Proposed Delays Heighten Uncertainty Surrounding California’s Landmark Climate Disclosure Laws of 2023

California Governor Gavin Newsom recently proposed amendments that would delay by two years the implementation of California’s landmark climate disclosure laws, Senate Bills 253 and 261 (SB253 and SB261). When Governor Newsom signed SB253 and SB261 into law on Oct. 7, 2023, he expressly noted that the timeline for implementation of each was likely too aggressive. So, the proposed delays are not entirely unexpected; however, they heighten the uncertainty faced by businesses seeking to navigate the complex patchwork of mandatory climate disclosure laws developing across different jurisdictions.

SB253 and SB261 represent California’s attempts to legislate increased transparency and improved access to information about the greenhouse gas (GHG) emissions and climate-related financial risks of large companies doing business in California. These laws are considered the most far-reaching climate disclosure laws in the U.S. so far, going beyond what has been proposed or implemented even on the federal level, including by the U.S. Securities and Exchange Commission (SEC), though remaining less expansive than the emerging requirements in the E.U. This article briefly explores the background, status, and implications of SB253 and SB261.

Background of California’s SB253 and SB261

AB253 directs the California Air Resources Board (CARB) to “develop and adopt regulations” that will require the covered “reporting entities” to report their direct and indirect GHG emissions. “Reporting entities” that must comply with the law are U.S. entities “that do business in California” with total annual revenues of more than $1 billion. CARB has not, to date, initiated the rulemaking process to issue and adopt the implementing regulations required by the statute. Once these implementing regulations are in place, reporting entities will report three categories of GHG emissions: Scope 1, Scope 2, and Scope 3. Scope 1 emissions are direct GHG gas emissions from a reporting company’s owned or controlled sources. Scope 2 emissions are the company’s indirect emissions associated with the company’s use of electricity, steam, heating, and cooling. Scope 3 emissions include all other indirect emissions related to the company, for example, emissions from “purchased goods and services, business travel, employee commutes, and processing and use of sold products.” SB253 provides general deadlines for compliance with the reporting requirements, beginning in 2026 for Scope 1 and 2 emissions, and 2027 for Scope 3 emissions.

SB253 does not restrict reporting entities from providing additional data on metrics not listed in the statute. The law provides that entities measure and report emissions “in conformance” with the “Greenhouse Gas Protocol standards and guidance” developed by the World Resources Institute and the World Business Council for Sustainable Development. This Protocol provides that Scope 3 emissions calculations can be determined through “both primary and secondary data sources,” including “industry average data, proxy data, and other generic data.” The law requires third-party assurances regarding the quality and accuracy of the information in their public disclosures, starting at a “limited assurance level” by 2026 for Scope 1 and Scope 2 emissions, and 2030 for Scope 3 emissions.

SB261 requires U.S. entities with more than $500 million dollars in annual revenue that do business in California to prepare a climate-related financial risk report biennially.  The bill requires covered entities to disclose both their climate-related financial risk and any measures adopted to reduce and/or adapt to that risk. The bill defines “climate-related financial risk” as the “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks …,” such as disruptions to operations, the provision of goods and services, and employee health and safety. The law provides that such risk can be reported in accordance with the framework contained in “the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures.” A covered entity fulfills the requirements of the law if reporting climate risks under another disclosure framework with consistent requirements. Senate Bill 261 requires each reporting company, on or before Jan. 1, 2026, to publish a copy of the report “on its own internet website.”

Status of SB253 and SB261

CARB has not yet initiated the rulemaking process to issue the regulations required by the statutes, and this month, the Newsom administration proposed a bill to push back the implementation of each law. In the case of SB253, the proposed bill would require the regulations mandating emissions disclosures be developed by Jan. 1, 2027, rather than 2025, thereby delaying by two years the initial dates for compliance by reporting entities. In the case of SB263, the proposed bill would delay until Jan. 1, 2028, the date by which a covered entity is required to prepare the initial climate-related financial risk report.

This delayed implementation means delayed clarity regarding key definitions related to the laws. In particular, the definition of “doing business in California” is expected to be clarified in the implementing regulations, and so, in the meantime, an additional layer of uncertainty exists for companies seeking to confirm whether they are “reporting entities” under SB253 or “covered entities” under SB261.

In addition to delayed implementation, various business groups have brought litigation challenging the constitutionality of both laws, arguing the laws impermissibly mandate speech in violation of the First Amendment. Dispositive motions could be decided as early as September 2024. And so, these laws could be struck down before they even take effect; however, the outcome of the litigation remains uncertain at this time.

Preparing for SB253 and SB261 Despite Swirling Uncertainty

These and other major questions related to these laws have large businesses wondering whether and to what extent they should begin to prepare for the types of disclosures they would require. Despite the uncertainties facing SB253 and SB261, businesses must not get caught flat-footed and should continue to prepare for these or similar laws to eventually take effect. The global marketplace is moving in a direction where regulators, businesses, consumers, and investors are demanding a greater understanding of the sources and volumes of GHG emissions produced by large companies and the climate-related financial risks those companies face, regardless of where they do business. For example, some 50,000 companies, including American businesses with an E.U. presence, fall within the scope of the E.U.’s Corporate Sustainability Reporting Directive (CSRD). CSRD requires in-scope companies to disclose detailed information on risks, opportunities, and material impacts related to climate, as well as other environmental, social, and governance (ESG) issues, going beyond the scope of the disclosures that would be required by SB253 and SB261. Such requirements have implications for companies up and down the supply chains of in-scope companies.

As such, preparation and awareness are key. Firms can and should learn about and prepare to implement disclosures based upon the key reporting frameworks, upon which laws such as SB253 and SB261 are based. Firms that invest in these efforts will not only streamline compliance with California’s new disclosure laws, should they remain in effect, but will also better position themselves in the marketplace, even in the event the laws are limited, narrowed, or struck down.

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