National news is abuzz about the proposed rules issued by the U.S. Securities and Exchange Commission (SEC) that would require domestic and foreign registrants to include extensive climate-related information in their registration statements and periodic reports. However, legislators in California are nonplussed and moving full steam ahead on their own California unique brand of corporate climate disclosures, which in their view are bigger, better, and broader.
The SEC’s proposed rules would require all registrants, regardless of size, to disclose their direct greenhouse gas (GHG) emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2). In addition, registrants would also be required to disclose indirect GHG emissions from the company’s value chain, known as Scope 3 emissions, if material or if the company has set Scope 3 emissions targets or goals.
California plans to go further, seeking to require both public and private companies doing business in California and generating over $1 billion in gross annual revenue to disclose their Scope 1, Scope 2, and Scope 3 GHG emissions to the State of California on an annual basis, as well as to obtain third-party audits of disclosures. If enacted, California’s legislation would set the U.S. standard for climate disclosures and has the potential to reach every part of a company’s value chain.
The California Climate Corporate Accountability Act (Senate Bill 260) passed out of the Senate on January 26, 2022, and is awaiting committee review in the California Assembly. With SB 260, California is poised to advance what could be first-of-its-kind legislation in the United States to require reporting of GHG emissions across a company’s value chain. The legislative findings are clear about what the drafters of the bill envision:
The current approach for monitoring climate emissions from private corporate enterprises relies almost exclusively on voluntary reporting of GHG inventories, goals, commitments, and agreements, and lacks the full transparency needed for the state to make meaningful, strategic, and rapid carbon reductions. By their nature, these voluntary campaigns neither record nor disclose the full list of emitters or the full scope of carbon pollution by those reporting the information. The result is a continuing lack of transparency from polluters.1
The bill further declares that the mandated disclosures will “inform policymaking, empower the public and activate the private sector to drive corporate GHG emissions reductions.”2
If passed into law, the bill as proposed would apply to U.S.-based companies with annual revenues exceeding $1 billion and doing business in California. Defined in existing law, this would include companies engaging in any transaction for the purpose of financial gain within California, regardless of the company’s location.
In addition to Scope 1 and Scope 2 emissions, reporting entities would be required to publicly disclose to the California Secretary of State all other emissions that occur in the company’s value chain — such as purchased goods and services, business travel, employee commuting, waste disposal, use of sold products, transportation and distribution (upstream and downstream), investments, and leased assets and franchises, regardless of location. The disclosures would be required to be consistent with the Greenhouse Gas Protocol standards and “guidance developed by the World Resources Institute and the World Business Council for Sustainable Development, including guidance for Scope 3 emissions calculations that detail acceptable modeling and statistical analysis when scope 3 emissions data from nonreporting entities is unavailable or not feasible.”3 As a result of these reporting requirements, even smaller companies that do not conduct business in California could be affected because a reporting entity within their value chain may be required to report their emissions as part of the reporting entity’s Scope 3 emissions.
The bill would require reporting entities to ensure that their public disclosures have been independently verified by a third-party auditor, approved by the California Air Resources Board (CARB), with expertise in GHG emissions accounting. This auditing requirement goes beyond the requirements in the SEC’s proposed rules, which require only attestation of Scope 1 and Scope 2 emissions.
The bill would require the CARB to adopt implementing regulations by January 1, 2024, and reporting would begin as early as 2025, which would require disclosure of a company’s Scopes 1, 2, and 3 GHG emissions from calendar year 2024. Violations of the reporting requirements would be subject to civil penalties. Unlike the SEC’s proposed rules that establish a safe harbor for Scope 3 emissions disclosures from certain forms of liability under the federal securities laws, the California Attorney General would be able to bring a civil action against companies that violate the disclosure requirements in California state court.
While there has been much focus on the SEC’s proposed rules, public and private companies will want to continue to monitor SB 260 as it moves through the legislative process. Regardless of how the SEC proceeds with final rules on climate-related disclosures, California is expected to press ahead with its own unique reporting requirements.
1SB 260 (2021-22), Section 1(h).
2Id., Section 1(k).
3Id., Section 2(c)(1)(A).
