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California Climate Disclosure Laws Have Not Evaporated After SEC Climate-Related Rule Adoption

On March 6, 2024, the Securities and Exchange Commission (the “SEC”) adopted highly anticipated rules to enhance and standardize climate-related disclosures by public companies and in public offerings, as outlined in our LEGALcurrents. While the fate of the SEC’s hotly debated rules is in the hands of the Eighth Circuit Court of Appeals, companies that do business in California cannot rest their hopes that their climate-related reporting obligations will evaporate based on the SEC litigation, as California has enacted its own climate-related reporting obligations.

Overview

In late 2023, California’s Governor signed into law Senate Bill 253, the Climate Corporate Data Accountability Act, (“SB 253”) and Senate Bill 261, the Climate-Related Financial Risk Act (“SB 261”), which require certain companies doing business within California to make climate disclosures, including reports relating to greenhouse gas (“GHG”) emissions and climate-related financial risks.

Covered Entities

The California laws are broader than the SEC rules: they apply to all private and public companies (defined as partnerships, corporations, limited liability companies, or other business entities formed under the laws of California, the laws of any other state of the United States or the District of Columbia) that meet certain revenue thresholds and that “do business” in California (“Covered Entities”). Covered Entities will be required to publicly disclose the information set forth in the table below.

“Doing business” in California is a low bar. If a company meets any of the following criteria, it is considered to be a business operating in California and subject to these laws:

      • Engage in any transactions for financial gain in the state of California

      • Organized or domiciled commercially in the state of California

      • California sales, property taxes, or payroll taxes meet or exceed the following amounts for 2022 (these figures are updated annually):
        • Sales taxes: $690,144
        • Property taxes: $69,015
        • Payroll taxes: $69,015

      SB 253 applies to Covered Entities with total annual revenue of at least $1 billion. SB 261 applies to Covered Entities with total annual revenue of at least $500 million. If a Covered Entity falls below these thresholds, then they will not have a reporting obligation in California.

      Disclosure Requirements

      Law Scope[1] California Disclosure Requirement
      SB 253 1 All direct GHG emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.
      2 Indirect GHG emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.
      3 Indirect upstream and downstream GHG 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.
      SB 261   Entity’s climate-related risks[2] and measures adopted to reduce these risks.

        SB 253 requires disclosure of Scope 1 and 2 GHG emissions from 2025 by some time in 2026 (the exact date to be determined by the CA state board) and annually thereafter. Initial Scope 3 disclosure is required in 2027, and then annually 180 days after Scope 1 and Scope 2 disclosures. Disclosures must be made to an “Emissions reporting organization” contracted by California and publicly available. Similar to the SEC requirements, Covered Entities will need to retain an independent third-party assurance provider to review and provide assurance on the company’s public disclosures under SB 253. Assurances for Scopes 1 and 2 emissions will need to be performed at a limited assurance level beginning in 2026 and a reasonable assurance level starting in 2030. The state board is required to establish an assurance level for Scope 3 disclosures by January 1, 2027.

        SB 261 requires initial disclosure no later than January 1, 2026 and then every two years thereafter. Disclosures must be made publicly available on the company’s website and with the California Air Resources Board on a web-based platform that will be created by January 1, 2025. Reporting companies will need to pay a yet-to-be-determined fee to report on the platform.

        Penalties for Noncompliance

        The California Air Resources Board is responsible for deciding any penalties to be imposed under SB 253 and SB 261 after an administrative hearing. The penalties cannot exceed $500,000 in a reporting year for SB 253 or $50,000 in a reporting year for SB 261. Covered entities are also required to pay an annual fee for the California Air Resources Board’s actual costs of administering the laws.

        Next Steps

        The new California laws have been challenged in the Central District of California by business groups arguing they violate the First Amendment, principles of federalism, and the dormant commerce clause doctrine. However, given the uncertainty of the legal challenge, Covered Entities under California SB 253 and SB 261 should begin strategizing and planning for compliance with the new rules, including implementing the systems and processes for gathering the data necessary for the required disclosure and planning for incorporating these processes into their system of internal control over financial reporting.

        If you have any questions about the new rules, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group.


        [1] Disclosure of Scope 1, 2 and 3 GHG emissions in California is broader than the SEC rule. The final SEC rule added a materiality standard for the disclosure of Scope 1 and 2 GHG emissions and will not require public companies to disclose Scope 3 GHG emissions.

        [2] “Climate-Related Risks” are defined in SB 261 as material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.

         

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