CARB Releases First Enforcement Notice for the Climate Corporate Data Accountability Act

On December 5, 2024, the California Air Resources Board (“CARB”) released an enforcement notice (“Enforcement Notice”) related to the Climate Corporate Data Accountability Act (Senate Bill 253, as amended by Senate Bill 219 (“SB 253”)). SB 253 requires U.S. entities that “do business” in California and have total annual revenues in excess of US$1 billion (“reporting entities”) to annually report their scopes 1, 2, and 3 greenhouse gas (“GHG”) emissions, including obtaining assurance for such disclosures. Under SB 253, reporting entities would first report their scopes 1 and 2 GHG emissions in 2026, based on data from fiscal year 2025. SB 253 is discussed in greater detail in previous Sidley Updates found here and here.

In the Enforcement Notice, CARB indicated its intention to exercise its enforcement discretion under California Health and Safety Code section 38532 to not take enforcement action against a reporting entity for incomplete reporting of its scope 1 and scope 2 GHG emissions for the first report due in 2026, as long as the company makes a good faith effort to retain all data relevant to emissions reporting for its prior fiscal year (i.e., 2025). CARB encouraged reporting entities to move toward full compliance as quickly as possible; however, the agency acknowledged that meeting the statutory deadlines set forth in SB 253 would be difficult.

The Enforcement Notice comes at a time when the timelines and due dates for reporting under SB 253 continue to cause consternation for reporting entities, as the statute puts the proverbial cart before the horse. In order to comply with the 2026 deadline for reporting scopes 1 and 2 GHG emissions under SB 253, reporting entities will be required to begin measuring and recording GHG emissions as early as January 1, 2025. However, SB 253 does not require CARB to issue regulations establishing the reporting structure and associated reporting regulations until July 1, 2025. As a result, reporting entities will need to start recording and collecting GHG emissions data before CARB develops and adopts regulations specifying the processes and procedures pursuant to which such information should be collected and reported to the agency. As a consequence of the uncertainty created by the juxtaposed timelines, the Enforcement Notice could be viewed as a welcome relief for reporting entities concerned with compliance with SB 253, but how much relief does it actually provide? In short, certainly not as much relief as the regulated community would like.

What Relief Does the Enforcement Notice Provide?

 The Enforcement Notice acknowledges that many reporting entities are unlikely to have in their possession on January 1, 2025, all of the data that they will ultimately be required to report in 2026. Thus, CARB’s first form of relief is recognizing that the smaller subset of information that companies presently have in their possession may be sufficient for compliance with SB 253 in the first reporting year (i.e., 2026).

The Enforcement Notice allows that, for the first scopes 1 and 2 GHG emissions disclosures due in 2026, reporting entities are permitted to submit data for fiscal year 2025, from sources of “information the reporting entity already possesses or is already collecting” as of the date of the Enforcement Notice—December 5, 2024. In practice, this means that if a reporting entity already discloses scopes 1 and 2 GHG emissions voluntarily, for purposes of the 2026 report, it will be able to use its existing data collection process for purposes of its first submission. Meaning, even if CARB’s subsequent rulemakings proscribe disclosure of GHG emissions recorded from data sources that do not align with the reporting entity’s current practices (in existence prior to the release of the Enforcement Notice), for purposes of this first report, the entity will be permitted to disclose its scopes 1 and 2 GHG emissions in accordance with such preexisting practices.

The second form of relief is for reporting entities that “demonstrate good faith efforts to comply with the requirements of the law.” CARB recognizes in the Enforcement Notice that companies may need some lead time to implement new data collection processes to allow for fully complete scope 1 and scope 2 emissions reporting, to the extent they do not currently possess or collect the relevant information. The Enforcement Notice specifically states that “CARB will not take enforcement action for incomplete reporting against entities, as long as the companies make a good faith effort to retain all data relevant to emissions reporting for the entity’s prior fiscal year.”

Is This Enforcement Notice the Equivalent of a “Get Out of Jail Free” Card?

 No, it is not. The Enforcement Notice merely states that CARB will exercise enforcement discretion where companies exhibit “good faith” in complying with the requirements of the law. To the extent that a reporting entity is unable to establish that it was actively working toward full compliance with SB 253 in 2025, CARB could potentially bring an enforcement action against it. Therefore, it is important for reporting entities to act now to put in place data collection processes and procedures to begin recording and collecting GHG emissions data in fiscal year 2025 to demonstrate good faith efforts to comply with the statutory deadlines in 2026.

What Should You Be Doing Now?

 Because the Enforcement Notice is not a full reprieve from the statutory requirements, all companies – public and private – must determine if they must comply and how best to do so with these challenging new reporting requirements. While it may seem daunting, especially for reporting entities that have not disclosed scopes 1 and 2 GHG emissions before, we offer the following guidance to help companies prepare for the reporting process:

1. Applicability Analysis –

A - Determine if SB 253 applies to your company or subsidiaries. The first step toward compliance seems straightforward but in actuality can be quite complex. For example, take a Delaware holding company (the “HoldCo”) with three subsidiaries, each of which does business in California but individually none of which exceed the US$1 billion threshold. If these subsidiaries report revenues in aggregate in excess of the US$1 billion threshold to the HoldCo, the HoldCo could be deemed subject to SB 253.

B - Determine the ideal entity reporting level for your company. Many companies face multiple climate-related reporting requirements from several different reporting regimes. Using SB 253 as an example, reporting entities have the option to report at either the subsidiary or the parent level. Companies should consider, in connection with experienced advisors, the additional reporting obligations they face, the availability of data, existing procedures and controls, and past experience with similar mandatory disclosure regimes or voluntary disclosures when deciding at what level (parent or subsidiary) to report.

2. Analyze gaps between the company’s current reporting practices and what will be required by SB 253. For many companies, this may be the first public reporting of their scopes 1 and 2 GHG emissions, and therefore ensuring that they have the procedures and controls in place to collect and obtain third-party assurance of the required data disclosures should be of paramount consideration.

3. Retain all data related to the emissions reporting process. As outlined in the Enforcement Notice, companies seeking to mitigate the risks of an enforcement action by CARB must “make a good faith effort to retain all data relevant to emissions reporting for the entity’s prior fiscal year.” While CARB did not provide guidance as to what “good faith” means, in practice, companies should institute, at minimum, procedures and controls over their emissions data to ensure its reliability and verifiability, among other best practices, commencing in fiscal year 2025, which for many companies begins on January 1, 2025.

4. Engage consultants through counsel to preserve privilege. Many organizations will need to hire consultants to assist with developing their GHG emissions reporting procedures and controls. As this is an emerging area of law with new legal terms and no traditional standards or practices and similar legal requirements across multiple jurisdictions (e.g., EU’s CSRD, SEC, UK, Japan, Canada, Brazil, etc.), GHG emissions disclosures will require coordination with both legal counsel and consultants. Therefore, companies should consider having external counsel engage the consultant to the extent it is possible or necessary to preserve privilege in the event of an enforcement action or litigation.

5. Consider undergoing a vulnerability analysis. For many companies reporting scope 1 and scope 2 GHG emissions for the first time, to the extent their emissions or associated disclosures do not align with that of their peers, companies should plan with their legal teams for any pushback from investors and/or stakeholders arising from its disclosures.