Extracted from Law360
On Oct. 7, California Gov. Gavin Newsom signed a trio of climate disclosure bills into law that will impose far-reaching reporting requirements on companies.
The first, S.B. 253, is titled the Climate Corporate Data Accountability Act, or CCDAA.[1] It will require companies doing business in California with more than $1 billion in annual revenue to disclose Scope 1, 2 and 3 emissions in accordance with regulations published by the California Air Resources Board.[2]
The second, S.B. 261, the Climate-Related Financial Risk Act, or CRFRA, requires companies doing business in California with more than $500 million in annual revenue to report climate-related financial risks, and measures used to mitigate these risks, under the Task Force on Climate-related Financial Disclosures framework or an equivalent.[3]
Lastly, A.B. 1305, the Voluntary Carbon Market Disclosures Act, or VCMDA, will require companies that operate in California and make net-zero, carbon-neutral or significant emissions reductions claims to substantiate them on their website, documenting the accuracy and means of achieving these goals.
Additional disclosure requirements apply if a company purchases or uses voluntary carbon offsets within California for such claims.[4]
Rulemaking by CARB on the CCDAA and CRFRA will be forthcoming in 2024, and may continue into 2025. Companies that do business in California should consider the threshold questions of whether they could be subject to these laws — and should prepare to actively participate in upcoming rulemaking that will define the scope of CCDAA and CRFRA applicability, among other important details.
Companies operating in California and making net-zero, carbon-neutral or significant emissions reductions claims — including those that purchase carbon offsets on the voluntary market to support net greenhouse gas reductions — should prepare to conduct the necessary evaluation to substantiate those claims.
It will also be important to review — and, if necessary, update — any websites or other marketing material that may contain claims subject to the legislation by Jan. 1, 2024. Companies should review the laws' requirements and be prepared to take action in the coming months.
Climate Corporate Data Accountability Act
Under the CCDAA, companies that exceed $1 billion in annual revenue for the previous fiscal year will be required to annually disclose their Scope 1 and 2 GHG emissions beginning Jan. 1, 2026, and their Scope 3 emissions beginning in 2027, within 180 days of disclosing the Scope 1 and 2 emissions.
Although it was just signed by Newsom last month, the CCDAA has already seen pushback from industry. While companies that have been tracking this data for years are well-equipped to meet the new reporting requirements, many companies find the preparations for reporting the required climate data cumbersome.
Companies have also expressed concern over the CCDAA's feasibility, the ownership and use of emissions data, and the timelines set forth in the CCDAA. These concerns are reflected in Newsom's signing message for the CCDAA.[5]
While he lauds the law's goals, he cautions that he is "concerned about the overall financial impact of this bill on businesses," that "implementation deadlines in this bill are likely infeasible," and that his administration will be working with the Legislature to address these issues.
We expect some cleanup legislation as a result of the governor's direction. In the meantime, companies should promptly start evaluating the implications of the CCDAA's reporting requirements in anticipation of CARB's rulemaking pursuant to the new law.
In the coming year, CARB will promulgate regulations that should define what it means to "do business" in California, how the $1 billion revenue threshold is determined, and the specifics for reporting emissions. Companies should be aware of the issues that may affect them, so that they can be prepared to engage in the rulemaking and any legislative cleanup, whether through comment letters, trade organizations or other means.
Climate-Related Financial Risk Act
The CRFRA, similar to the CCDAA, will require any company organized under any U.S. state or the District of Columbia with more than $500 million in revenue for the previous fiscal year that is "doing business" in California to develop and publicly disclose climate-related financial risk reports.
The reports must disclose companies' (1) climate-related risks, in accordance with the TCFD or an equivalent framework; and (2) measures that have been implemented to reduce or adapt to those risks. The climate-related risk reports must be publicly available on the company's website by Jan. 1, 2026, and updated biennially.
The CRFRA also requires that CARB biennially compile reported climate-related financial risks into a comprehensive report that will be publicly available on CARB's website. Newsom expressed concerns in his CRFRA signing message, cautioning that the implementation deadlines are too short to allow CARB to develop regulations, and noting that he is instructing CARB to make recommendations on ways to streamline the program to reduce cost impacts.[6]
This new law will help make businesses' climate-change risks more transparent, but companies subject to the CRFRA should begin thinking about their process for preparing this report and how it will be published. As with the CCDAA, CARB will develop regulations that will implement the CRFRA. Companies should assess the implications of the law, and monitor and engage in the rulemaking as warranted.
Voluntary Carbon Market Disclosures Act
The VCMDA, which takes full effect on Jan. 1, 2024, requires companies that operate in California and make claims about net-zero GHG emissions and carbon neutrality, or broadly imply the company has made "significant reductions to its carbon dioxide or greenhouse gas emissions," to make disclosures on their websites, including substantiating the claims' accuracy, and how interim progress toward stated goals are being evaluated.
Additionally, companies that make these claims and purchase or use voluntary carbon offsets sold in the state must disclose extensive details about the VCO projects — including the name of the entity selling the offset, and the registry, identification number, name, type of reduction (including whether it is a carbon removal or avoided emission) and protocol.
Finally, companies that make GHG emissions claims — whether they use or purchase VCOs — must disclose whether their data and claims have been verified by an independent third party.
The VCMDA also mandates disclosures for companies that market or sell VCOs in California. These companies will be required to publish extensive information about the offsets on their websites, including:
- Details on carbon offset projects including protocols, project timelines, durability periods, and amounts of emissions reduced or carbon removed annually;
- Accountability measures the company will take either directly or contractually if a project is not completed, a carbon storage project is reversed, or future emissions reductions do not occur; and
- The relevant data and calculation methods that would allow third parties to quantify and verify the VCOs.
The VCMDA has far-reaching and nearly immediate implications. It does not define "operate" in California, and unlike the CCDAA and CRFRA, does not have a minimum applicability threshold.
The VCMDA's "make claims within the state" language is broad, appearing to cover every claim on a company's website, so long as that website is accessible in California. The scope of covered companies is enormous, and prompt action on behalf of these companies is needed, given the Jan. 1, 2024, effective date.
Next Steps
Companies should review the laws and consider whether they could be subject to one or more of them, even while the applicability of the CCDAA and CRFRA will be further defined in CARB's rulemaking.
Applicability, what it means to "do business in California," how the threshold revenues of $1 billion and $500 million are calculated, and how this could apply to subsidiary companies are key issues that will be further developed in CARB's rulemaking. Companies should be prepared to articulate opinions on the appropriate scope of the regulations' applicability, and take an active role in the rulemaking in order to educate and inform decision makers.
CARB's rulemaking process may include the initial development of concepts, presented to stakeholders through public, often virtual, workshops, along with the development of draft rule language circulated for public comment.
There are typically several opportunities for formal and informal comments throughout the rulemaking process, but it is beneficial for companies to get involved early if they have identified issues important to them that should be addressed.
While the CCDAA mandates that CARB develop and adopt regulations implementing the law by Jan. 1, 2025, CARB's regulatory timeline is not specified under the CRFRA. Nonetheless, because the CRFRA's climate-related disclosure deadline is Jan. 1, 2026, and subject to penalties developed by CARB rulemaking, expect rulemaking to implement both laws in 2024 and into 2025.
In addition to addressing the scope of the regulations, companies that could be subject to any one of the trio of new laws should begin evaluating how they are going to collect, report and present the data required.
For example, companies that have performed internal assessments of Scope 1, 2 or 3 emissions should consider whether their calculations use the standards required under the CCRAA: the GHG Protocol corporate accounting and reporting standard[7] and the GHG Protocol corporate value chain Scope 3 accounting and reporting standard,[8] developed by the World Resources Institute and World Business Council for Sustainable Development.
A company that has internally or publicly disclosed any climate-related financial risks should consider whether that was done pursuant to the TFCD or equivalent framework, as required under the CRFRA. Companies will need to consider any internal changes required to meet the reporting deadlines in the 2026 disclosure requirements.
And as this exercise is undertaken, companies should identify issues that may warrant raising in the rulemaking process, such as the degree of company data that must be made public and the scope of the reporting — e.g., GHG emissions only within California, nationally or internationally — even within the identified frameworks.
The requirement to update company websites to support net-zero, carbon neutrality or significant GHG reduction claims begins Jan. 1, 2024. This requirement also applies to companies that purchase VCOs in support of these claims, and additional requirements apply to companies selling VCOs.
Whether or not a company has bought or sold VCOs, companies should review their published materials, including websites, brochures and other marketing material, to assess whether they have made such claims and could be subject to this new law.
If they are, company websites should be updated by Jan. 1 with information documenting how, if at all, the claims were determined to be accurate or achieved, how interim progress toward that goal is being measured, and whether the data and claims are verified by third parties.
Companies should incorporate plans to update this disclosure annually. Companies that fail to comply could be subject to penalties of up to $2,500 per day that the information is not available on their websites, up to a maximum penalty of $500,000.
These laws should prompt companies to assess their potential GHG emissions impacts, but they may also require a substantial amount of work as companies determine whether these laws might apply to them, take any necessary near-term internal actions, and decide how and whether to participate in upcoming rulemaking that will further define the reach of the CCDAA and CRFRA disclosures.
[1] Climate Corporate Data Accountability Act, S.B. 253 (2023), available at: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB253.
[2] Alston & Bird, "California Bill to Require Emissions Reporting, but What Does This Mean for Businesses?," Sept. 27, 2023, available at: https://www.alston.com/en/insights/publications/2023/09/california-bill-to-require-emissions-reporting.
[3] Climate-Related Financial Risk Act, S.B. 261 (2023), available at: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB261.
[4] Voluntary Carbon Market Disclosures Act, A.B. 1305 (2023), available at: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240AB1305.
[5] Gov. Newsom's signing message for S.B. 253, Oct. 7, 2023, available at: https://www.gov.ca.gov/wp-content/uploads/2023/10/SB-253-Signing.pdf.
[6] Gov. Newsom's signing message for S.B. 261, Oct. 7, 2023, available at: https://www.gov.ca.gov/wp-content/uploads/2023/10/SB-261-Signing.pdf.
[7] GHG Protocol Corporate Accounting and Reporting Standard, World Business Council for Sustainable Development and World Resources Institute, March 2004, available at: https://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf.
[8] GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard, World Resources Institute and World Business Council for Sustainable Development, September 2011, available at: https://ghgprotocol.org/sites/default/files/standards/Corporate-Value-Chain-Accounting-Reporing-Standard_041613_2.pdf.