A Guide to California’s 2024 Climate Accountability Package: California SB 253 and SB 261
California is once again raising the bar for addressing climate change — this time with a focus on corporate climate disclosure. In October 2023, California Governor Gavin Newsom signed into law two acts requiring mandatory disclosure of greenhouse gas (GHG) emissions data and disclosure of climate-related financial risks by large U.S. public and private businesses that do business in California.
The acts, which together are referred to as the California Climate Accountability Package, are stricter than the U.S. Securities and Exchange Commission’s (SEC) final rule on climate disclosure and on par with the stringent new European Union (EU) climate disclosure requirements.
Although the new California climate laws were intended to take effect in 2026, Governor Newsom has proposed postponing them until 2028, an idea the state legislature will soon weigh in on. A legal challenge asserting the acts violate the U.S. Constitution could also slow their effective date — or extinguish the new laws altogether. The case is set for hearing in federal court in September.
In a Nutshell: Overview of the Climate Accountability Package
The two new California climate disclosure laws are the Climate Corporate Data Accountability Act (SB 253), which requires companies to report Scope 1, 2, and 3 GHG emissions data, and the Greenhouse Gases: Climate-Related Financial Risks Act (SB 261), which requires companies to disclose their climate-related financial risks and the measures they're taking to reduce or adapt to such risks.
The acts, which are intended to protect the Golden State and its citizens from the effects of global climate change, apply to both public and private companies that meet certain revenue thresholds and do business in California, even if their headquarters are in another state. Both laws will be overseen by the California Air Resources Board (CARB).
Climate Corporate Data Accountability Act (SB 253) FAQs
What does SB 253 require?
“Reporting entities” doing business in California must report Scope 1, 2, and 3 greenhouse gas (GHG) emissions data and provide qualified third-party assurance for such data.
What is a “reporting entity” under SB 253?
Any U.S. business entity (public or private) that has annual revenue exceeding $1 billion and is doing business in California.
What does “doing business in California” mean under SB 253?
The act doesn’t provide a definition. Presumably, the implementing regulations will provide clarity.
What are greenhouse gases?
Greenhouse gases trap heat in the atmosphere and make the planet warmer. According to the Environmental Protection Agency, the increase in greenhouse gas emissions over the last 150 years is almost completely attributable to human activity. The most significant sources of greenhouse gas emissions are the burning of fossil fuels for commercial and residential electricity, heat, and transportation; industry; agriculture; and forestry.
What are Scope 1, 2, and 3 greenhouse gas emissions?
Scope 1: direct emissions from sources owned or controlled by an entity.
Scope 2: indirect emissions associated with an entity’s purchase of electricity, steam, heating, or cooling.
Scope 3: emissions (other than Scope 2) from indirect upstream sources (i.e., the production of a company’s products) and downstream sources (i.e., the use and disposal of those products). Scope 3 emissions also include emissions from business travel and employee commutes.
How do companies determine their greenhouse gas emissions under SB 253?
At first, by following the globally-recognized Greenhouse Gas Protocol. In the future, CARB may adopt a new standard.
What is the third-party assurance requirement?
Companies will have to contract with third parties that are experienced in GHG measurement and can provide assurance that the reported GHG data is correct.
What happens to the data once it’s reported to CARB?
CARB is responsible for developing an online platform that will be publicly available and will show GHG emissions data on an entity-by-entity basis.
What is the required reporting cadence under SB 253?
Annually.
Is there a penalty for noncompliance?
Yes; companies can be fined up to $500,000 in a single reporting year.
When does SB 253 go into effect?
This remains to be seen, but the original effective dates of 2026 for Scope 1 and 2 reporting as well as 2027 for Scope 3 reporting are not likely to stand.
Greenhouse Gases: Climate-Related Financial Risk Act (SB 261) FAQs
What does SB 261 require?
“Covered entities” doing business in California must report their climate-related financial risks and their measures to reduce or adapt to such risks.
What is a “covered entity” under SB 261?
Any U.S. business (public or private) with annual revenue exceeding $500 million and is doing business in California (except for insurance companies, which are exempt from SB 261 because they’re already subject to separate climate-related risk reporting standards).
What does “doing business in California” mean under SB 261?
SB 261 act doesn’t say.
What is climate-related financial risk under SB 261?
The risk posed by climate to a company’s short- and long-term financial health.
How do companies determine their climate-related financial risk under SB 261?
Companies must comply with the framework recommended by the Task Force on Climate-related Financial Disclosures (TCFD) or an equivalent protocol, such as the International Financial Reporting Standards Sustainability Disclosure Standards issued by the International Sustainability Standards Board (ISSB). If a company is unable to comply with these frameworks, it must make its disclosure “to the best of its ability,” explain the reason for any gaps, and outline its plans to make a complete disclosure.
What is the required reporting cadence under SB 261?
Biennially.
If a company has subsidiaries, must it provide a disclosure for each one?
No; SB 261 gives covered entities the option to make their disclosures at the parent company level only.
What happens to the disclosures once they’re made?
In addition to submitting disclosures to CARB, companies must post a copy on their own websites. CARB will arrange for a biennial, publicly available report showing the climate-related financial risks facing each industry and the state itself and also identifying companies whose disclosures were inadequate.
Is there a penalty for noncompliance?
Yes; companies can be fined up to $50,000 in a single reporting year.
When does SB 261 go into effect?
This also remains to be seen, but the initial date of January 1, 2026, is not likely to stand.
Legal Challenge to California’s New Climate Laws
On January 30, 2024, a group of business and industry associations filed suit against CARB (amended on February 22) in federal court in California, claiming SB 253 and SB 262 violate the following provisions of federal law:
First Amendment
The First Amendment protects not only the right to speak freely but also the right to not speak at all. Plaintiffs claim SB 253 and SB 261 violate the First Amendment by compelling companies to publicly express a speculative, noncommercial, controversial, and politically charged message they would rather not express, including (in the case of SB 261) expressly requiring companies to communicate that message on their own websites.
Supremacy Clause
Under the Supremacy Clause, when state and federal laws conflict, the federal law trumps. Plaintiffs assert that because the federal Clean Air Act regulates pollution, it preempts SB 261.
Commerce Clause
The Commerce Clause gives Congress the authority to regulate interstate commerce. Plaintiffs allege SB 253 and SB 261 violate the Commerce Clause by putting burdens on interstate commerce that outweigh benefits to California.
On March 27, 2024, CARB filed a motion to dismiss plaintiffs’ suit. The California district court is set to hold hearings on the case in September 2024. Until the court rules, the fate of the new climate laws remains in limbo.
New SEC Climate Disclosure Rule: Softer Than California’s New Laws and Also Under Legal Attack
On March 6, 2024, the SEC issued a final rule that would require all foreign and U.S. companies registered with the SEC (i.e., public companies only) to disclose a number of climate-related matters, including material climate-related financials and, for certain companies, material Scope 1 and 2 GHG emissions.
The SEC final rule is less stringent than the California laws in four main respects:
It applies only to public companies, while California’s laws also govern private companies.
Unlike SB 261, the SEC rule does not require disclosure of Scope 3 emissions.
Unlike SB 253, the SEC rule contains a number of materiality qualifiers, meaning companies may decline to disclose certain risks on the basis they are not “material” to investor decisions.
The SEC rule requires disclosure of only “outside-in” risks, which are the risks to the company created by the climate. SB 261 requires disclosure of both outside-in and “inside-out” risks, which are the risks to the climate created by the company.
The final rule was intended to take effect on May 28, 2024. However, the SEC has voluntarily stayed the rule pending review by the U.S. Court of Appeals for the Eight Circuit, which will hear challenges to the rule brought by a number of stakeholders. The legal challenges raise a number of claims, including violations of the Administrative Procedure Act, which requires courts to set aside agency actions found to constitute an abuse of discretion, and violations of the “major questions doctrine,” which states that federal agencies do not have authority to decide major questions of political and economic significance unless such authority has been expressly granted to them.
Given the Supreme Court’s recent overruling of the Chevron doctrine, which required courts to defer to an agency’s interpretation of an ambiguous statute, the Eighth Circuit is likely to review the SEC’s final rule on climate disclosure more stringently than in the past.
The New EU Corporate Sustainability Reporting Directive — on Par With California’s New Laws
In June 2022, the EU Parliament adopted the EU Commission’s Corporate Sustainability Reporting Directive (CSRD). Under the CSRD, which went into effect in January 2023, certain large EU companies, as well as certain non-EU companies that operate in the EU, must disclose, among other things, their:
Scope 1, 2, and 3 GHG emissions;
Targets relating to achieving the objectives of the Paris Agreement (which seeks to limit global warming to 1.5°C); and
Targets under the EU Climate Law (which strives to achieve climate neutrality by 2050).
Like the California package, the CSRD is aimed at protecting from climate change not only investors and financial markets but also the health and well-being of EU citizens. Thus, like the new SB 261, the CSRD requires disclosure of both outside-in and inside-out risks.
Like the Climate Itself, Climate-Related Laws Continue to Change
Public and private U.S. companies await resolution of the legal challenges to both the California and SEC climate disclosure laws, as the rulings in both cases could significantly change anticipated climate disclosure obligations in the U.S. Given the constantly evolving landscape around corporate climate reporting and responsibility in California, the U.S., and around the world, this is an area of law that both today’s and tomorrow’s lawyers will need to stay on top of.
Stay up to date on the most current legal developments in California and the rest of the nation with Purdue Global Law School.
Purdue Global Law School offers an online Juris Doctor. Graduates of our program are academically eligible to sit for the California bar or, with an approved petition, for the Indiana bar. If you wish to advance your legal education but do not intend to become a practicing attorney, you may consider an online Executive Juris Doctor.
Single law courses are also available to help you explore a particular area of law without committing to a full degree program. Request more information today.