Tired of Waiting on the SEC, California Adopts Extensive Climate Disclosure Laws

California recently has passed three climate disclosure laws, with yet another still pending. These new laws are aimed at increasing transparency and consistency in climate-related disclosures, including greenhouse gas (GHG) emission and carbon offset disclosures, and to encourage climate risk mitigation including decarbonization. Senate Bill 253, “Climate Corporate Data Accountability Act” (“SB 253”); Senate Bill 261, “Greenhouse gases: climate-related financial risk” (“SB 261”); and Assembly Bill 1305, “Voluntary Carbon Market Disclosures Act” (“AB 1305) were signed into law by the California Governor on October 7, 2023. Senate Bill 252, “Public Retirement Systems: Fossil Fuels: Divestment” (“SB 252”) applies to specific California retirement funds and is still under review in the California Senate, having been referred to the Public Employment and Retirement Committee.

Assembly Bill 1305 “Voluntary Carbon Market Disclosures Act”

AB 1305 is drawing the least public attention of the three new laws, but it becomes effective on January 1, 2024, which is much sooner than the other two laws. Companies need to give immediate attention to making sure they are in compliance with AB 1305.

AB 1305 is aimed at combatting greenwashing and imposes disclosure requirements on certain businesses that make net zero, carbon neutrality, or similar claims such as through the use of voluntary carbon offsets as well as requiring disclosures from companies that market or sell voluntary carbon offsets. AB 1305 applies to any business entity that operates in California and makes claims in California. What it means to “operate within California” is not further defined, nor is there a revenue requirement as in SB 253 and SB 261. Accordingly, any business that makes such claims in California — even a small company with a minimal presence in California — could be subject to the requirements of AB 1305 as detailed below. In general, any type of claim that is published on the internet should be considered as being made in California, which satisfies the second requirement of AB 1305.

Under AB 1305, a business that markets or sells voluntary carbon offsets in California is required to disclose on its internet website:

• Details regarding any offset projects, including project location, timelines, and protocols used to estimate emission reductions or removal benefits;
• Accountability measures in the event a project is not completed or does not meet the projected emissions reductions or removal benefits; and
• Data and calculation methods needed to reproduce or verify protocol results for emission reduction or removal credit claims.

A business that purchases or uses voluntary carbon offsets that make claims related to achieving net zero emissions; being “carbon neutral;” or implying that it, an affiliated entity, or product does not add net carbon dioxide or GHG to the climate or has made significant reductions to its carbon dioxide or GHG emissions is required to make disclosures on its website for each offset program or project, including:

• Details of the entity selling the carbon offsets;
• Details of the carbon offset program;
• Protocols for estimating emission reductions; and
• Whether there is independent third-party verification of the data and claims.

Similarly, a business that makes claims related to achieving net zero emissions, being “carbon neutral,” or other similar climate related claims is required to make disclosures on its website related to its GHG emissions claims, including:

• All information related to how such net-zero, “carbon neutral,” or other similar claims are determined to be accurate and how progress toward such goals is measured; and
• Whether there is independent third-party verification of the data and claims.

Businesses are required to ensure accurate information is disclosed and update such information at least annually. AB 1305 also provides for penalties of up to $2,500 per day, not to exceed $500,000, for each day information is not included on a business’s website or is inaccurate.

Many companies that discuss their net zero or other carbon claims and which have published a Corporate Responsibility Report or ESG Report may determine that such report is sufficient to address the foregoing disclosure requirements. However, businesses operating in California should nonetheless review any and all carbon-related claims immediately in order to confirm that sufficient carbon-related disclosures are posted to its website or prepare to provide the above disclosures beginning in 2024.

Senate Bill 253 “Climate Corporate Data Accountability Act”

SB 253 requires business entities with total annual revenues in excess of US$1bn and doing business in California (“Reporting Entity”) to publicly disclose to the emissions reporting organization, which will be designated by the California State Air Resources Board (“State Board”), their scope 1 and scope 2 GHG emissions on an annual basis, beginning in 2026, as well as their scope 3 GHG emissions, beginning in 2027. Additionally, a Reporting Entity will be required to obtain an assurance engagement, performed by an independent third-party assurance provider, of the entity’s public disclosure.

SB 253 does not define what it means to do business in California. Unless addressed in future regulations, most are following California’s Franchise Tax Board rule for doing business in California:

1. Engage in any transaction for the purpose of financial gain in California;
2. Are organized or commercially domiciled in California; and
3. Have California sales, property, or payroll in excess of the following amounts in 2022:
   1. $690,144 in sales;
   2. $69,015 in real and tangible personal property or 25% of total property; or
   3. $69,015 in payroll compensation or 25% of total payroll.

SB 253 defines GHG emissions as follows:

• “Scope 1 emissions” means all direct GHG emissions stemming from sources that a Reporting Entity owns or directly controls, regardless of location.
• “Scope 2 emissions” means indirect GHG emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a Reporting Entity, regardless of location.
• “Scope 3 emissions” means other indirect upstream and downstream GHG emissions from sources that the Reporting Entity does not own or directly control such as purchased goods and services, business travel, employee commutes, and processing and use of sold products.

Accordingly, beginning in 2026, SB 253 requires Reporting Entities to measure and report GHG emissions in conformance with the Greenhouse Gas Protocol standards and guidance, a widely used global framework for measuring and managing GHG and related climate risks.

The Reporting Entity will not only be required to obtain independent third-party assurance for its public disclosure, but a copy of the third-party assurance report will need to be provided to the emissions reporting organization. Limited assurance (a review) will be required for Scope 1 and 2 beginning in 2026 with reasonable assurance (an audit) required for Scope 1 and 2 in 2030. Scope 3 will only need limited assurance beginning in 2030 and thereafter.

While SB 253’s disclosure and reporting requirements represent a new hurdle for Reporting Entities, the language of SB 253 acknowledges that a Reporting Entity may have other climate-related disclosure requirements under the laws of other jurisdictions and that the SB 253 emissions reporting “is structured in a way that minimizes duplication of effort and allows a reporting entity to submit to the emissions reporting organization reports prepared to meet other national and international reporting requirements.” SB 253 contemplates that such reports prepared for other jurisdictions may need to be supplemented to meet all of SB 253’s requirements. State, federal, and international requirements for climate-related disclosures and reporting are on the rise, and companies will need to assess how to meet each applicable requirement and whether synergies will be possible.

Importantly, SB 253 authorizes the State Board to develop and adopt regulations in order to effectuate the reporting and disclosures required by SB 253. Additionally, the State Board is authorized to adopt regulations in order to implement any penalties for non-filing, late filing, or other failures to meet the requirements of SB 253, with the potential for administrative penalties of up to $500,000 per reporting year.

Senate Bill 261 “Greenhouse Gases: Climate-Related Financial Risk”

SB 261 requires businesses with total annual revenues in excess of US$500mn doing business in California (“Covered Entity”) to prepare a climate-related financial risk report disclosing the entity’s climate-related financial risk and measures adopted to mitigate such risk (“the Report”). The Report will be required on a biennial basis, with the first report due by January 1, 2026. A Covered Entity will also be required to make a copy of the Report available to the public on its website.

A Covered Entity’s Report will be required to be in accordance with the recommended framework and disclosures contained in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosure (commonly referred to as TCFD), which the Securities and Exchange Commission has closely followed in drafting its proposed Climate Disclosure Rule. However, SB 261 provides some leeway to Covered Entities, stating that the Covered Entity shall provide the disclosures “to the best of its ability,” describing any gaps in reporting and how it will close such gaps going forward.

Similarly to SB 253, discussed above, SB 261 authorizes the State Board to develop and adopt regulations in order to effectuate the reporting and verification of GHG emissions required by SB 261 and to monitor and enforce compliance. Additionally, the State Board is authorized to adopt regulations in order to implement any penalties for failures to meet the requirements in SB 261, with the potential for administrative penalties of up to $50,000 per reporting year.

Senate Bill 252 “Public Retirement Systems: Fossil Fuels: Divestment”

If enacted, SB 252 will prohibit the California boards of the Public Employees’ Retirement System and the State Teachers’ Retirement System (“the Boards”) from making or renewing investments of public employee retirement funds in fossil fuel companies. SB 252 also will require the Boards to liquidate investments in fossil fuel companies on or before July 1, 2031. Additionally, beginning in 2025, the Boards will be required to file an annual report with the California Legislature and Governor detailing certain information, including a list of any fossil fuel company investments that have been liquidated, any fossil fuel investments that have not been liquidated, and an analysis of methods and opportunities to reduce dependence on fossil fuels and transition to alternative energy sources.

Conclusion

AB 1305, SB 253, and SB 261 mark the first comprehensive climate-related disclosure requirements in the U.S. These laws require similar but more limited disclosures than the Securities and Exchange Commission’s proposed Climate Disclosure Rule. If the SEC’s Climate Disclosure Rule is ever released, it will be interesting to see how closely its timeline for compliance matches that of California’s. While these laws in California, and the regulations that the State Board may propose to implement them, may be challenged in court, companies should be immediately considering a comprehensive strategy for climate-related risk disclosure.

Foley & Lardner is well positioned to assist parties with navigating climate-related risk mitigation and disclosures. Please reach out to Foley & Lardner, LLP for specific recommendations or for additional information about any of the issues discussed above.

This summary was drafted by Michael Kirwan and Natasha Dempsey, members of Foley & Lardner’s Environmental, Social & Governance (ESG) team.