California Sets the Pace for Climate Regulations

In October, California took many businesses by surprise when it passed three first-in-the-nation climate reporting laws applicable to all public and private US companies doing business in the state. 

The first law—the Climate Corporate Data Accountability Act, or SB 253—requires all companies with over $1 billion in annual revenue to publish their total carbon emissions. The second law—the Climate-Related Financial Risk Act, or SB 261—states that businesses with annual revenue exceeding $500 million must disclose their climate-related financial risks, as well as any measures they are taking to mitigate those risks. And the third law—AB 1305—requires companies to disclose information about voluntary carbon offsets and marketing claims, in an effort to reduce greenwashing.

However, recent challenges could impact implementation of two of the three laws. The US Chamber of Commerce is suing the state over the climate laws, and California Governor Gavin Newsom excluded funding for implementation from a recent budget. Until there is more clarity resulting from the lawsuit, the regulations are currently considered to be in effect, and many businesses are closely monitoring California’s budget cycle, which will be updated in May.

California is the world’s fifth-largest economy, and these regulations are estimated to impact over 10,000 businesses. That number could increase as other states follow suit. New York, for example, already has bills in the state Senate and Assembly modeled on California’s climate laws. 

Businesses could face a fine of up to $500,000 for failing to disclose the full scale of their carbon emissions, or not disclosing certain information about their greenhouse gas offsets and reduction claims, and a fine of up to $50,000 for not reporting climate-related financial risks. More than anything, though, it is the timing of the bills that has raised eyebrows.

“These laws caught a lot of people by surprise, because they were finalized into law before the SEC,” says Anita Chan, an Audit Partner at KPMG. 

As written, the laws require businesses to start disclosing GHG reduction claims as of 2025; their climate-related financial risks along with Scope 1 and 2 emissions for FY 2025 by 2026; and their Scope 3 emissions for FY 2026 by 2027.

The laws don’t give businesses much time to put processes in place to comply, which is why organizations shouldn’t put off preparation. 

“This really lights a fire under them,” says Chan.

How businesses can start preparing

Due to a mix of investor pressure and the recently-finalized SEC climate-disclosure rule, many companies have already started gathering data and reporting on their emissions. According to a survey by the Task Force on Climate-related Financial Disclosures (TCFD)—the body that created the framework for assessing climate-related risk that California’s Climate-Related Financial Risk Act is based on—87% of businesses either already estimate their Scope 3 emissions, or plan to.

The California laws were clearly written with interoperability in mind, says Maura Hodge, ESG Audit Leader at KPMG. Rather than writing its own standards, California’s legislation allows companies to use existing reporting methods under recognized reporting standards. 

“Ultimately, California is looking for transparency—not trying to create additional complexity,” says Hodge. 

That said, the reach of California’s new laws is wider than the SEC’s purview or that of other governing bodies, requiring reporting from private companies, whereas the SEC’s rule is applicable to public companies only. The Climate Corporate Data Accountability Act also has broader requirements, mandating public disclosure of all Scope 3 emissions.

As companies are at different stages of gathering data on both carbon emissions and climate-related financial risks, Chan recommends that any business likely to be impacted by the climate laws begin their journey with an assurance readiness exercise—essentially a dry run to test whether their processes and data are at the maturity level needed to comply. 

“Having a robust data-collection process can be a challenge, which is why it helps to assess what you already have in place and scale up,” says Chan. 

To help clients grapple with new and upcoming disclosure requirements, Hodge monitors the interoperability of the requirements, and has created a Venn diagram of the applicability of various regulations. She advises companies to map where there’s regulatory overlap, along with the effective dates of regulation, and to use this information to create a reporting and assurance strategy. 

Next, Hodge encourages organizations to create an inventory of all their greenhouse gas emissions, and to establish an accounting policy document to ensure consistency. The same applies for gathering information on financial risks, which should include physical risks from climate change, such as the likelihood of flooding, and the transition risks of shifting to a carbon-neutral operation. 

In both instances, the data tends to be spread across multiple sources and platforms. Companies can solve this fragmentation, says Hodge, by assigning a lead to work with a cross-functional task force to gather, review and report climate-related financial risks, mitigation efforts and greenhouse gas emissions. She says that finance, compliance and legal departments must be involved, as well as sustainability operations personnel, who are likely to have a better sense of how much greenhouse gas the company emits, and an understanding of the impact of climate change on the day-to-day business. 

Ultimately, the more practiced companies are at gathering this data, the easier it will be to comply with the California regulations, or others that might crop up in the future.

“This is a relatively nascent area at the moment,” says Hodge. “Once companies recognize how difficult it is to collect this information and how quickly they may need to act, they will need to mobilize to get their processes in place.”

With the SEC rule the need for standardized, quality data in climate reporting is becoming a reality for publicly traded companies in the U.S. 

While the SEC's stay pauses the need for calculating the impact of certain climate-related events or conditions on the financial statements, the remaining provisions of the rule are required for other reporting regimes.  Companies should continue to move forward according to plan and carry out an interoperability analysis.