Climate change is upon us and governing bodies are paying attention. The Intergovernmental Panel on Climate Change (IPCC), an intergovernmental arm of the United Nations which assesses climate change science, has affirmed that in the near future, every region of the world will face climate change hazards, from flooding due to rising sea levels, to wildfires and tropical storms, to severe drought and failed crops.
Fortunately, there is a global movement towards legislation that requires corporations and businesses to report any climate-risk information in relation to conducting business. This is part of global ESG climate policy initiative, and is in alliance with the EU’s Corporate Sustainability Reporting Directive (CSRD).
While we still wait for more broader and final regulations from the Securities & Exchange Commission (SEC) regarding US climate policy, the State of California is forging ahead with climate-risk reporting legislation in the form of California SB 253 and SB 261.
This legislation proposes a positive shift towards more robust ESG rules and regulations in the US. It can also be confusing to some business leaders.
In this article, we’ll discuss California SB 253 and SB 261 in more detail, what corporations’ responsibilities are, and how this will impact the future of business in California.
Let’s dig in.
What Are California SB 253 and SB 261, and Why Are They Important?
California’s climate action and governance has worldwide implications. Being the fifth largest economy in the world, the passing of the most recent corporate climate responsibility legislation is a positive step forward, but can also present some confusion among businesses.
Following the SEC’s ruling on The Enhancement and Standardization of Climate-Related Disclosures for Investors in October 2023, California Senate Bills 253 and 261 have been formally ratified, and will be enacted into law beginning January 2026.
The California SB 253 and 261 bills are two separate pieces of legislation that together, apply to businesses and corporations that conduct business inside the State of California. These bills are also known as the Climate Data Accountability Act (the CCDAA) and the Climate-Related Financial Risk Act (the CRFRA), respectively.
Essentially, the CCDAA and CRFRA require California businesses to disclose their scopes 1, 2, and 3 greenhouse gas emissions and other climate-related financial risk details.
SB 253 and SB 261 are also an attempt to create more corporate transparency regarding climate responsibility, and ultimately, ESG reporting. This makes sense given that climate change – and how we respond to it – is a public issue.
What Do the CCDAA and the CRFRA Mean for Businesses in the US?
The new California climate disclosure law requires all public and private companies with an annual revenue in excess of $500M (CRFRA) and $1 billion (CCDAA), conducting business in California, to disclose emissions. As of right now, this applies to over 5,000 companies doing business in the state, and potentially has a wider impact globally.
While this legislation aligns with other ESG requirements regulations moving forward in 2024, for businesses not already equipped with the resources to undertake this reporting responsibility, this can lead to consequences, environmentally, legally, and financially.
What Is Required Under These Disclosure Rules?
While the legislation is detailed, and can be found on the State of California website, the broad requirements of sustainability disclosure are:
- Roles and responsibilities of corporate actors in identifying and managing climate-related risks
- Potential and actual impacts of climate-related risks on financial performance and/or operations, short-, medium-, and long-term
- Detailed processes for identifying, analyzing, and preparing a strategy for managing climate-related risks
- Potential impact of climate-related events, such as wildfires and severe storms
- Any potential or actual changing in business operations taken in order to mitigate climate-related risks
- Scopes 1, 2, and 3 emission metrics (this is detailed more thoroughly below)
- Any other climate-related goals
Scope 3 emissions reporting mandates are fairly soft. Prior to finalization of this legislation, there were some concerns regarding the lack of proposed targets required in these reports. This still appears to be an issue, which can potentially stall meaningful change.
However, as we outlined previously, the ultimate goal is that while these companies are now legally mandated to provide transparency in ESG reporting, this may also drive companies into going beyond just compliance with their goal-setting to meet more aggressive internal targets.
What Does the CCDAA (SB 253) Require and What Are the Implications?
Beginning in 2026, the CCDAA will require companies with revenue over $1B to provide limited assurance on scope 1 and 2 emissions. This will increase in 2030, requiring companies to provide reasonable assurance. For scope 3 emissions disclosure, limited assurance must be given beginning in 2030, and will be subject to review by the California Air Resources Board (CARB) in 2027.
In the first year of disclosure, starting in 2026, companies must provide assurance on scope 1 and 2 emissions.
CCDAA (SB 253) gives the State authority to bring civil actions against any business that are in violation of the act, with a maximum fine of $500,000.
For scope 3 emissions, amendments have been made to scale back the liability via introduction of “safe harbor,” which essentially means that legal implications are reduced, provided certain requirements are met.
Under the new amendment, companies would not be subject to penalty for errors in scope 3 emission reporting, on a reasonable basis.
Why Mandating Climate Disclosures Is So Important
While disclosing ESG reports is not new for a lot of companies, there is a worldwide rising demand for transparency, particularly from stakeholders, investors, and customers. This means that many businesses must prepare and disclose sustainability reports, 90% of which are S&P companies that are already publishing reports.
This is a step in the right direction.
However, standardization across business sectors is critical, which is one of the purposes behind the CCDAA (SB 253) and the CRFRA (SB 261). As there have been a plethora of ESG frameworks that require interpretation, setting a standardization baseline is important. This will help investors and other stakeholders make well-informed decisions, bolster customer confidence, and create more sustainable and climate-aware industries.
What Does the CRFRA (SB 261) Require and What Are the Implications?
While the two pieces of legislation are very similar, there are some key differences.
The CRFRA, or SB 216, requires entities doing business in California with revenue over $500M to prepare and submit climate-related financial risk reports. These reports should be consistent with the recommendations made under the Task Force on Climate-Related Financial Disclosure (TCFD) framework for climate-related financial risk reporting.
As an example, if a business has budgeted for increased compliance insurance costs, this would be a climate-related financial cost that would be reported under the CRFRA.
Additionally, companies will need to make these climate related disclosure reports available publicly on their websites.
First reports will be required by January 1, 2026.
When Will SB 253 and SB 261 Disclosure Requirements Come Into Effect?
The Net Zero deadline is just around the corner, and in accordance with that, first reports for scope 1 and 2 emissions will be expected by January 1, 2026.
Scope 3 emissions reports will be expected by 2027.
How Will This Legislation Impact Business in California?
While there are a lot of companies under the $500M and $1 billion annual revenue threshold, the sheer business power that operates in the State of California means that the CCDAA (SB 253) and the CRFRA (SB 261) are a positive step in the right direction.
How Can Your Company Prepare For the California Climate Bill?
While many companies operating in California are already preparing ESG disclosure reports, there are actionable steps that can be taken to ensure any new requirements under the California Climate Bill are met.
1. Assemble a Cross-Functional Team and Educate Company Personnel Responsible for Reporting
Climate ESG reporting is complex and operates across multiple arms of a company. A lot of information can be lost in translation throughout departments and key players.
The first step is to create a cross-functional team that will not only be thoroughly educated in the CCDAA (SB 253) and the CRFRA (SB 261), but will have the ability to identify reporting risks, teach interdepartmental team members on reporting requirements, and ensure all disclosure requirements are met.
Secondly, educate yourself and your cross-functional team on all aspects of the CCDAA (SB 253) and the CRFRA (SB 261). Identify how these might differ from previous disclosure requirements, particularly the CCDAA’s inclusion of scope 3 emissions.
Your cross-functional team should work closely together to define each department’s roles and responsibilities.
2. Articulate a Clear Plan for Gathering Data
As you create your plan for reporting implementation, understanding what information to gather and how to go about doing it will set you on the right path.
As an example, a logistics company may have scope 1 emissions data that includes fuel, scope 2 including electricity used, and scope 3 might include emissions from outsourced companies required for regular business operations.
Armed with this information, develop a workflow that helps streamline data collection across departments. This workflow should include all timelines and responsibilities in order to avoid missed deadlines or data reporting errors, which can be costly.
3. Streamline Workflows Across Departments
Accurate and efficient data collection company-wide is not negotiable. Implement workflow systems, such as ESG reporting software, that is consistent across all departments and accurately collects all data required under the legislations.
Even regardless of the CCDAA (SB 253) and the CRFRA (SB 261), collecting data and creating ESG reports, quickly and accurately, is quickly becoming a standard requirement demanded by investors and stakeholders. As climate-risk data has to become more accessible and transparent, a workflow system to do this is imperative.
As your workflow is implemented, check in with your team and conduct audits regularly. Catching errors or bottlenecks in data gathering processes will save you time and money in the future.
4. Establish Internal Governance and Controls
Approach your climate data like you would your financial data. Internal governance and controls will always be necessary to ensure consistency, efficiency, and most importantly, accuracy in data gathering and reporting.
Create an ESG data gathering and reporting governance charter – a document that clearly sets out all parameters, permutations, requirements, roles and responsibilities. Include both soft and hard deadlines for reporting. Additionally, create a system where your team can continually update their education regarding various legislations that might apply to your company, as well as responsible reporting.
Your charter should lay out steps to be taken in the event of discrepancies, data gaps, or other inconsistencies, and how these issues should be addressed and by whom.
If you are working with specialized ESG reporting software, utilize the onboarding personnel to help train an ongoing education team.
5. Achieve Company-Wide Buy-In
Every level of an organization needs to be on the same page. Along with ESG data gathering and reporting software onboarding, hold regular educational seminars, made available company-wide. Outline the importance of the CCDAA (SB 253) and the CRFRA (SB 261), and how they impact the company and individual roles and responsibilities.
Use concrete examples that align with workers’ daily tasks. Consider incentive programs for departments when they meet their data collection goals. Integrate these objectives into performance metrics and compensate accordingly.
Acknowledging any extra labor these initiatives might require is critical in gaining stakeholder buy-in and keeping it.
What Does This Legislation Mean for Businesses Outside the US?
While the CCDAA (SB 253) and the CRFRA (SB 261) are California State laws, any company that operates within the state, regardless of where the company originates, will be required to submit reports as per the legislation.
If a company’s business extends beyond California, the operations that occur within California will still need to be reported.
Less tangibly, this legislation signals California’s vested interest in climate change mitigation, particularly at a corporate level. This is also in alignment with the United Nations Net-Zero commitment. It aims to alleviate corporate greenwashing and will require more tangible action against climate change.
Take Action Today
ESG reporting is becoming more important every day – but with the right software, it doesn’t have to be complex. To learn more about FigByte’s leading ESG data collection, management, and reporting solution, speak to a FigBytes expert today.
