California has long been a climate leader in the US, implementing innovative policies aimed at reducing anthropogenic carbon emissions including its Low-Carbon Fuel Standard and Cap & Trade Programs. On October 7, 2023, California Governor Gavin Newsom continued this leadership by passing the most comprehensive package of corporate climate disclosure laws in the US to date.
Why is California implementing these laws now?
The voluntary carbon offset market has continued to face criticism about the integrity and credibility of the market and companies’ net zero and carbon neutral claims. Coupled with the ever-evolving risks posed by climate change – both known and unknown – to companies and their investors, California is eager to increase accountability and transparency related to carbon reduction claims within the state.
Below we outline each regulation and provide concrete next steps companies can take to prepare.
The Voluntary Carbon Market Disclosure Act (AB 1305)
The purpose of AB 1305 is to regulate the carbon offset market to increase transparency and accountability. This will bolster the credibility of the offset market and subsequent net zero and carbon neutrality claims made by companies. Companies can incur a civil penalty of up to $2,500 per day (capped at $500,000 per year) for each day of non-compliance.
Who is obligated and what is required for compliance?
Sellers and marketers of VCOs in California must disclose and annually update information on their websites, including:
- The project type, location, timeline, quantity of GHG emissions reductions, and third-party verification or validation (if applicable);
- The protocol used to estimate emissions reductions or removal benefits, including data and calculation methods needed for independent verification of claims, and whether the project meets requirements established by non-profit entities or law; and,
- A plan of action for if GHG emissions reductions do not materialize or if stored carbon is released.
Purchasers and users of VCOs in California and making climate-related claims (e.g., carbon reductions or neutrality) must disclose and annually update information on their websites, including:
- The name of the entity selling the offset and the offset registry or program;
- The project name, identification number, type, site location, protocol used to estimate emissions reductions or removal benefits, and third-party verification or validation (if applicable); and,
- Information documenting how a carbon neutrality, or similar claim, was determined to be accurate or accomplished and how interim progress is measured (e.g., independent third-party verification, accounting methodology supporting the claim, and/or science-based targets for emissions reductions and pathway for achieving reductions).
How should companies start preparing?
First, companies must substantiate their net zero, carbon-neutral, and other climate-related claims with reliable data and methodologies. We recommend removing any claims from marketing that cannot be substantiated. Having an independent third party verify claims and address concerns can offer significant benefits in this situation. Second, when basing carbon claims on VCOs, request all relevant project information from the seller.
While the bill does not specify the date on which the first set of disclosures must be posted to a company’s website, assembly member Jesse Gabriel has submitted a formal letter expressing intent for the first disclosure to be January 1, 2025. This deadline provides reporting entities with sufficient time to align their business practices with the AB 1305 objectives prior to being subject to potential civil fines. Within the year-long preparation period, organizations should strategize optimal methods to present mandated disclosure information on their business website.
The Climate Corporate Data Accountability Act (SB 253)
Starting January 1, 2026, SB 253 will require companies that do business in California and earn an annual revenue of at least $1 billion to publicly disclose their scope 1, 2, and 3 emissions for the prior fiscal year. Companies will have to measure their emissions using the Greenhouse Gas Protocol’s accounting methodology and obtain third-party assurance for the quality and validity of their claims. Understanding the challenge associated with gathering data regarding scope 3 emissions, California plans to take a phased approach, not requiring scope 3 disclosures until the 2027 reporting year.
How should companies start preparing?
Though uncertainties exist about the final rule, early preparation remains crucial. Companies not currently measuring or disclosing GHG emissions should start gathering the required data and consider hiring a third-party firm who can help validate their data and claims. Companies already disclosing but not presently utilizing Greenhouse Gas Protocol’s accounting methodology should consider the requirements for transitioning.
The Climate-Related Financial Risk Act (SB 261)
SB 261 will require companies that do business in California and earn an annual revenue of at least $500 million to prepare a publicly available, biennial report – starting in 2026 – that discloses their climate-related financial risk. The report must also outline the measures the company has adopted to reduce and adapt to climate-related financial risks.
How should companies start preparing?
California is relying on guidance developed by The Task Force on Climate-Related Financial Disclosures (TCFD) to provide companies with a framework for the report. We recommend acquainting oneself with the Task Force’s June 2017 Final Report if not already familiar with it. Similar to the GHG disclosures, companies may find it prudent to hire a third-party firm who can validate the data in their report and evaluate their adaptation measures.
Note that although SB 253 and SB 261 passed, they lack key specifications California Air Resources Board (CARB) will develop by January 1, 2025. There are concerns about infeasible implementation deadlines and inconsistencies in reporting across companies, as well as the overall financial impact. CARB possesses the authority to address and resolve these concerns within its rulemaking and law implementation. While companies wait for full clarity, they can still take concrete steps to start preparing.
Lastly, these requirements, in certain critical aspects, may very well surpass the forthcoming SEC climate-related disclosure rule applicable to Accelerated and Large Accelerated Filers. Moreover, global companies subject to the California bills may also fall under the EU's Corporate Sustainability Reporting Directive (CSRD), which applies to companies meeting specific thresholds and operating within the EU. Consequently, companies must anticipate dealing with overlapping yet distinct climate-related disclosure mandates across multiple jurisdictions.
