California’s Climate Bills are a Path to Better Strategy

2nd October 2023

cassandra martynow

Cassandra Martynow

Director

North America

California’s new climate bills will prepare companies for other mandatory reporting, but that’s not enough – the real strategic gains will happen when we start thinking beyond compliance.

California’s Climate Reporting Requirements Are Foundational

It’s understandable if companies are eyeing California’s recently passed bills under the California Climate Accountability Package (CCAP) as merely an additional reporting burden instead of a meaningful contribution to their sustainability programs.

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 Senate Bill (SB) 253 and SB 261 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 undertake regardless of regulatory pressure.

Yes, they will 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 CA

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 CA

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


Climate Regulations that Sync with Global Requirements

Preparing to comply with California’s requirements will also prepare companies for mandatory GHG and climate risk reporting requirements in other regions without duplicating efforts. California has also built in some flexibility to allow companies to meet its reporting requirements by submitting other regulated reports, though the GHG reporting under SB 253 will still need to funnel into a new system to enable aggregated, state-wide analysis for California’s own emissions goals.

Fast Facts on SB 261Fast Facts on SB 253
Applies to:Business entities (except in the insurance business) formed in the U.S. with annual revenues >500M USD that do business in CABusiness entities formed in the U.S. with annual revenues >1B USD that do business in CA
Requires:biennial climate-related financial risk report aligned with the TCFD, starting January 1, 2026annual Scope 1 and 2 reporting by 2026 on a fiscal year basis
information on how the company is reducing and adapting to the disclosed risksannual Scope 3 reporting by 2027 on a fiscal year basis
disclosure fee & publication of reports on a company’s websiteannual 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-complianceannual monetary penalties for non-compliance
Consolidated reporting at the parent company level (for a CA subsidiary, e.g.)potentially submitting other reports with the required GHG data (such as a future SEC-compliant 10-K) to fulfill the obligation
Reporting under the IFRS’ sustainability standards set by the ISSB, if required by another jurisdiction

California May Lead to Further U.S. Compliance Obligations

California’s bills have made headlines in part because many companies have been slowing their preparation as they watch the SEC extend the deadlines on its proposed climate-related disclosure rule—meanwhile, the CCAP snuck up to fill that regulatory space.

The reason the CCAP is already considered a landmark case is the scale of its expected impact. California’s multi-trillion-dollar economy is certainly the largest in the United States, but it is also currently the fifth largest in the world (SB 253 claims it is “on track to be the fourth largest”). 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).

There is also historical evidence for California’s environmental influence in the U.S.. For example, 17 other U.S. states currently follow California’s stricter vehicle emissions standard instead of the federal one. At a federal level, SEC Chair Gary Gensler has said the CCAP 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.

Doing Business in CA

California’s Franchise Tax Board clearly defines “doing business” as meeting any 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 that increase annually.The CCAP doesn’t confirm whether this is the definition that will be used for SB 253 and SB 261 eligibility, but this does suggest a potentially broad application of the requirements.

GHG reporting and verification is or will be required under:

  • the EU’s Corporate Sustainability Reporting Directive (CSRD) if considered material
  • the U.S. Securities and Exchange Commission (SEC)’s proposed climate disclosure rule, and
  • a host of other regional requirements like the UK’s Procurement Policy Note 06/21 for government contractors

The ongoing consolidation of mandatory reporting standards has also established the four pillars of the Task Force on Climate Related Financial Disclosures (TCFD) framework as the basis for multiple regulations, including:

  • the CSRD and SEC
  • the new International Sustainability Standards Board (ISSB)’s standards (including IFRS S2) that are being considered for mandatory disclosures in places like Malaysia, Singapore, and Australia.


BUT…. 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 fall behind.

Customers don’t simply want to hear about a company’s sustainable values, they increasingly want to buy products and services with lower environmental impact. Investors don’t simply want to know the climate-related risks a company faces – they want to know what actions the company is taking to protect their investment in a climate change-altered world.

California’s leadership on U.S. environmental regulations should be a signal to U.S.-based companies that mandatory reporting is coming sooner than many thought with the CSRD’s extended compliance deadlines. 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. The California Climate Accountability Package is pitched as a mandatory reporting regulation, but ultimately its purpose is to further California’s own emissions and risk reduction strategy – companies that fall under its purview would do well to take that as a model.

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, analyzing potential gaps, implementing foundational programs, or building compliance into your broader strategy.

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