In October 2023, the State of California passed groundbreaking legislation requiring the disclosure of greenhouse gas (GHG) emissions and climate-related financial risks. As the world’s fifth-largest economy, California has the economic heft to influence the course of regulatory developments in many domains worldwide. Sustainability reporting is no exception.
SB253: Climate Corporate Data Accountability Act
- “Reporting entities,” defined as business entities with total annual revenues exceeding $1 billion and that do business in California, will be subject to the requirements under this act.
- All disclosures pursuant to SB253 shall be done in accordance with the GHG Protocol:
- Scope 1 emissions: all direct GHG emissions stemming from sources that a reporting entity owns or directly controls, regardless of location.
- Scope 2 emissions: indirect GHG emissions that stem from consumed power, steam, heating or cooling purchased or acquired by a reporting entity, regardless of location.
- Scope 3 emissions: indirect upstream and downstream GHG emissions from sources that a reporting entity neither owns nor directly controls.
- Assurance shall be obtained on all disclosures pursuant to SB253.
Phase-in dates for disclosure compliance and attestation
- From 2026 and every year thereafter, reporting entities shall disclose their Scope 1 and 2 emissions, beginning with 2025 emissions.
- From 2026, limited assurance shall be obtained on Scope 1 and 2 emissions.
- From 2030, reasonable assurance shall be obtained on Scope 1 and 2 emissions.
- From 2027 and every year thereafter, reporting entities shall disclose their Scope 3 emissions, beginning with 2026 emissions.
- From 2030, limited assurance shall be obtained on Scope 3 emissions.
- The California Air Resources Board (CARB) is authorized to levy administrative penalties up to $500,000 per reporting year for violations.
- A grace period will be established for Scope 3 misstatements made in good faith between 2027 and 2030.
SB261: Climate-Related Financial Risk Act
- “Covered entities,” defined as business entities with total annual revenues exceeding $500 million and that conduct business in California, will be subject to the requirements of this act.1
- By Jan. 1, 2026, and biennially thereafter, covered entities shall prepare a report disclosing their climate-related financial risks, as well as the measures they’ve adopted to mitigate and adapt to these risks, beginning with 2025 data.
- Climate-related financial risks must cover both:
- Physical risks: risks associated with the tangible effects of climate change, including extreme weather events and sea level rise.
- Transition risks: risks associated with the pace at which, and extent that, entities adapt to and manage the ongoing shift to a low-carbon economy.
- The report must be accessible to the public; comprehensive in scope, including risks from regulatory developments and technological advancements, among others; and must be in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).
- CARB is authorized to levy administrative penalties up to $50,000 per year for violations.
- Covered entities shall pay an annual fee to CARB for the administration of SB261, the proceeds of which will be deposited in the Climate-Related Financial Risk Disclosure Fund.
In light of the novel requirements established by SB253 and SB261, it’s imperative that businesses act now to navigate the evolving regulatory landscape.
The action steps to be taken vary widely depending on the work that’s already been done by a company evaluating the impact of these new laws, as well as other considerations relative to publicly traded and international companies.
Here are several initial steps to consider:
1. Determine the new laws’ impact on your business and monitor legislative and regulatory developments to enhance internal decision-making and ensure alignment with evolving frameworks.
2. Develop a road map to compliance based on an assessment of gaps between current emissions calculations and climate-related risk practices against new requirements outlined in SB253 and SB261.
3. No later than early 2024, organize to have the relevant information in place and compliant with GHG Protocol and TCFD standards. This includes:
- A climate strategy and governance structure
- An inventory of current emissions
- An assessment of climate-related risks and opportunities impacting the business
- Data collection, management and review policies and procedures
- A reporting framework
4. Prepare for assurance requirements by hiring an auditor to perform a “test” engagement on 2024 data, allowing that auditor to provide observations on process/controls deficiencies, errors in data reporting or departures from standards; this approach will allow for proper remediation before the 2025 “live” assurance.
Our team of experienced sustainability professionals leverages a wealth of knowledge and global expertise on corporate governance, accounting and reporting to help businesses ensure they’re well positioned to meet regulatory obligations and stakeholders’ expectations.
Mazars can support compliance with the new laws with the following services:
- Comprehensive assessments
- Conduct internal assessments of current practices, disclosure requirements and regulatory obligations to inform decision-making. This includes initiating an emissions inventory and evaluating climate-related risks.
- Educational and process optimization
- Organize educational sessions and collaborative reviews to align existing governance structures and reporting strategies with new legislative mandates, uncovering and addressing gaps.
- Data management solutions
- Devise and enact robust data collection, management and review processes to facilitate accurate and consistent emissions tracking and reporting.
- Reporting framework guidance
- Provide expertise in the development and implementation of a reporting framework that meets regulatory and stakeholder expectations.
- Assurance preparation and regulatory monitoring
- Select appropriate standards and engage with third-party providers to validate emissions data and reporting processes.
- Keep abreast of ongoing deliberations at SEC and CARB to ensure alignment between internal practices and evolving regulatory frameworks.
These services are illustrative. Contact our specialists to discuss your needs, meet our ESG team and explore further how we can help you comply with the new laws — and create value.
1. Excludes entities regulated by the Department of Insurance in California or those in the insurance business in other states.
The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.