California Governor Gavin Newsom announced on Sunday, September 17, at the start of "Climate Week" in New York, a week of events coinciding with the U.N. General Assembly, that he would sign two landmark climate accountability bills that the California Legislature has approved (known as Senate Bills 253 and 261), authored by Democratic Sens. Scott Wiener and Henry Stern, respectively.

The first-in-the-nation bills that would require large companies doing business in California to publicly disclose their greenhouse gas emissions and climate-related risks now head to Gov. Gavin Newsom's desk for final approval. We understand that the governor may make some final tweaks to one or both bills.

The new laws are intended to increase transparency into large corporations' carbon emissions, garnering data that can be used to address climate change, according to a statement from Sen. Scott Wiener, D-San Francisco.

The first new law, Senate Bill 253, also known as the Climate Corporate Data Accountability Act, will require companies making more than $1 billion in gross annual revenue to disclose the scope of their emissions for their operations and supply chains, including private companies that supply products and services to those reporting companies. The bill likely will affect approximately 5300 companies. It is thought to be a first step in reducing emissions by first requiring that emissions be measured and disclosed and eventually leading to either public pressure or regulatory oversight to further the goal of reducing carbon emissions. The law would require the California Air Resources Board to adopt regulations by 2025 that would apply to all U.S. companies—public or private—with more than $1 billion in annual revenue that are "doing business" in California, regardless of where in the U.S. such companies are headquartered.

Companies would need to disclose their carbon emissions from Scope 1, 2, and 3 sources with reporting for Scope 1 and 2 emissions to begin in 2026, and reporting for Scope 3 emissions to begin in 2027 no later than 180 days after its Scope 1 emissions and Scope 2 emissions are publicly disclosed to the emissions reporting organization for the prior fiscal year.

Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased or acquired electricity, steam, heat, or cooling. Scope 3 emissions are indirect upstream and downstream greenhouse gas emissions, other than Scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.

Beginning in 2026, a reporting entity must measure and report its emissions of greenhouse gases in conformance with the Greenhouse Gas Protocol standards and guidance, including the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard developed by the World Resources Institute and the World Business Council for Sustainable Development, including guidance for Scope 3 emissions calculations that detail acceptable use of both primary and secondary data sources, including the use of industry average data, proxy data, and other generic data in its Scope 3 emissions calculations.

If a company is required to disclose its emissions, but fails to file, makes a late filing, or otherwise fails to meet the requirements of the law, it would be subject to administrative penalties not to exceed $500,000 per report year.

In assessing any penalty, the state must consider the violator’s past and present compliance and whether the violator took good faith measures to comply with the law and when those measures were taken. We note a reporting entity is not subject to an administrative penalty under the law for any misstatements with regard to Scope 3 emissions disclosures made with a reasonable basis and disclosed in good faith. Penalties assessed on Scope 3 reporting, between 2027 and 2030, will only occur for nonfiling.

Some companies, such as Apple and Microsoft, have voiced support for the bill, but the California Chamber of Commerce objected to the law as a "costly mandate that will negatively impact businesses of all sizes in California and will not directly reduce emissions." The U.S. Securities and Exchange Commission is yet to issue its own final guidance on such disclosures and may be voting on carbon emission reporting rules in October of 2023 for implementation in 2024.

The second bill, known as Senate Bill 261, applies to all U.S. companies with more than $500 million in annual revenue that are "doing business" in California, regardless of where such companies are headquartered in the U.S., excluding companies subject to regulation by the California Department of Insurance or that are in the insurance business in another state. This bill would require, on or before January 1, 2026, and biennially thereafter, a covered entity, as defined, to prepare a climate-related financial risk report disclosing the entity’s climate-related financial risk and measures adopted to reduce and adapt to such climate-related financial risk. The bill would require the covered entity to make a copy of the report available to the public on its own website.

The administrative penalties imposed on a reporting entity would not exceed $50,000 in a reporting year. In imposing penalties for a violation of the law, the state board charged with enforcement must consider all relevant circumstances, including both of the violator’s past and present compliance and whether the violator took good faith measures to comply and when those measures were taken. More than 10,000 companies are expected to be subject to the new law.

These new laws will no doubt add to the controversy raised by politicians in the U.S. over measures aimed at managing environmental, social and governance (ESG) factors. We expect the new California legislation will likely be challenged in court.

Last week, California also sued major oil companies, alleging they had failed to disclose the risks posed by fossil fuels. The suit seeks to hold fossil fuel companies accountable financially for contributing to "climate change-related harms in California," including extreme drought, wildfires and storms.