 entities, and the Climate-Related Financial Risk Act (SB-261) is expected to apply to over 10,000.² The new rules, which go beyond new climate-related disclosure rules proposed by the U.S. Securities and Exchange Commission (SEC) and which are expected to be announced later this year for public companies, also add to a growing chorus of global regulators and evolving disclosure requirements around environmental, social and governance (ESG) impacts, risks and opportunities applicable to public and private businesses.

In fact, global ESG disclosure regulation has expanded dramatically in recent years. The European Commission also recently adopted regulation that requires companies in scope to report on material sustainability-related impacts, risks and opportunities (IROs), including a wide range of environmental and climate-related issues and the related metrics. Securities regulators in the UK, Canada, Brazil, India and many other jurisdictions now also require environmental and climate-related disclosures. The California legislation seeks to align climate disclosures in the state with these evolving global standards.

Practical Implications

Businesses, especially medium- and large-sized multinationals, whether public or private, should prepare for a future in which environmental and climate-related disclosures on performance metrics and risks are the norm. Below are three practical steps that organizations should take immediately if they are not already doing so.

• Consider complying with TCFD. The TCFD framework is almost universally accepted under climate regulation (e.g., UK, European Union, California, Canada, etc.) and is widely viewed as best practices for voluntary climate disclosures, including the risk management aspects of the framework required by California. Yet, beyond risk management, companies should also begin preparing for their climate disclosures by assessing their climate-related policies and procedures in line with TCFD’s other focal areas on good climate-related governance, strategy and metrics/targets.
• Conduct a GHG inventory. A GHG inventory under the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) is the starting point for assessing and understanding your direct and indirect emissions footprint. The inventory identifies the sources of its Scope 1, 2 and 3 emissions as the business prepares for its initial emissions baseline.
• Enhance internal controls to prepare for assurance requirements. Ensuring proper controls are in place not only is a fundamental component of good GHG emissions disclosure and climate risk management but also is now a requirement for obtaining assurance over climate-related reporting in many jurisdictions, including California. Information on GHG emissions and climate risk is only as good as the underlying data and the integrity and adequacy of the internal control environment. Organizations should begin by mapping out their data lineages, systems, processes and procedures related to environmental and climate reporting.

How Kroll Can Help

Our ESG Advisory practice regularly helps clients navigate and comply with growing ESG and sustainability regulation. Kroll provides an extensive range of ESG and sustainability-related advisory support and technology solutions that can assist clients with environmental and climate regulation, including:

• Identifying and assessing environmental and climate-related impacts, risks and opportunities
• Conducting GHG inventories and calculating GHG emissions 
• Performing scenario analyses of transition and physical climate risks
• Assessing and enhancing internal controls to prepare for limited and/or reasonable assurance requirements 
• Reporting and communicating on environmental and climate performance and risk

Kroll is the world’s leading independent valuation and risk management consulting firm, and we harness our team’s global subject matter expertise and technology solutions to help clients address ESG challenges and create sustainable value and growth.

At Kroll, we believe ESG and good citizenship mean protecting our environment, empowering our people to make positive change, promoting inclusivity and diversity, and operating with transparency and good governance. To find out more about our ESG and corporate responsibility practices click here.

Reference
[1] SB-253
[2] https://www.ceres.org/news-center/press-releases/californias-first-nation-climate-disclosure-legislation-sets-new