California climate disclosures: 5 things you can do now to get ready for the new rules

Companies are now grappling with an alphabet soup of ESG regulations worldwide. But where should they focus their attention? California is a great place to start. It ranks as the world’s fifth-largest economy. And it’s home to many of the world’s largest corporations.

California’s climate-disclosure rules are demanding ESG professionals’ attention. And they’re worth your attention too.

We can help you sort out what it all means. Let’s examine five actions you can take to tackle the new California climate regulations that affect you and your supply chains. But first, let’s start with a primer on the climate disclosure rules.

Climate disclosure rules: A suite of bills affecting private and public companies

The two laws are called the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261). We refer to them by their Senate bill numbers and they apply to private and public companies doing business in California.

They make up the core of California’s new Climate Accountability Package. It is a suite of bills designed to improve transparency, standardize disclosures, align public investments with climate goals, and increase corporate climate disclosure.

Here is a quick summary of SB 253:

• It requires companies doing business in California with annual revenues of $1 billion or more to annually disclose their GHG emissions.
• The emissions are categorized into Scopes 1, 2, and 3 by the Greenhouse Gas Protocol.
• Estimates suggest SB 253 would impact more than 5,000 companies.

Similarly, SB 261 would:

• Apply to companies doing business in California with annual revenues of $500 million or more.
• Require those companies to prepare biennial climate-related financial risk reports based on the Task Force on Climate-Related Financial Disclosures (TCFD) framework (recently taken over by the International Sustainability Standards Board).
• Impact about 10,000 companies. They will be required to file climate-risk disclosure reports.

The laws contain similar requirements to the CSRD climate change standards. They are also like the SEC rules put on hold in March 2024, although the SEC rules do not require Scope 3 emissions disclosures.

Action 1: Start your data collection and climate-risk analysis now

If you’ve determined your company is impacted by the California climate disclosure laws, you shouldn’t wait to start collecting your GHG emissions data or examining your climate-risk scenarios. We recommend companies rapidly accelerate their preparations for these disclosures. Why?

SB 253 will require companies to report their Scope 1 and 2 emissions beginning in 2026. Scope 3 reporting starts in 2027, using 2026 data. SB 261 requires companies to report their climate-risk financial data starting in 2026, with reporting occurring biennially.

Two years isn’t long to prepare. While many large companies already report their emissions to the California Air Resources Board, others do not. And Scope 3 emissions data is complicated to gather and concerns activities extending up and down your value chain. (More on this in Action 3).

It will take several years to get your emissions data to a level where you are ready for a third-party audit (another requirement of SB 253). Also, you will need to be ready to share results publicly, as both laws require companies to make their results public.

Action 2: Do a gap assessment

Scope 1 and 2 emissions are easier to measure because the data is likely readily available within your company. Scope 1 data is based on energy your company is combusting, such as fuel for your fleet or machinery. Scope 2 is your purchased electricity for assets such as office buildings. Scope 2 emissions are considered “indirect” emissions because they occur at your utility’s facilities.

If your company is already reporting on Scope 1 and 2 emissions, you’re on your way to SB 253 compliance. However, we still recommend that you complete a gap assessment to determine what data you’re missing and where you will find it. This is called an audit trail.

Our teams have conducted many gap assessments. In addition to determining your data needs, we can set up systems for data collection and management. It is a worthy investment to set up emissions data systems to build on your collection and management needs over time.

Scope 3 emissions are a higher bar to clear. Scope 3 emissions are indirect emissions that occur throughout your company’s value chain, both upstream and downstream activities. Scope 3 emissions are more challenging to measure and manage because they come from parties outside your company. If you’re a supplier for a California company, you may want to think about a gap assessment as well. 

Action 3: Start digging into Scope 3 emissions

We know some companies can be overwhelmed by Scope 3 data. We know certain larger industries are ahead in reporting their Scope 3 emissions, while others may be far behind. Here’s why it is complicated.

Scope 3 covers 15 categories, as defined by the Greenhouse Gas Protocol, that are categorized as upstream or downstream emissions. The upstream category includes emissions from activities such as purchased goods and services and their transport, waste, and business travel. The downstream categories include activities such as the transport, processing, use and disposal of sold products, and investments. There are a lot of data streams to uncover.

We work with companies to examine all 15 categories to see which are relevant. If, for example, you’re a cement company and don’t have investments, then that Scope 3 category will not be relevant to your reporting. If you’re a bank, however, that category will be truly relevant.

Action 4: Start to identify your climate risks and opportunities

Like emissions reporting, we know companies vary in their understanding and approach to the TCFD framework. In fact, the TCFD recommendations are intended to be a flexible framework. If you’re impacted by the California laws, it’s time to undertake a climate risk assessment that looks at the physical and transitional risks (and opportunities) climate change poses to your business.

Once you identify those risks, you’ll want to identify what you’ll do to mitigate them.

Here are some examples:

• If you’re in the financial industry, you may want to assess risks to your data centers from severe weather events. Also, plan for backup centers in low-risk locations.
• If you’re a power utility, you may want to assess how powerful storms affect transmission lines. And then look at what you can do to mitigate the risk.
• Finally, all companies will need to begin planning for a transition to a low-carbon economy and examine the policies, technologies, and consumer behaviors that drive that transition.

Action 5: Embed climate disclosure work in your company

We advise companies to view ESG regulations and climate disclosure risks as financial risks. Companies shouldn’t think of climate risk as a single consideration. We advise companies to embed consideration of climate risks across their organizations.

How? You should make them part of your standard operating procedures and your risk assessment process.

California’s new climate disclosure regulations significantly raise the bar on corporate ESG reporting. They are part of a global shift to standardize disclosures and make companies more sustainable. They address climate change and higher investor expectations.

Even if your organization isn’t doing business in California, disclosures like these are likely in your future.