California’s Senate Passes Ambitious Climate Disclosure Mandate—Will it Survive the State Assembly? | IPO, Then What?

While the U.S. Securities and Exchange Commission (“SEC”) has been working on its climate disclosure rulemaking for the past 15 months, the California legislature may end up beating it to the punch.  The SEC first announced its proposed rulemaking to require certain businesses to include climate-related disclosures in their registration statements and periodic reports in March 2022, but the rulemaking process has been slow in light of strong resistance from various stakeholders. However, California introduced its own climate disclosure legislation in February of this year, Senate Bill 253 (the “Bill”). On June 5, the Bill was passed in the Senate and now moves on to consideration at the state Assembly.

Like the proposed SEC rule, the Bill would require certain businesses to disclose their emissions in their annual reports.  To accomplish this, the Bill requires the California Air Resources Board (“CARB”) to develop and adopt regulations requiring partnerships, corporations, LLCs, and other business entities with total annual revenues exceeding $1,000,000,000 that do business in California (“reporting entities”) to publicly disclose their emissions of greenhouse gas (GHG) annually. CARB would be required to develop and adopt regulations requiring reporting entities to annually disclose and verify to the emissions reporting organization all of the reporting entity’s scope 1, scope 2, and scope 3 emissions by January 1, 2025.

In specific, the Bill requires the following:

• Starting in 2026 or a date to be determined by CARB, all reporting entities must annually publicly disclose its scope 1 and scope 2 emissions for the prior year, and its scope 3 emissions for that same calendar year no later than 180 days after that date using 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.
  • Reporting timelines must consider stakeholder input and take into account timelines by which reporting entities receive the reportable data, as well as the capacity for independent verification to be performed by an approved third-party auditor.
• The inclusion of certain definitions, including the following particularly significant definitions:
  • Reporting entity: a partnership, corporation, LLC, or other business entity formed under the laws of this state, the laws of any other state of the US or laws of DC, or under an act of the Congress with total annual revenues in excess of one billion dollars ($1,000,000,000) and that does business in California. (Note that the definition appears to exclude foreign corporations.)
  • Scope 1 emissions: all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.
  • Scope 2 emissions: indirect greenhouse gas emissions from electricity purchased and used by a reporting entity, regardless of location.
  • Scope 3 emissions: indirect greenhouse gas emissions, other than scope 2 emissions, from activities of a reporting entity that stem from sources that the reporting entity does not own or directly control and may include, but are not limited to, emissions associated with the reporting entity’s supply chain, business travel, employee commutes, procurement, waste, and water usage, regardless of location. (It is unclear whether this definition includes emissions associated with the use of a product manufactured by an entity, such as the combustion of fuel.)
• The disclosure must include the name of the reporting entity and any fictitious, trade, or assumed names, and logos.
• The disclosure must be independently verified by a third-party auditor approved by CARB. A copy of the complete, audited GHG emissions inventory, including the name of the auditor, must be provided in connection with the disclosure.
• CARB must contract with an emissions reporting organization to develop a reporting program to receive and make publicly available the required disclosures.

While this Bill in many ways reflects the provisions of the SEC’s proposed rulemaking, it goes beyond what the SEC would require in two significant aspects. First, the Bill requires reporting entities to disclose not only scope 1 and scope 2 emissions, like the SEC’s rule, but it would also require disclosure of scope 3 emissions—those produced not by the reporting entity, but by the customer or supplier. The SEC rule would only require disclosure of scope 3 emissions if those emissions are material or if the entity has set a GHG emissions target or goal that includes scope 3 emissions. However, the Bill does not include such limitations, which could mean that a much wider range of scope 3 emissions will be subject to disclosure obligations. This could dramatically increase a reporting entity’s emissions, and result in a significant increase in what is being disclosed—as well as a significant increase in administrative burden on reporting entities.

Second, the Bill would require both publicly traded and privately owned companies to disclose their emissions, while the SEC’s rule would only apply to publicly traded companies. This would significantly increase the number of entities that are subject to the disclosure requirements. California’s economy alone is one of the fifth largest in the world, and nearly every large U.S. company does business in the state, so the Bill, if passed, will impact a significant number of businesses.

While the SEC’s rule remains on pause, California is poised to be the first U.S. government entity to mandate comprehensive climate disclosures.  However, a bill with similar provisions to this Bill was previously defeated in the Assembly last session, so it is possible that this Bill will face the same fate; we will just have to wait and see.