Industries such as chemical manufacturing, pharmaceuticals, and energy production rely heavily on harmful chemicals for their processes. This often results in the release of toxic gasses into the environment. According to the U.S. Environmental Protection Agency (EPA), U.S. greenhouse gas emissions saw a 0.2% increase in 2022 compared to 2021, totaling 6,343.2 million metric tons of CO2 equivalent. These emissions, largely contributed by various industries, pose significant environmental threats and carry substantial climate-related financial risks.

 

To address greenhouse gas emissions and ensure responsible industrial practices, California will implement mandatory ESG disclosure requirements. Starting in 2026, these frameworks will become compulsory. Therefore, businesses operating in California must stay informed about these requirements and understand how to maintain compliance.

 

California governor Gavin Newsom signed new ESG disclosure rules into law in October 2023. As a result, companies doing business in California will be required to report greenhouse gas (GHG) emissions and climate-related financial risks, adhering to all disclosure frameworks. This bill will apply to companies with annual revenues exceeding $1 billion that conduct business in California.

 

Companies must maintain transparency regarding their total greenhouse gas emissions. Therefore, understanding the new ESG disclosure rules is essential, and this blog will highlight the key takeaways. Continue reading to learn more.

 

 

California’s ESG Disclosure Rules: What is it?

 

California’s ESG (Environmental, Social, and Governance) disclosure rules are transformative regulations mandating businesses operating within the state to report their greenhouse gas (GHG) emissions and climate-related financial risks. In mid-September 2023, California’s state congress passed two pivotal pieces of legislation: Senate Bill 253, the Climate Corporate Data Accountability Act (SB 253), and Senate Bill 261, the Greenhouse Gases: Climate-Related Financial Risk (SB 261). These laws apply to both private and public companies meeting specific revenue thresholds.

 

The two separate ESG laws are described below so, take a look:

 

1. SB 253: 

 

It is the “Climate Corporate Data Accountability Act” mandates that all private and public companies understand the following key points:

  • All private and public companies with annual revenues over $1 billion that do business in California must publicly disclose their Scope 1, 2, and 3 greenhouse gas emissions.
  • Companies must disclose Scope 1 and 2 emissions by 2026 and Scope 3 by 2027, with annual reports in California. 
  • Reporting entities must hire an independent third party to verify their disclosures under SB 253.
  • Starting in 2026, assurances for Scopes 1 and 2 emissions must be conducted at a limited assurance level. From 2030 onwards, it should be conducted at a reasonable assurance level.
  • By January 1, 2027, the state board must set the assurance level for Scope 3 disclosures.

 

 

2. SB 261: 

       The “Climate-Related Financial Risk Act”(SB 261) has broader requirements than SB 253, applying to companies with lower revenue thresholds. Key points to note include:

 

  • It requires all private and public companies with annual revenue over $500 million and operating in California to publicly disclose their significant climate-related risks and the measures they are taking to mitigate them.

 

  • By January 1, 2026, each covered entity must submit its first report to the California Air Resources Board. Also, a copy of it should be published on its website.

 

Did You Know?

  • After an administrative hearing, the California Air Resources Board determines penalties under SB 253 and SB 261.
  • For SB 253, penalties can go up to $500,000 per reporting year, while for SB 261, they can reach a maximum of $50,000 per reporting year.
  • Covered entities must also pay an annual fee to cover the California Air Resources Board’s costs of administering these regulations.

 

When will it Go into Effect?

 

California’s ESG Disclosure Rules will take effect starting in 2026. Companies subject to SB 253 must disclose Scopes 1 and 2 GHG emissions by 2026, with Scope 3 disclosures required by 2027. Assurances for Scopes 1 and 2 must reach reasonable levels by 2030.

 

 For SB 261, the first disclosures are due in 2026, with biennial updates thereafter. While Governor Newsom has noted potential timeline adjustments, businesses should begin preparations now.

 

Some Major Points to Keep in Mind about California’s ESG Disclosure Requirements:

 

While every aspect of the ESG disclosure framework is crucial, businesses must thoroughly understand each component to fully grasp its increasing significance. The following points provide essential insights to help gain a logical understanding of  California’s ESG disclosure requirements. So, take a look:

 

  • It’s a Mandatory Requirement:

 

Global regulations requiring ESG disclosures are increasing. For instance, many EU and EU-listed companies need to follow European Sustainability Reporting Standards(ESRSs) due to the Corporate Sustainability Reporting Directive (CSRD). Also in the U.S., the Securities and Exchange Commission (SEC) has finalized rules for publicly listed companies. It requires companies to report on climate risks and opportunities. 

 

These regulations make it clear that the ESG disclosure framework is not just mandatory but will stay in the long term too. Therefore, businesses need to understand that assessing climate risks and reporting GHG emissions are now essential compliance requirements.

 

  • Requirement of Climate Disclosure will Increase:

 

Having a complete knowledge of these regulations is mandatory for every company in California. Of course, as of now, not every company is directly subject to California’s disclosure rules or other regulations. However, indirect impacts are also not avoidable.

We are talking about all your value chain partners who have to comply with the ESG regulatory requirements. They may require your climate-related data to meet their disclosure obligations.

Besides, many investors and financial institutions will likely need to see your ESG governance documentation at the time of decision-making. So, each business needs proper preparation and keep their data ready which may be required to share.

 

  • Collecting Proper GHG Data is Necessary:

 

With more disclosure requirements and growing pressure, businesses need to start collecting GHG data or enhancing their current processes. Many companies find it difficult to manage data, especially for Scope 2 and Scope 3 GHGs.

Scope 2 tracking needs accurate data from utility companies. It becomes tougher when conducted manually or with paper records. However, to stay compliant companies need to collect appropriate GHG data. Therefore, preparing and organizing the report in the right format is necessary to stay compliant. 

 

Some Useful Tips to Stay Prepared for California’s ESG Disclosure Framework:

 

Just like any other regulatory requirement, your company must be prepared to meet ESG disclosure rules. Understanding how to handle each challenge and requirement will help you stay compliant. Here are some crucial tips to help you at every stage. Check them out below:

       

  • Understanding the Framework:

 

 Each company needs to develop a firm understanding of all the frameworks. So, you must familiarize yourself with the ESG disclosure framework’s requirements. Also, by going through the guidelines all of the requirements will be clearer. After all, it ensures comprehensive compliance and reporting accuracy.

 

  • Scope of Disclosures: 

 

It’s crucial to recognize the scope of GHG emissions that need to be reported. It includes Scopes 1, 2, and 3, and knowing each one is vital. With a thorough and appropriate understanding businesses can conduct a complete and transparent disclosure of all the documents. Therefore, understand each scope make the right disclosure, and stay compliant. 

 

  • Reporting Deadlines: 

 

Missing the deadline can result in substantial penalties. Therefore, organizations must keep track of critical deadlines. For instance, the 2026 requirement for Scopes 1 and 2 disclosures and the 2027 deadline for Scope 3 emissions must never be missed. Timely reporting is essential to avoid penalties and to avoid any reputational damages. 

 

  • Assurance Levels: 

 

Companies also need to stay aware of the required assurance levels. This is for emissions data, starting with limited assurance in 2026 and moving to reasonable assurance by 2030. This is vital as it ensures the reliability of your reported data.

 

  • Financial Risks Disclosure: 

 

Identify and disclose material climate-related risks and the measures taken to mitigate them. It’s vital to keep proper tracking in case your annual revenue exceeds $500 million. Also, keep in mind that the initial disclosures are due by January 1, 2026.

 

  • Penalties and Fees: 

 

Understand the potential penalties for non-compliance, which can be substantial. Moreover, calculate the annual fees required to cover administrative costs. Preparing for these financial implications is crucial to always stay ahead and compliant.

 

  • Preparation and Adaptation: 

 

A thorough preparation should be started now. It helps your company to meet these stringent requirements, even if implementation timelines might be revised. Proactive adaptation will ensure your business remains compliant and avoids last-minute challenges.

Also, taking the help of software that keeps sharing information on regulatory requirements can help. After all, getting the required accurate data would be easier. 

 

Conclusion:

 

Understanding California’s ESG disclosure requirements is crucial for all the businesses operating within the state. These new regulations mandate comprehensive reporting of GHG emissions and climate-related financial risks, pushing companies to adopt more transparent and sustainable practices. By staying informed and proactive, businesses can ensure compliance, mitigate risks, and contribute to a more sustainable future. 

 

Embracing these changes not only helps avoid penalties. It also enhances corporate reputation and aligns with the growing global emphasis on environmental responsibility. Consider the tips and details shared in the blog to begin your preparation. Prepare a checklist today and start collecting and saving all detailed data required for submission. Even if your business isn’t directly subject to these rules, be prepared for their indirect requirements as well.