Risk Management and Crisis Response Blog

California’s new ‘Climate Accountability Package’

Oct 25, 2023 6 MIN READ

ice burg

California’s legislature recently passed two bills that impose significant mandatory climate-related reporting requirements for large public and private companies doing business in that state. These bills are the first of their kind in the United States and are consistent with the ongoing trend for climate-related disclosure on both sides of the border and internationally. However, by adopting this legislation, California has jumped ahead of other regulators, including the United States Securities and Exchange Commission (SEC) and the Canadian Securities Administrators (CSA), and California has done so without engaging in the same level of consultation that those other regulators have in considering similar regulatory requirements.

To date, most climate-related disclosure has been largely voluntary or based on general principles of materiality to the applicable issuer. California’s legislature declared the voluntary approach to be lacking the transparency and consistency needed for both residents and financial markets to understand climate risks, and indicated that the new legislation was intended to “tackle the climate crisis” and to “allow governments and the public to hold the corporate community to their word” about their progress towards meeting climate goals.

Overview of California’s ‘Climate Accountability Package’

SB-253 Climate Corporate Data Accountability Act

SB-253 requires the California State Air Resources Board – the climate change government agency in California, to adopt regulations before January 1, 2025 to require corporations formed in the United States with total annual revenue exceeding $1 billion operating in California to report annually on their greenhouse gas emissions. Both public and private companies will be required to measure and report on their Scope 1, Scope 2 and Scope 3 GHG emissions in conformance with the Greenhouse Gas Protocol standards and guidance.

The Greenhouse Gas Protocol is one of the most widely used global standardized frameworks to measure and manage GHG emissions from private and public sector operations, value chains and mitigation actions. Consistent with the GHG Protocol, SB 253 defines “Scope 1 emissions” as all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities; “Scope 2 emissions” as all indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location; and “Scope 3 emissions” as all indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.

Under the Act, reporting is set to begin in 2026 for Scope 1 and Scope 2 emissions and, in 2027 for Scope 3 emissions. Company emissions disclosures will require independent verification and will be publicly available on a digital registry, which will be administered through an organization with which the state board contracts. Failure to comply with the reporting requirements could lead to financial penalties up to $500,000 per year.

SB-261 Greenhouse Gases: Climate-Related Financial Risk

SB-261 requires corporations formed in the United States, with more than $500 million in annual revenue, and which do business in California to prepare biennial reports disclosing their climate-related financial risk and the measures they are taking to reduce and adapt them. California’s proposed regulations would govern both publicly and privately-held companies.

Companies’ financial risk reporting must be consistent with the framework of the Task Force on Climate-Related Financial Disclosure (TCFD). Businesses must make their report publicly available on the company’s website, and failure to comply with the reporting requirements can lead to financial penalties up to $50,000 per reporting year.

Comparison To Existing Canadian Framework

There is currently no mandatory climate-related disclosure framework in Canada. However, voluntary disclosure is increasingly common and there has been a trend toward following, to varying degrees, the TCFD framework which encourages the reporting of Scope 1, Scope 2, and Scope 3 GHG emissions.

Climate-Related Disclosure Developments

An International Push Towards Reporting Requirements

California’s climate accountability package comes at a time when there has been an increasing push internationally towards common reporting standards modelled on the TCFD framework.

In March 2022, as we have previously written, the SEC proposed a rule requiring publicly-traded companies to disclose climate-related risks “that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.” The SEC rules are modelled on the TCFD framework, on which the many other climate-related disclosure frameworks are based. The proposed rule would require reporting on GHG emissions and an attestation report on such disclosure.

In July 2023, the EU adopted the European Sustainability Reporting Standards (ESRS) by way of delegated regulation. The ESRS is intended to provide the framework for implementing the framework and methodology for satisfying the reporting requirements and obligations under the EU’s Corporate Sustainability Reporting Directive. The ESRS are designed to cohere with the standards developed by the International Sustainability Standards Board (ISSB) which also released the final versions of its first two global sustainability disclosure standards – the IFRS S1 and IFRS S2 – for financial reporting in June 2023, and which will come into force in January 2024.

EU and non-EU entities subject to the delegated regulation will be required to publish separate sustainability statements, as part of their management reports, that contain sector-agnostic, sector-specific, and company-specific information covering the full range of environmental, social, and governance issues, including climate change adaptation and mitigation, pollution, water and marine resources, biodiversity and ecosystems, and resource use and the circular economy.

The ESRS is set to come into force in two phases. Sector agnostic standards applicable to all companies captured by the Corporate Sustainability Reporting Directive are set to come into force in January 2024. Sector-specific standards were expected to be adopted by the EU in June 2024. However, on October 17, 2023 [PDF], the EU Commission proposed postponing the deadline of sectoral European sustainability standards by two years to allow stakeholders to adapt to the new requirements.

In June 2023, the International Sustainability Standards Board (ISSB), a standard-setting body established by the International Financial Reporting Standards Foundation, released its first sustainability-based and climate-related disclosure standards – the IFRS S1 and IFRS S2 – for financial reporting, which will come into force in January 2024. IFRS S1 and IFRS S2 incorporate the TCFD framework. IFRS S1 requires companies to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance, or cost of capital over the short, medium, or long term. IFRS S2 requires companies to disclose information about climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance, or cost of capital over the short, medium, or long term. IFRS S2 does not require an attestation report on company emissions.

Developments In Canada

Canadian regulators are also focused on increasing and improving climate-related disclosure.

In October 2021, the CSA published proposed National Instrument 51-107 Disclosure of Climate-related Matters, which proposes to require climate-related disclosure generally in alignment with the TCFD framework.

However, in October 2022, the CSA announced that it was “actively considering international developments” and their implications for NI 51-107. Following the release of the final ISSB standards, the CSA indicated that it “welcome[d]” the publication of ISSB standards and commended the ISSB for “developing a global framework for investor-focused disclosure that is responsive to market demand for more consistent and comparable disclosures”. In September 2023, the CSA reiterated that it was “working towards the adoption of climate-related disclosure rules for Canada that are consistent and comparable with international climate-related disclosure standards” published by the ISSB and that consider the SEC’s proposed rule changes.

Significance

California’s climate accountability package provides tangible evidence that jurisdictions that want to be seen as doing something to address climate change may find it expeditious to adopt rules mandating disclosure by private industry. As such, it may act as a bell-weather for other jurisdictions to adopt similar disclosure requirements. Companies that operate over several jurisdictions need to be prepared for the risk of being subject to multiple different mandated disclosure regimes.