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Climate Accountability: Navigating California’s Climate Disclosure Laws

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Climate Accountability: Navigating California’s Climate Disclosure Laws

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As the world’s fourth-largest economy, California has taken proactive steps to combat climate change by mandating firms within its jurisdiction to report greenhouse gas emissions and climate-related financial risks starting in 2025.

On October 7, 2023, Governor Gavin Newsom signed a groundbreaking climate disclosure law package including three key acts:

  • California Corporate Data Accountability Act (SB 253)
  • Climate-Related Financial Risk Act (SB 261)
  • Voluntary Carbon Market Disclosures (AB 1305)

SB 253 and SB 261 are the first general regulations in the US requiring companies to report their greenhouse gas emissions and climate risks, while AB 1305 aims to prevent misleading claims about emissions, known as greenwashing. These laws mark a significant shift towards mandatory climate-related disclosure for companies operating in California.

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AB 1305 applies to all public and private firms, irrespective of revenue. Moreover, the disclosure mandated by AB 1305 must be prominently displayed on the company’s website and updated at least annually. Failure to do so may result in civil penalties of up to $2,500 per day per violation, not exceeding $500,000.

While AB 1305 is set to take effect on January 1, 2024, Mr. Jesse Gabriel, the bill’s author, has clarified the timing of disclosures. In a letter addressed to the Chief Clerk of the Assembly, Mr. Gabriel indicated that while the bill does not explicitly outline the timeline for initial disclosures, he intends for the first annual disclosure to be published no later than January 1, 2025.

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1The term “doing business in California” is unclear in either bill. Further clarification regarding the definition of the term is expected in the future. However, it is defined by the State here.

2Revenues are not required to be earned exclusively in California.

3Note that a subsidiary is not required to prepare a separate climate-related financial risk report if consolidated reports are prepared. Furthermore, if a covered entity does not complete a report consistent with all required disclosures, the covered entity shall provide the recommended disclosures to the best of its ability, provide a detailed explanation for any reporting gaps, and describe steps the covered entity will take to prepare complete disclosures.

4A nonprofit emissions reporting organization contracted by the California Air Resources Board (CARB) to develop a reporting program to receive and make publicly available disclosures that has experience with GHG emissions disclosure.

Following the Greenhouse Gas Protocol standards, companies must start working on identifying their GHG emissions sources, selecting an appropriate calculation approach, collecting data and determining emission factors, investing in calculation tools, and rolling up the data to corporate and reporting levels.

SB 261  requires disclosures following the Task Force on Climate-related Financial Disclosures (TCFD) guidelines, which requires the disclosures of the following key matters:

Governance
TCFD requires companies to describe their board’s oversight of climate-related risk and opportunities, including (a) the process and frequency the board is informed about climate-related issues, (b) whether climate-related issues are considered on board strategies and other business decisions, and (c) how the board monitors and oversees the process against goals and targets for addressing climate-related issues. Companies should also describe management’s role in assessing and managing climate-related risks and opportunities.

Strategy
Disclosures should include information about