Let's Talk Climate Disclosure Laws: A Business Guide to Navigating California's New Regulations
California's Recelled Climate Laws: A Synopsis
John B. Quinn, founder of Quinn Emanuel Urquhart & Sullivan LLP, the world's leading law firm focused on business litigation, shares his insights on the latest climate disclosure laws in California. These laws impose significant reporting obligations on businesses operating in the state, aimed at enhancing corporate accountability and transparency regarding greenhouse gas emissions and climate risks.
California is the first U.S. state to pass these climate disclosure laws, which will affect many companies conducting business within its borders. While legal challenges persist, these sweeping mandates are expected to take effect within the next 12 months. So, how can businesses prepare for compliance?
The Nitty-Gritty of SB 253 and SB 261
SB 253: The Climate Corporate Data Accountability Act
Companies with annual revenues exceeding $1 billion, doing business in California, must report their greenhouse gas (GHG) emissions annually. Starting in 2026, these companies will need to disclose scope 1 and 2 emissions, and by 2027, they must report scope 3 emissions.
The California Air Resources Board (CARB) has been tasked with developing regulations to ensure accurate and standardized reporting, with third-party verification becoming mandatory.
SB 261: The Greenhouse Gases: Climate-Related Financial Risk Act
SB 261 applies to companies with annual revenues over $500 million operating in California. These companies must prepare and publicly disclose biennial reports on their climate-related financial risks starting in 2026. Reports must outline both the material risks posed by climate change to the company's financial outcomes and the measures adopted to mitigate these risks. SB 261 impacts over 10,000 businesses, primarily privately held.
Recent Amendments
On September 27, 2024, Senate Bill No. 219 (SB 219) was signed into law, introducing vital updates to SB 253 and SB 261. The changes include extending the deadline for CARB to adopt regulations, giving CARB more flexibility in receiving disclosures, allowing large companies to report emissions at the parent company level, and providing more time for businesses to meet scope 3 emissions reporting requirements.
Legal Challenges
SB 253 and SB 261 have faced substantial legal challenges. The U.S. Chamber of Commerce and California Chamber of Commerce have filed a lawsuit claiming that these laws infringe upon the First Amendment by requiring speech and overstep state jurisdiction in regulating emissions, which they argue falls under federal authority. The ongoing litigation raises uncertainty around the laws' future enforcement.
Compliance Challenges and Preparatory Steps
To address compliance challenges and improve preparedness, business leaders should take the following steps:
Entity Classification Assessment
Determine if your company qualifies as a "reporting entity" under SB 253 or a "covered entity" under SB 261. This involves reviewing revenue thresholds and assessing business operations in California.
Emission Data Collection
If your company lacks a GHG tracking system, consider developing robust processes for measuring scope 1, 2, and 3 emissions, using the Greenhouse Gas Protocol as a guide.
Third-Party Verification
Engage independent firms for emissions verification now, as required for scope 1 and 2 emissions by 2026 and scope 3 emissions by 2030.
Climate Risk Analysis
Analyze and document climate-related financial risks for companies under SB 261, ensuring disclosures meet SB 261 standards.
Gap Analysis
If your company has existing climate disclosures, evaluate discrepancies between current reports and SB 261 standards, and address any gaps.
Supply Chain Engagement
Collaborate with suppliers to gather scope 3 emissions data or renegotiate contracts to ensure data access.
Reconciliation with Other Regulations
If your company is subject to both California and EU regulations, harmonize your reporting frameworks to meet all compliance requirements.
Widening Risks
California's disclosure laws expose companies to new legal and financial risks. Be aware of administrative penalties, contract disputes, potential securities and consumer fraud allegations, shareholder litigation, reputational harm, and increased activist scrutiny.
The Final Word
While legal challenges persist, John B. Quinn advises companies to begin preparing for these comprehensive mandates by taking the recommended steps outlined above. Stay informed on regulatory changes to ensure corporate responsibility and compliance strategies remain effective in the evolving landscape of climate regulations. Proactive preparation will not only ensure compliance but also position companies to respond effectively to future regulatory developments and stakeholder expectations regarding environmental accountability.
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- John Quinn, a prominent figure in business litigation through his leading law firm Quinn Emanuel Urquhart & Sullivan LLP, has emphasized the importance of awareness about the latest climate disclosure laws in California, which are aimed at increasing corporate accountability and transparency.
- In the upcoming months, companies across various sectors with annual revenues exceeding $1 billion, as per SB 253, or over $500 million, as per SB 261, will have to highlight their greenhouse gas emissions and climate-related financial risks respectively, while complying with a series of reporting obligations and verifications.
- Highlighting the risks associated with these new regulations, Quinn notes that non-compliant firms may face administrative penalties, contract disputes, potential securities and consumer fraud allegations, shareholder litigation, reputational harm, and increased activist scrutiny. Thus, it's crucial for businesses to proactively assess their entity classification, collect emission data, engage third-party verifiers, analyze climate risks, reconcile with other regulations, and collaborate with suppliers, as John Quinn suggests, to ensure their preparedness and compliance in the evolving landscape of climate regulations.
