California this year enacted two new significant pieces of climate legislation, requiring reporting of both climate-related financial risk and greenhouse gas emissions. The measures – SB 253 (Wiener) [Chapter 382, Statues of 2023] and SB 261 (Stern) [Chapter 383, Statues of 2023] – will have a significant impact on reporting entities as well as on those that do not qualify as a reporting entity themselves but exist within the supply chain of reporting entities. It is important to note that although the statutes are the result of three years of negotiations, language to SB 253 and SB 261, as of the signing date, will likely not be the ultimate rule with which reporting entities must comply. Based on CBA advocates’ historic and ongoing engagement on this issue, we have compiled the below information for our members as they work with their internal compliance teams in addition to an explanation of how the policy is likely to evolve.

WHO?

“Covered Entity” is defined as a corporation, partnership, limited liability company, or other business entity formed under the laws of the 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 and that does business in California, with a denoted annual revenue minimum. The total annual revenue threshold established in SB 253 is $1 billion and is $500 million in SB 261. Mandated reports of SB 253 and SB 261 alike must be submitted to the California State Air Resources Board (CARB) and must be publicly available.

CBA was successful in securing language in SB 261 that allows consolidation of reports at the parent company level, ensuring that subsidiaries are not also required to prepare a separate report[1], as well as language stating that entities satisfy the reporting requirements of SB 261 if they comply with another disclosure requirement pursuant to another government entity or voluntarily use a framework that meets specified requirements[2].

(1)CA Health and Safety Code Section 38533 (b)(2)
(2)CA Health and Safety Code Section 38533 (b)(4)

WHAT?

SB 253
The Climate Corporate Data Accountability Act, SB 253, requires entities to publicly report their annual scopes 1,2 and 3 greenhouse gas (GHG) emissions. Scope 1 emissions include those stemming from sources an entity operates; scope 2 includes indirect emissions, such as those associated with electricity, heating, or cooling; and scope 3 includes upstream and downstream emissions, such as those associated with employee commutes, energy used to grow raw materials, transportation and use of products, end-of-life disposal of products, etc. It is important to note that scope 3 incorporates 15 subcategories, including S3C15 “financed emissions” linked to investments and lending activity. For a financial institution reporting entity, reporting of financed Emissions includes the emissions of all the companies in its portfolio apportioned based on how much of these companies’ activities are financed by the financing entity.

Reporting entities will be subject to an annual reporting fee, to be determined by CARB. Non-filing, late filing, or other failure to meet requirements may result in administrative penalties not to exceed five hundred thousand dollars ($500,000) in a reporting year. CBA was successful in securing language to protect reporting entities that make scope 3 disclosures with a reasonable basis and disclosed in good faith[3] in addition to language stating that penalties assessed through 2030 on scope 3 reporting shall only occur for non-filing[4].

SB 261
Reporting entities are required under SB 261 to biennially report climate-related financial risk in accordance with the recommended framework contained in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) as well as the entity’s efforts to reduce and adapt to the reported risk. CBA was successful in securing language that allows risk reports to be consolidated at the parent company level[5] in addition to a “comply-or-explain” provision, requiring reporting entities to provide detailed explanations in instances where reporting gaps exist[6].

Reporting entities will be subject to an annual reporting fee, to be determined by CARB. Non-filing or insufficient reporting may result in administrative penalties not to exceed fifty thousand dollars ($50,000) in a reporting year. CBA was successful in lowering the maximum allowable penalty as well as securing language stating that CARB shall consider whether the violator took good faith measures to comply[7].

(3)CA Health and Safety Code Section 38532 (f)(2)(B)
(4)CA Health and Safety Code Section 38532 (f)(2)(C)
(5)CA Health and Safety Code Section 38533 (b)(2)
(6)CA Health and Safety Code Section 38533 (b)(1)(B)

WHEN?

SB 253
According to the measure, CARB must promulgate enacting regulations by January 1, 2025. Beginning in 2026, reporting entities must annually report and publicly disclose their scopes 1 and 2 emissions for the prior fiscal year; beginning in 2027, reporting entities must annually report and publicly disclose scope 3 emissions for the prior fiscal year no later than 180 days after reporting scope 1 and 2 emissions. Scope 1 and 2 data must be audited by an independent third-party assurance provider at a limited assurance level beginning in 2026 and a reasonable assurance level beginning in 2023. Assurance engagement for scope 3 must be performed at a limited assurance level beginning in 2030; CARB may establish an additional assurance requirement for scope 3 emissions.

SB 261
This measure requires biennial reporting to CARB to commence no later than January 2026; the measure also requires entities to make reports publicly available on their websites. Under SB 261, CARB is required to contract with a climate reporting organization for the purpose of preparing a biennial public report reviewing the climate-related financial risk reported by industry and an analysis of sector-wide climate-related financial risk to California – including but not limited to potential impacts on economically vulnerable communities – and the identification of inadequate and insufficient reports.

WHY?

Through enacting some of the most aggressive policies in the nation, the California Legislature has long held and seeks to retain the title of leader in the fight against climate change; California Governor Gavin Newsom has similarly captured the designation as “The Climate Governor.” While attending Climate Week in New York on September 17, 2023, the

Governor highlighted California’s climate action – including a recent lawsuit filed in partnership with California Attorney General Rob Bonta against oil companies, claiming they deceived the public about the risks of fossil fuels – and previewed that he intended to sign both climate reporting measures, but that “some clean-up” would be necessary. The much-anticipated signing messages, released on October 7, 2023, indicate non-specific concerns around infeasible timelines, financial impact, and potentially inconsistent reporting.

Notwithstanding the overlap of both the scope of reporting entities and the similarity in disclosure reports between SB 253 and SB 261, proponents of the measures prioritized enacting California policy that intentionally reaches well beyond the anticipated climate reporting rule of the Securities and Exchange Commission in terms of both reporting entities captured and the reporting requirements themselves. Some reporting entities may find themselves filing three separate reports in the coming years.

(7)CA Health and Safety Code Section 38533 (e)(2)

NEXT STEPS

In his signing messages of SB 253 and SB 261, Governor Newsom instructed the legislature to find solutions to his concerns about timing and accuracy. Lawmakers will reconvene the Legislative Session in Sacramento on January 3, 2024; at this point, new measures may be introduced, and lawmakers begin work on the state budget. Due to CARB’s deadline to promulgate regulations no later than January 2025, we anticipate that any agreed-upon solutions may move through the process on an expedited basis, either by way of a measure containing an “urgency clause” or via a budget trailer bill.

CBA advocates are continuing conversations with relevant stakeholders regarding both potential rulemaking by agency and potential solutions to the Governor’s stated concerns, and we anticipate maintaining status as a resource to lawmakers and stakeholders. During the 2023 Legislative Session, the association maintained an “Oppose Unless Amended” position on SB 253 and SB 261, and submitted amendments on both measures that would remove the opposition of the association. CBA advocated, among other things, to delay timelines and to tie reporting of scope 3 GHG emissions data in SB 253 to the reporting entity’s publicly stated targets and goals; we anticipate continuation of prior CBA messaging and objectives.

Likewise, CBA’s advocacy team will keep members updated in real-time as negotiations evolve. If we can be a resource to your institution, please reach out.

Staff contact: Melanie Cuevas, mcuevas@calbankers.com

The information contained in this bulletin is not intended to constitute, and should not be received as legal advice. Please consult with your counsel for more detailed information applicable to your institution.