14 September 2023
Overview of SB 253 and SB 261 Bills
As of 13 September 2023, the California Legislature has passed two groundbreaking pieces of legislation requiring thousands of companies, including retailers, to calculate and publicly disclose their corporate GHG emissions and exposure to climate risk. SB 253 and SB 261 now go to the desk of California Governor Gavin Newsom for signature.
Passage of this legislation once again reaffirms California’s position as a national and global leader on climate change, together forming a powerful alternative to the U.S. SEC’s embattled Climate-Related Disclosures Rule that still awaits finalization at the federal level. Enactment will start the clock for thousands of large companies doing business in the state to take complete stock of their climate impacts.
What Do the SB 253 and SB 261 Bills Require?
SB 253 (Climate Corporate Data Accountability Act) will require large US companies to report their Scope 1, 2 and 3 emissions annually following the Greenhouse Gas Protocol standards and guidance. Companies must start publicly reporting Scope 1 and Scope 2 emissions in 2026 (based on prior fiscal year data), with Scope 3 emissions reporting beginning the following year. An independent third-party assurance provider must also verify reported emissions totals.
SB 261 (Greenhouse Gases: Climate-Related Financial Risk) will require an even broader range of US companies to prepare and publicly release a climate-related financial risk report by 2026.
The report must include:
- A disclosure of the company’s risks in line with the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations
- The measures taken by the company to reduce and adapt to those risks.
Who Do the SB 253 and SB 261 Bills Apply to?
Although California state laws, SB 253 and SB 261 would apply to many businesses that operate outside of the state under their applicability triggers. Specifically, businesses are covered if they meet all of the following criteria:
- Is the company (or subsidiary) formed under the laws of the US or a US state?
- Does the US entity have total revenues above $1 Billion (SB 253) or $500M (SB 261)?
- Does the entity “do business” in California?
“Doing business” in California is already defined under another California law (Cal. Rev. & Tax Code section 23101). Criteria include having more than $610,395 in sales into the state in a given year. It is through this “tether” that the requirements will capture thousands of non-California companies.
These criteria are expected to capture approximately 5,000 (SB 253) and 10,000 (SB 261) businesses, respectively — comparable to the approximate 7,000 businesses that the US SEC Climate-Related Disclosures Rule would impact.
When Do Businesses Need to Comply with SB 253 and SB 261?
Both bills embed transition periods for different requirements. Some of these deadlines are still to be defined by the California Air Resources Board (CARB), the state agency charged with implementing the legislation.
For SB 253, businesses must report Scope 1 and 2 emissions starting in 2026. Scope 3 emissions are to be reported beginning the following year and in every year 180 days after Scope 1 and Scope 2 totals are reported.
Third-party assurance will also initially apply to only Scope 1 and Scope 2 emissions totals at a “limited” assurance level, with “reasonable” assurance starting in 2030. For Scope 3 emissions, assurance will begin no later than 2030, although CARB may apply requirements sooner.
For SB 261, businesses must issue their first climate-related financial risk reports aligned to the TCFD Recommendations by 1 January 2026, and then every two years after that.
What are the Penalties for Non-Compliance?
SB 253 sets maximum penalties for violating the Act at $500,000 per company per reporting year. Importantly, this includes protections for Scope 3 reporting: entities cannot be penalized when their Scope 3 disclosures were made “with a reasonable basis and disclosed in good faith” and will only be penalized from 2027 through 2030 if they fail to report Scope 3 emissions entirely.
SB 261, by contrast, establishes more limited penalties, which may not exceed $50,000 each reporting cycle. This likely reflects the narrative nature of such disclosures and the broader range of companies subject to SB 261’s disclosure requirements.
What's Next for Businesses?
Accounting for greenhouse gas emissions and climate risk across an entire corporate enterprise is a significant undertaking. Businesses must establish processes to assess and quantify the sources of emissions along their entire supply chains annually, correctly classify those activities according to the GHG Protocol Scope system, and calculate resulting emissions in an accurate, transparent, and comparable manner.
It’s increasingly complex to navigate the industry’s changing legislation, but you can stay ahead with Vaayu. Click here for a general overview of the most crucial legislation expected in 2023 and beyond, or follow Vaayu on LinkedIn for updates as they happen.
