Recognising that climate change is a global issue that doesn’t respect human-created boundary lines, in the past month-plus the state of California took decisive action that will impact many companies defined as doing business within its boundaries. Its
legislature passed two bills, both later signed by Governor Gavin Newsom, that will require larger companies that have significant operations in the state, including some prominent financial institutions and Fintechs, to soon begin reporting greenhouse gas
emissions and climate-related business risks.
The state senators who authored the bills, Scott Weiner (Senate Bill 253-the Climate Corporate Data Accountability Act) and Henry Stern (Senate Bill 261-the Climate-Related Risk Disclosure Act) weren’t alone in their support for this landmark legislation.
According to global nonprofit
Ceres, which Finextra profiled in a recent interview
series on financial institutions and sustainable investments, more than 30 brands and industry associations including prominent names Apple, American Apparel and Footwear Association, IKEA USA, Levi Strauss & Co, Microsoft, Recology, and Salesforce
joined in supporting the proposed laws, which will likely apply to more than 10,000 companies doing business in California.
Laws from a powerful state translate to impacts across the globe
So, what does this action mean to the world at large? Before you say, “Who cares what California does?” it might be wise to consider these facts: California – as measured by 2022 gross domestic product (GDP) is – at least - the world’s fifth largest
economy. By that measure, it’s bigger than every country after the United States (and of course the state’s $3.5 trillion figure is part of the overall US GDP of roughly $25.5
trillion) except China, Japan, and Germany, with India a very close sixth and Germany itself in jeopardy of being eclipsed by both as the euro’s value vs. the dollar rises and falls over time. So, at least according to the most common measure of financial
output, every nation after the first four or five in the world must look up to California in the business power pecking order.
So, what California, which began mandating its own vehicle emissions standards (prior to the US itself) more than five
decades ago, legislates in any area will almost certainly have major impacts across the globe. Even with “only” 39 million
people within its borders, the Golden State punches far above its weight in economic output and commercial and political power – whatever one thinks of its relatively high cost of
living and other socioeconomic challenges, or Silicon Valley’s unwavering power in the technology industry, or Hollywood’s continued domination of the entertainment field.
Which companies are affected, and when?
Specifics on the newly enacted California climate laws and what they will mean to businesses:
- SB 253 will require companies of at least $1 billion in annual revenue, estimated at around 5,300 US and multinational enterprises—including publicly and privately held corporations, LLCs, and partnerships - to report their global greenhouse gas emissions
under the widely-accepted GHG Protocol standards. Emissions
data reported must also be verified by a certified third-party, which is still to be determined. Emissions categorised as Scope 1 - from sources that are controlled or owned by an organisation (e.g., those associated with fuel combustion in boilers, furnaces,
vehicles) and Scope 2: indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling, must both be reported by subject companies beginning in 2026. Scope 3 emissions data, from these businesses’ suppliers and downstream customers,
must also be included beginning in 2027.
- SB 261 is focused on smaller companies, those from $500 million in annual turnover up to $1 billion in size. It will apply to approximately 10,000 U.S. and multinational firms doing business in California, including the same types of enterprise categories
as its ‘sister’ bill SB 253, and mandating first disclosures under its provisions in 2026. However, it will only require such reporting every two years, and specifies that this be done using the globally-recognised International Task Force on Climate-Related
Financial Disclosures’ (TCFD) framework – at least for a starting point. As Ceres asserts in its own analysis, this is the same framework expected to be used by the US Securities and Exchange Commission (SEC) in its
proposed and still-pending climate disclosure
rules for public corporations.
Industry response initially mixed, clarifications should ease some concerns
Despite the long list of major firms coming out in support of the California legislation, “Bureaucratic overreach!” has been the rallying cry of certain business groups against the proposed climate change-challenging rules – which will actually closely follow
and be harmonised with not just those being considered by the SEC, but also requirements issued earlier this year under the European Union’s
Corporate Sustainability Reporting Directive (CSRD).
In fact, a deeper dive into the regulations’ fine print, as signed into law by California Governor Gavin Newsom in October, provides real clarity and likely some relief vs. initial trepidation for business owners located in or doing business in the state.
Ceres, a worldwide leader in the climate change and social justice arena since 1989, shared key background information and explanations of the California legislation in an online seminar last week.
The nonprofit’s online presentation included brief interviews with Senators Weiner and Stern, as well as a conversation on the need for such legislation and her industry’s support with Chelsea Murtha, Sustainability Director at the American Apparel and Footwear
Association. Ceres’s policy experts Jake Rascoff and Sarah Sachs provided further details about the individual bills, their intentions, stated goals, specific timing, and implementation plans. They shared several key
facts and projections for likely impacts of the new laws.
Compliance mandatory, but aim is to reward honest effort and minimise penalties
The Ceres webinar and associated documents helped dispel a number of myths and some early misinformation from opponents around what compliance would really mean, and likely cost companies impacted by the passage of California’s new laws. As Ceres’s Rascoff,
the nonprofit’s Climate Financial Regulation Director pointed out, neither of the bills should add significant new administrative or financial burdens for larger companies. This is because, he said, most are already either actively reporting their carbon and
methane emissions and those of their value chain partners or preparing to do so now because of requirements from other governing bodies like the SEC or specific locales (such as Europe’s CSRD) that apply to them now anyway.
“One high level thing to note,” Rascoff said, “is that the California laws and the SEC proposed rule are both informed by the same language […] the reporting is at the consolidated sort of parent company level, obviously your emissions do not discriminate
whether they took place in California or elsewhere.” He furthered, “we really tried to work with the California bill sponsors to ensure that we're presenting the least burden on these companies…making sure that reporting is sort of consistent with what they're
used to doing from a financial and general consolidation perspective.”
As Ceres’s
explanatory document points out, the specific requirements of the two bills are focused more on encouraging compliance than adding major new costs, potential penalties, or administrative burdens to affected companies, as some critics have claimed. Filing
fees to cover the costs of administration are expected to be small, in the few-thousand-dollar range for affected companies. Both new laws reference and promote well-known industry standard emissions reporting templates and make allowances for “good faith”
estimates and reasonable data misstatements companies might make from gathering information (or industry-level estimates, one option) from supply chain (Scope 3) partners. They both also include caps on administrative penalties for particularly egregious offenders
of $500,000 for businesses subject to SB 253 and $50,000 for the smaller firms required to publish their emissions in any one reporting year.
In fact, the laws’ rules make it clear that under present plans companies will be given lots of latitude by the governing authority, the California Air Resource Board (CARB) for initial errors and demonstrated efforts to meet reporting requirements. Future
changes in reporting standards will be reviewed and requirements adjusted if appropriate, says the language contained in each bill, and complementing what other entities require as emissions standards evolve over time is a top priority of the state’s approach.
The new climate emissions standards America’s third largest in area, and most populous, state has presented to the world are a positive, critically important example for others to follow, says Rascoff. “I do not want to diminish the fact that the California
laws are crucial, first of their kind mandatory disclosure standards in the United States - the likes of which we have never seen. (Though) we are in a holding pattern awaiting the final SEC rules, the California bills are all the more important right now.
“And,” he concluded, “we really applaud the leadership from California” on setting the new emissions requirements for larger companies doing business there.