California’s Climate Bills are a Path to Better Strategy
Insights
Contents
- SB 253
- SB 261
- SB 219
- Doing Business in CA
- U.S. Compliance Obligations
- Feeding ESG Strategy
- How Anthesis can help
- Contact us
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This post was originally published in 2023 and last updated in December 2024.
The dramatic growth in the “alphabet soup” of ESG reporting standards, frameworks, and regulations in recent years has added substantial effort to the jobs of sustainability, legal, investor relations, finance, and other operational teams throughout a business, and the return on that investment of time and money is not always clear.
The good news is that California’s Senate Bill (SB) 253 and SB 261, along with the recently signed SB 219, don’t ask for anything revolutionary. Greenhouse gas (GHG) accounting (SB 253) and the evaluation and management of climate-related risks (SB 261) are foundational actions every company should consider undertaking regardless of regulatory pressure.
Yes, complying with the California climate disclosure requirements can further a sustainability program and reporting, but they also enable operational decisions that can lower costs, lessen the impact of risks, and, in some cases, provide a competitive advantage in markets where sustainability adds customer and investor value.
Climate Corporate Data Accountability Act – SB 253
Applies to:
- Business entities formed in the U.S. with annual revenues >1B USD that do business in California
Requires:
- annual Scope 1 and 2 reporting by 2026 on a fiscal year basis
- annual Scope 3 reporting by 2027 on a fiscal year basis
- annual verification by a third party, limited assurance level for Scope 1 & 2 by 2026 and reasonable assurance by 2030 (limited assurance for Scope 3 by 2030)
- disclosure fee & submission of reports to a future state-established system
Allows for:
- annual monetary penalties for non-compliance
- potentially submitting other reports with the required GHG data (such as a future SEC-compliant 10-K) to fulfil the obligation
Climate-Related Financial Risk Act – SB 261
Applies to:
- Business entities (except in the insurance business) formed in the U.S. with annual revenues >500M USD that do business in California
Requires:
- biennial climate-related financial risk report aligned with the TCFD, starting January 1, 2026
- information on how the company is reducing and adapting to the disclosed risks
- disclosure fee & publication of reports on a company’s website
Allows for:
- Annual monetary penalties for non-compliance
- Consolidated reporting at the parent company level (for a CA subsidiary, e.g.)
- Reporting under the IFRS’ sustainability standards set by the ISSB, if required by another jurisdiction
Greenhouse Gases: Climate Corporate Accountability: Climate-Related Financial Risk – SB 219
In late September 2024, SB 219 was signed into law, making important amendments to SB 253 and SB 261.
Notably, SB 219:
- Delays the deadline by which the California Air Resources Board (CARB) must issue implementing regulations: Under SB 219, CARB must finalise the new GHG emissions reporting requirements and regulations by July 1, 2025, whereas SB 253 originally imposed a January 1, 2025, deadline.
- Offers CARB greater flexibility in setting reporting dates: SB 219 does not affect the timing of Scope 1 and 2 reporting, as set out by SB 253. However, SB 219 does provide CARB with the flexibility to determine the reporting date for Scope 3, whereas SB 253 had originally dictated a lag of up to 180 days between Scope 1 and 2 and Scope 3 reporting.
- Allows for consolidated reporting: SB 219 allows reports from subsidiaries to be consolidated at the parent company level. If a subsidiary qualifies as a reporting company under SB 253, they are not required to prepare a separate report.
- Authorizes CARB to contract with a climate reporting organisation: SB 219 allows CARB to engage a climate reporting organisation to prepare climate-related financial risk disclosure under SB 261 at its discretion, rather than making it a mandatory requirement.
What does “Do Business in California” mean?
The California climate disclosure bills (SB 253, SB 261, and SB 219) do not define the key term “do business in California.” However, other California statutes provide explanations that can offer us some insight.
California’s Franchise Tax Board defines “doing business” as meeting one or more of the following criteria:
- Engaging in any transaction for the purpose of financial gain within California;
- Being organized or commercially domiciled in the state;
- Or having California sales, property, or payroll that exceed certain thresholds, which increase annually.
Additionally, according to California’s Corporations Code, a company does business in California by “entering into repeated and successive transactions of its business in [the] state, other than interstate or foreign commerce.” Cal. Corp. Code §191(a).
Based on the above, it can be assumed that the California climate disclosure rules will impact companies conducting business activities within the state, regardless of whether their headquarters are located in California.
California May Lead U.S. Compliance Obligations
California’s multi-trillion-dollar economy is the largest state economy in the United States, but it is also the fifth largest in the world (SB 253 claims it is “on track to be the fourth largest”), according to the 2023 data.
The size of its economy lends California an enormous amount of leverage over business activities that fall within its jurisdiction, meaning it can have an outsized influence on both federal policy and the actions of other states when its policies are tied in part to economic criteria (like a business’ total annual revenue & activities in California).For example, 17 other U.S. states currently follow California’s stricter vehicle emissions standard instead of the federal one. Prior to the U.S. SEC formally adopting the climate-related disclosure rules, the SEC Chair Gary Gensler stated that California climate disclosure rules may make it easier for the SEC to finalize its own climate disclosure rule because it “may change some of the economic baseline” and shift companies’ perception of compliance away from an SEC-imposed cost.
Climate Disclosure Compliance Can and Should Feed Strategy
Despite California’s and other jurisdiction’s efforts to streamline mandatory sustainability, climate, and/or ESG reporting requirements, compliance obligations are still expanding on a regional level throughout the world and at a rapid pace with no clear signs of slowing. This growth is bringing us toward a tipping point where companies who find a way to make these regulations serve broader strategic and operational aims will gain an advantage over companies who get trapped in a compliance loop.
Compliance can be a temporary end and likely will be for those at the early stages of their sustainability journey – action driven by regulation is ultimately still action. Without developing and implementing an organizing sustainability or ESG strategy, however, a company can spend substantial time and cost reacting to each new regulation while strategic programs that materially move the needle on what matters to its stakeholders (such as consumers and investors) fall behind.
California’s climate disclosure rules should be a signal to U.S.-based companies that mandatory reporting is coming sooner than many thought. It should also flag that focusing solely on those reporting obligations may prevent companies from realizing any of the strategic and operational benefits beyond compliance.
How Anthesis Can Help
Our experts can support you at any stage of your journey to and beyond compliance, whether that’s in understanding your mandatory reporting obligations, analysing potential gaps, implementing foundational programs, or building compliance into your broader strategy.
We are the world’s leading purpose driven, digitally enabled, science-based activator. And always welcome inquiries and partnerships to drive positive change together.
