12 September 2023

California moving closer to mandatory climate disclosures

California is on the verge of becoming the first US state to require climate disclosures for large companies after its State Assembly approved the Climate Corporate Accountability Act (SB 253) yesterday (11 September).

If signed into law, the legislation will require all business operating in California that make over $1bn a year, roughly 5300 companies, to annually report their direct (Scope 1 and 2) emissions from 2026 and annually report their indirect (Scope 3) emissions from 2027. Notably the rule would require independent verification for these disclosures.

The bill's sponsor, Senator Scott Wiener, said: "These commonsense disclosures are already the norm in many markets - we need to standardize them to ensure investors, regulators, and consumers have the information they need to engage with major corporations in a warming world."

The bill was approved by the lower house with 41 votes in favour and 20 votes against. It now needs to be rubber stamped by a final Senate vote before Governor Gavin Newsom can sign it into law, which is expected to happen in the coming days. The California Air Resources Board will then have to approve regulations by 2025 to implement the climate disclosure requirements.

The previous iteration of the law didn't pass the Assembly last year as a significant number of moderate Democrats voted against it.

Wiener has built a wider political coalition this time around and made amendments to the bill to alleviate concerns over reporting indirect carbon emissions by weakening the repercussions for inaccuracies in Scope 3 reporting.

Momentum has been building behind the legislation for some months, with endorsements from lawmakers, climate advocacy groups and companies, all of which showed their support at a rally in Sacramento at the end of August.

This momentum has continued, the California Appropriations Committee approved SB 253 last week and Apple and Google both threw their support behind the bill in last couple of days.

SB 253 is co-sponsored by a range of environmental groups, including Ceres, the Greenlining Institute, Carbon Accountable, Sunrise Bay Area, and California Environmental Voters (EnviroVoters), who pushed back on an anti-disclosure lobbying campaign headed by the California Chamber of Commerce.

"Up against the most powerful and resourced interests in our state, the Assembly stood strong and advanced world-changing policy, yet again proving our state's critical role in the global fight against the climate crisis," EnviroVoters CEO Mary Creasman said in a statement. "As the 4th largest economy in the world California will move the world forward on climate action and accountability."

Meanwhile, the other side of the climate disclosure package, the Climate-Related Financial Risk Act (SB 261), awaits a vote on the Assembly floor. SB 261 would require businesses operating in California with over $500m in annual revenue to annually release TCFD-aligned disclosures on their climate-related financial risks.

The US Securities and Exchange Commission is expected to finalise and release its proposed climate disclosure rule in the coming months, although significant problems and uncertainties remain. Many hope that the California legislation will lead the way to nation-wide climate disclosure requirements, with CDP announcing that the "world is watching" before yesterday's vote.

"The world is looking to the United States to provide climate leadership, particularly as we strive to set measurement and disclosure standards," former IOSCO Executive Committee chair Jane Diplock said. "That's why all eyes right now are on California. The current Californian climate accountability bill (SB-253) would be a great step forward."