Navigating California's New Climate Laws: SB 261 and SB 253

October 2024 update:

California has now adopted SB 219—slightly modifying SB 253 and SB 261, discussed below in our original post, to provide the California Air Resources Board (CARB) with additional flexibility. Among the minor changes:

• CARB now has until July 1, 2025, to adopt regulations on emissions reporting, rather than January 1, 2025.
• CARB now has discretion when exactly in 2027 companies will be required to begin scope 3 emissions reporting (as opposed to precisely 180 days after scopes 1 and 2 emissions are publicly disclosed).

SB 219 also clarifies that covered entities are able to consolidate their emissions reporting at the parent level, which was largely assumed but now explicitly stated. Otherwise, the eligibility thresholds, disclosure requirements, compliance deadlines, and penalties for noncompliance remain the same.

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California has recently passed and signed into law two significant pieces of climate legislation: Senate Bill 253 (SB 253), better known as the Climate Corporate Data Accountability Act, and Senate Bill 261 (SB 261) focused on climate-related financial risk reporting. These laws could have substantial implications for large-scale businesses operating in California, particularly those with total annual revenues in excess of $1 billion and $500 million, respectively. Here's what you need to know.

What Kind of Businesses Are Covered?

In the context of these new laws, a "covered entity" is defined as a corporation, partnership, limited liability company, or other business entity formed under the laws of the state, the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the United States that does business in California.

SB 253 applies to entities with total annual revenues in excess of $1 billion; SB 261 applies to entities with total annual revenues in excess of $500 million.

Applicability is determined based on the business entity's revenue for the prior fiscal year.

While the current definition of what kind of entity is covered is quite broad, there are some notable exceptions to SB 261 for insurance companies and corporate subsidiaries.

Furthermore, we expect the California Air Resources Board (CARB) to clarify in the coming year what businesses are considered covered entities that do business in California, especially to help determine the applicability of these laws to businesses and subsidiaries within complex corporate structures or with limited connection to California.

Senate Bill 253: Climate Corporate Data Accountability Act

SB 253 requires covered entities to publicly disclose their scope 1 and scope 2 greenhouse gas emissions starting in 2026, and their scope 3 greenhouse gas emissions starting in 2027.

The law also requires CARB to contract with an emissions-reporting organization to develop a reporting program to receive and make publicly available the required disclosures.

Finally, SB 253 also introduces an annual fee for reporting entities that will be payable upon filing the required disclosure.

Senate Bill 261: Climate-Related Financial Risk Reporting

SB 261 requires covered entities to prepare a climate-related financial risk report on or before January 1, 2026, and biennially thereafter. This report should disclose your entity's climate-related financial risk and the measures adopted to reduce and adapt to this risk.

SB 261 also introduces an annual fee beginning on or before January 1, 2026, for covered entities.

Governor Newsom's Concerns Suggest Changes to the Laws Are Coming

Governor Newsom, while signing Senate Bill 253 into law, expressed concerns about the feasibility of the implementation deadlines and the potential for inconsistent reporting across businesses. He has directed his administration to work in the coming year to address these issues by revising this new law.

Governor Newsom also expressed concern about the overall financial impact of this law on businesses. He has instructed CARB to closely monitor the cost impact as it implements this new law and to make recommendations to streamline the program.

Conclusion

These new laws represent a significant shift in California's climate policy, with potential implications for large-scale businesses operating in the state. It's prudent for businesses to understand these laws and begin preparing for their implementation. This may include assessing your company's climate-related financial risks and greenhouse gas emissions, and developing strategies to reduce these risks and emissions and ensure compliance with these new requirements once they are clarified.

As California moves forward with the implementation of this legislation, businesses should stay informed about any updates or changes to these laws.