#DeloitteESGNow — The Sweeping Impacts of California’s Climate Legislation (October 10, 2023; Last Updated December 19, 2023)

#DeloitteESGNow — The Sweeping Impacts of California’s Climate Legislation

AB-1305 Update: The author of AB-1305 (discussed below), California State Assembly Member Jesse Gabriel, sent a letter to the chief clerk of the assembly to clarify his intent related to the timing of the disclosures required under AB-1305. In the letter, Mr. Gabriel stated, “While the bill does not specify the date on which the first set of disclosures must be posted to a company’s Internet website, it was my intent that the first annual disclosure be posted by January 1, 2025. This deadline provides reporting entities with sufficient time to align their business practices with the stated objectives of AB 1305 prior to being subject to potential civil fines” (emphasis added).

While the effective date of AB-1305 remains January 1, 2024, Mr. Gabriel’s letter may affect enforcement decisions by the California attorney general. Companies should continue to consult with their legal advisers regarding how to approach the disclosure requirements in AB-1305 and the January 1, 2024, effective date.

Background

On October 7, 2023, California Governor Gavin Newsom signed into law two state senate bills and one state assembly bill that collectively require certain public and private U.S. companies that perform certain business activities in California to provide disclosures about their greenhouse gas (GHG) emissions, climate-related financial risks, voluntary carbon offsets (VCOs),1 and certain climate-related emission claims. The two senate bills, SB-253, Climate Corporate Data Accountability Act and SB-261, Greenhouse Gases: Climate-Related Financial Risk, will establish the first industry-agnostic U.S. regulations that mandate the corporate reporting of GHG emissions and climate risks in the United States. The assembly bill, AB-1305, Voluntary Carbon Market Disclosures, is intended to combat companies’ “greenwashing” of climate-related emission claims and establishes requirements for both U.S. and international entities that market or sell VCOs within California as well as entities that operate in California and make certain climate-related emission claims2 (whether or not they purchase or use VCOs).

California is the largest state in the nation in terms of both population and gross domestic product.3 Since many of the largest companies in the United States have operations in California, they could be within the scope of the new legislation. On the basis of floor analyses conducted by the California State Senate,4 approximately 5,000 companies could be required to provide both GHG emissions and climate risk disclosures, and an additional 5,000 companies may be required to provide qualitative climate risk disclosures only. In addition, approximately 80 percent of the over 10,000 U.S.-based companies5 that are within the scope of one or both senate bills are privately held and not otherwise subject to the SEC’s proposed climate regulations.6

Overview of the Legislation and Its Applicability

In combination, SB-253 and SB-261 cover much of the same disclosure content as would be required under the SEC’s climate proposal. However, application of the California legislation depends on a U.S-based company’s total annual revenue, regardless of whether the company is publicly or privately held. Therefore, private companies that would not be directly within the scope of climate reporting under the SEC’s proposed rule could be required to provide disclosures under the California regulations if they meet the revenue thresholds (outlined below) and do business in California. The senate bills, as written, do not clearly define what “doing business in California” means. We expect further clarification regarding the definition of that term in the future; however, on the basis of this concept under California tax law, early indications are that the threshold for doing business in the state might be quite low. In addition, both senate bills apply to U.S.-based companies; because there is no specific exception for non-U.S. parents, foreign companies with U.S.-based subsidiaries that meet the requirements would, by default, be within the scope of the legislation. Business entities that meet the senate bills’ revenue thresholds and have sales, property, or payroll activity in the state should consider consulting with their tax and legal advisers to assess whether they are required to comply with the new requirements.

Under AB-1305, the following types of entities (or combinations thereof) must provide specific disclosures:

Entities that market or sell VCOs within the state of California.
Entities that purchase or use VCOs, make climate-related emission claims, and both (1) operate in California and (2) purchase or use VCOs sold within California.
Entities that make climate-related emission claims and both (1) operate in California and (2) make such claims in California.

Certain terms used in the bill are not defined, such as “operate in California,” “make claims within the state,” “significant reductions,” or “marketing or selling VCOs within California.” Therefore, such terms may be interpreted broadly by the California government. In addition, an entity that makes climate-related emission claims on the internet (i.e., on its Web site) and “operates within California” may qualify as an entity that “makes claims within the state.”

AB-1305 applies to both public and private companies and, unlike SB-253 and SB-261, there are no revenue thresholds associated with its applicability. Furthermore, only voluntary offsets are subject to its requirements; compliance-related offsets (e.g., cap-and-trade programs) are excluded from its scope.

The table below summarizes the requirements and applicability of the three bills.

Starting in 2030, entities may need to disclose Scope 3 GHG emissions “as close as practicable” to their disclosure timing for Scope 1 and Scope 2 GHG emissions; however, the California Air Resources Board will evaluate this in 2029 on the basis of current trends in Scope 3 GHG emission reporting.

Scope 3 assurance requirements to be determined by 2027.

Companies may also report in accordance with an “equivalent reporting requirement” (e.g., IFRS Sustainability Disclosure Standards, issued by the ISSB).

Because the wording in AB-1305 may be broadly interpreted by the California government, we recommend that an entity consult with legal counsel for assistance in assessing the applicability of AB-1305 to its specific facts and circumstances if it operates in California and has made any public climate-related emission claims, including claims about emissions reductions, carbon neutrality, or other similar claims.

Quantitative Emission Disclosures (SB-253)

Under SB-253, a U.S.-based company that is doing business in California and has over $1 billion in total annual revenue (a “reporting entity”) for the prior fiscal year would be required to disclose its annual GHG emissions in accordance with guidance provided by the GHG Protocol. SB-253 specifies the reporting for the three types of emissions generated by a business and its value chain as follows:

“ ‘Scope 1 emissions’ means 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’ means indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.”
“ ‘Scope 3 emissions’ means indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.” Scope 3 emissions can be calculated by leveraging either primary emissions data from entities in the value chain or by leveraging secondary data such as industry averages or proxy data.

GHG emissions reporting is subject to independent third-party assurance. Scope 1 and Scope 2 GHG emissions are subject to limited assurance from the first year of disclosure in 2026 (on the basis of 2025 fiscal-year activity) and reasonable assurance starting in 2030 (on the basis of 2029 fiscal-year activity). Scope 3 GHG emission disclosure is required beginning in 2027 (on the basis of 2026 fiscal-year activity) on a date no later than 180 days after the reporting entity’s Scope 1 and Scope 2 GHG emission disclosures. Scope 3 GHG emissions may be subject to limited assurance starting in 2030. The California Air Resources Board (CARB) is required to review and evaluate trends in third-party assurance of Scope 3 information during 2026 and determine by January 1, 2027, whether to establish an assurance requirement for Scope 3 GHG emission disclosures.

CARB is tasked with developing and adopting regulations to codify the requirements in the bill by January 1, 2025, including the first annual reporting deadline sometime in 2026. CARB currently oversees the state’s mandatory reporting of GHG emissions (e.g., Scope 1 stationary combustion and process emissions) from major sources such as electricity generators, industrial facilities, fuel suppliers, and electricity importers under the California Global Warming Solutions Act of 2006 (AB-32).10 The annual mandatory reporting deadline for nonabbreviated reporters is April 10 and June 1 for abbreviated reporters.11 CARB may consider these dates when selecting an annual deadline for SB-253 reporting.

Qualitative Climate Risk Disclosure (SB-261)

Under SB-261, U.S.-based companies that are doing business in California and have over $500 million in total annual revenue (“covered entities”) for the prior fiscal year would be required to publish a biennial climate risk report and make it available on their Web sites. In addition, this report may be consolidated at the parent-company level. A subsidiary that qualifies as a covered entity is not required to file a separate report if the parent entity includes the subsidiary in its consolidated report. SB-261 excludes insurance companies already subject to similar climate-risk reporting requirements.12

The bill defines a “climate-related financial risk” as one in which there is:

[A] material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.

Covered entities must also disclose the measures they are undertaking to reduce and adapt to the climate risks identified. The bill requires covered entities to frame their risk assessment in accordance with the guidance in the Final Report — Recommendations of the Task Force on Climate-Related Financial Disclosures (June 2017) published by the TCFD, or any successor or equivalent reporting requirements. The IFRS Sustainability Disclosure Standards issued by the ISSB are considered equivalent standards.

Qualitative Voluntary Carbon Market Disclosure (AB-1305)

Under AB-1305, an entity must post its disclosures on its Web site and update them at least annually. Summarized below are some (but not all) of the disclosures an entity is required to provide under the bill.

For entities that market or sell VCOs within the state of California, required disclosures include, but are not limited to:
- “Details regarding the applicable carbon offset project,” including:
  - “The specific protocol used to estimate emissions reductions or removal benefits.”
  - “The location of the offset project site.”
  - “The project timeline.”
  - “Whether the project meets any standards established by law or by a nonprofit entity.”
  - The type of project, including durability.
  - “Whether there is [an] independent expert or third-party validation or verification.”
  - The annual emissions reduced or carbon removed.
- “Details regarding accountability measures if a project is not completed or does not meet the projected emissions reductions or removal benefits, including, but not limited to, details regarding what actions the entity . . . shall take” if carbon storage projects are reversed or if future emissions reductions do not materialize.
- “The pertinent data and calculation methods needed to independently reproduce and verify the number of emissions reduction or removal credits issued using the protocol.”
For entities that purchase or use VCOs, make climate-related emission claims, and both (1) operate in California and (2) purchase or use VCOs sold within California, required disclosures include, but are not limited to:
- “The name of the business entity selling the offset and the offset registry or program.”
- “The offset project type, including whether the offsets purchased were derived from a carbon removal, an avoided emission, or a combination of both, and site location.”
- “The specific protocol used to estimate emissions reductions.”
- “Whether there is independent third-party verification of company data and claims listed.”
For entities that make climate-related emission claims and both (1) operate in California and (2) make such claims in California, required disclosures include, but are not limited to:
- “All information documenting how, if at all, a ‘carbon neutral,’ ‘net zero emission,’ or other similar claim was determined to be accurate or actually accomplished, and how interim progress toward that goal is being measured.”
- “Whether there is independent third-party verification of the company data and claims listed.”

Illustrative Timeline

The timeline below outlines the initial requirements for disclosure under the bills. Unlike other climate disclosure regulations, including the SEC’s proposal and European regulations under the Corporate Sustainability Reporting Directive (CSRD), the California rules do not allow for a phase-in of applicability on the basis of company size. TCFD risk reporting under SB-261 is required every two years, disclosures about VCOs and climate-related emission claims under AB-1305 are required at least annually, and GHG emission reporting under SB-253 is required annually.

Reporting date to be determined by CARB.

Upon signing SB-253 and SB-261, Governor Newsom noted his concerns related to the bills’ implementation timelines (which he described as “likely infeasible”) and their financial impact on businesses. The governor’s administration will work with the California legislature in 2024 to address these issues.

Monitoring and Compliance

The senate bills task CARB with developing and adopting regulations as necessary to require the disclosures outlined above and to monitor and enforce compliance. Entities within the scope of those bills will be required to pay an annual fee to CARB to cover the costs of implementation and administration. Fees will be managed through dedicated funds established by each bill.

For all three bills, monitoring or enforcement would be performed by outside entities or a judicial body as follows:

Each bill includes a mechanism for penalizing companies for noncompliance or if reporting is found to be insufficient:

Under SB-253, penalties of up to $500,000 in a reporting year could be levied for failures to meet the bill’s requirements. Between 2027 and 2030, penalties related to Scope 3 GHG emission disclosure would only be levied for nonfiling.
Under SB-261, penalties of up to $50,000 in a reporting year could be levied for the failure to make a report publicly available or for the publication of an inadequate or insufficient report.
Under AB-1305, each violation is subject to civil penalties of no greater than $2,500 per violation per day, not to exceed a total amount of $500,000.

For the senate bills, CARB will consider all relevant circumstances when determining penalties, including past and present compliance with the regulations and whether companies undertook good-faith measures to comply.

Relationship Between the Senate Bills and Other Disclosure Regulations

The senate climate bills are notable because they apply to many U.S. companies not otherwise affected by the climate disclosure regulations proposed by the SEC or mandated in foreign jurisdictions. However, for U.S. public companies or companies with sizeable foreign operations, the California bills represent just two of many global requirements related to disclosing climate information. The good news is that both bills leverage existing disclosure frameworks: the GHG Protocol and the TCFD, which are also the foundation of many other climate-related disclosure requirements, including those proposed or mandated by the SEC, ISSB, and CSRD. Therefore, it is expected that companies may be able to use GHG emission and climate-risk information for multiple different disclosure purposes, including reporting in California.

The tables below provide a high-level comparison of each of the senate bills and three of the leading proposed or final climate disclosure regulations for a few specific metrics and provisions.14

The SEC climate rule has been proposed but not yet finalized; all specifications in the table are based on the proposed regulation and are subject to change. Smaller reporting companies are exempt from Scope 3 disclosure requirements, and nonaccelerated filers are exempt from attestation requirements.

Proposed SEC implementation timeline would require initial reporting in 2024 for a large accelerated filer; however, the timeline reflected in the SEC proposal is likely to differ from the timeline in a final SEC rule.

IFRS S1, General Requirements for Disclosure of Sustainability-Related Financial Information, and IFRS S2, Climate-Related Disclosures.

The CSRD requires assessment of materiality from both an impact and a financial perspective (a concept known as “double materiality”).

“An entity need not disclose information otherwise required by an IFRS Sustainability Disclosure Standard if the information is not material” on the basis of an assessment of materiality as defined in IFRS S1.

See footnote 18.

See footnote 19.

See footnote 15.

See footnote 16.

Assurance and Other Considerations

With mandatory climate disclosure now a reality in the United States, companies will need to rapidly accelerate their preparedness for assurance-ready climate reporting. Outlined below are a few factors for companies to consider as they engage in this process.

Because the initial disclosure requirements under AB 1305 are effective on January 1, 2024, companies should gather the reporting data they will need related to their (1) climate-related emission claims; (2) purchase, use, sale, or marketing of VCOs; and (3) operations in California.

Other Resources

Contacts

	Eric Knachel Audit & Assurance Partner Deloitte & Touche LLP +1 203 761 3625 eknachel@deloitte.com		Kristen Sullivan Audit & Assurance Partner Deloitte & Touche LLP +1 203 708 4593 ksullivan@deloitte.com
	Brenna Vanderloop Audit & Assurance Partner Deloitte & Touche LLP +1 612 397 4271 brvanderloop@deloitte.com		Mark Strassler Audit & Assurance Managing Director Deloitte & Touche LLP +1 415 783 6120 mstrassler@deloitte.com
	Brianna Butterfield Audit & Assurance Senior Manager Deloitte & Touche LLP +1 650 529 5804 bbutterfield@deloitte.com		Christine Haman Audit & Assurance Senior Manager Deloitte & Touche LLP +1 504 376 4902 chhaman@deloitte.com
	Michael Millar Audit & Assurance Senior Manager Deloitte & Touche LLP +1 805 358 4840 mmillar@deloitte.com		John Tripodi Audit & Assurance Senior Manager Deloitte & Touche LLP +1 917 573 9813 jotripodi@deloitte.com
	Ashley Frambach Baker Audit & Assurance Manager Deloitte & Touche LLP +1 650 245 9345 aframbachbaker@deloitte.com

Footnotes

The assembly bill defines a VCO as “any product sold or marketed in the state that claims to be a ‘greenhouse gas emissions offset,’ a ‘voluntary emissions reduction,’ a ‘retail offset,’ or any like term, that connotes that the product represents or corresponds to a reduction in the amount of greenhouse gases present in the atmosphere or that prevents the emission of greenhouse gases into the atmosphere that would have otherwise been emitted.”

The bill describes these as “claims regarding the achievement of net zero emissions, claims that the entity, related entity, or a product is ‘carbon neutral,’ or . . . other claims implying the entity, related entity, or a product does not add net carbon dioxide or greenhouse gases to the climate or has made significant reductions to its carbon dioxide or greenhouse gas emissions.”

U.S. Bureau of Economic Analysis.

Floor analyses of SB-253 and SB-261.

SB-253 and SB-261 apply to U.S.-based companies but use slightly different terminology. SB-253 defines a “reporting entity” as “a partnership, corporation, limited liability company, or other business entity formed under the laws of this state, the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the United States.” SB-261 defines a “covered entity” similarly; however, it excludes companies in the insurance business.

SEC Proposed Rule Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors.

Scope 3 assurance requirements to be determined by 2027.

Companies may also report in accordance with an “equivalent reporting requirement” (e.g., IFRS Sustainability Disclosure Standards, issued by the ISSB).

Mandatory Greenhouse Gas Emissions Reporting | California Air Resources Board.

Mandatory GHG Reporting — Key Dates and Activities | California Air Resources Board.

In April 2022, the National Association of Insurance Commissioners in conjunction with the internationally recognized TCFD adopted a new standard for insurance companies’ reporting of their climate-related risks.

Reporting date to be determined by CARB.

The tables merely summarize certain aspects of the metrics and requirements under the climate disclosure regulations; they do not take into account all scope or disclosure scenarios. See the Other Resources section for additional information about other existing or proposed climate disclosure regulations.

IFRS S1, General Requirements for Disclosure of Sustainability-Related Financial Information, and IFRS S2, Climate-Related Disclosures.

The CSRD requires assessment of materiality from both an impact and a financial perspective (a concept known as “double materiality”).

See footnote 18.

See footnote 19.

See footnote 15.

See footnote 16.

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