The Nickel Report

On October 7, 2023 California Governor Gavin Newsom signed two landmark climate disclosure laws aimed at making major companies publicly disclose their greenhouse gas emissions and report on their climate-related financial risks. The first, the Climate Corporate Data Accountability Act (SB 253), will require all business entities with an annual revenue exceeding $1 billion to disclose their greenhouse gas emissions in a format accessible to the public. The second, SB 261, will require all business entities with annual revenue exceeding $500 million to publish a report on their “climate-related financial risks” on their websites. These first-in-the-nation laws are broader than the proposed SEC climate disclosure rule and reach more than just California-based entities.

Who is covered?

Both bills are intentionally broad to encompass all business entities —­ partnerships, public and private corporations, and limited liability companies — that meet the relevant revenue threshold based on revenues generated during the prior fiscal year. SB 253 deems all entities with a total annual revenue exceeding $1 billion a “reporting entity.” SB 261 deems all entities with a total annual revenue exceeding $500 million a “covered entity.” For both SB 253 and SB 261, the revenue requirement is coupled with a requirement that the entity “does business in California.” These broad definitions of “covered entity” and “reporting entity” mean that SB 253 and SB 261 impose reporting requirements for more entities than the SEC’s proposed rulemaking for climate disclosures, which would cover only publicly traded corporations.

SB 261 specifically excludes insurance companies.

How do I know if my company “does business in California?”

Neither SB 253 nor SB 261 defines this key applicability criterion. Rather, the California Air Resources Board (CARB) will define the phrase as part of the implementing regulations. Based on both bills’ legislative history, CARB may adopt a definition in line with existing California law. The California Revenue & Tax Code § 23101 provides one potential definition. Under the Revenue & Tax Code, “doing business” for corporate franchise tax purposes means actively engaging in any transaction for the purpose of financial or pecuniary gain or profit when any of the following conditions are satisfied:

• The taxpayer is organized or commercially domiciled in California;
• California sales for the 2020 taxable year exceeded the lesser of $610,395 or 25% of the taxpayer’s total sales;
• California real/tangible personal property in 2020 exceeded the lesser of $61,040 or 25% of the taxpayer’s total real/tangible property value;
• California payroll in 2020 exceeded $61,040 or 25% of the taxpayer’s total payroll.

The California Corporations Code, also referenced as a relevant source of current law in the legislative history of both SB 263 and SB 261, may provide further guidance. The Corporations Code defines what it means to “transact intrastate business” as “entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce.” Cal. Corp. Code. § 191(a). While the Code does not list what specific activities will constitute doing business, it does specify circumstances where a "foreign” corporation or LLC (i.e., one formed under the laws of any state but California) will not be deemed to be transacting intrastate business, including where it has a subsidiary that transacts intrastate business, or where it is a shareholder of a California corporation, is a shareholder of a non-California corporation that transacts intrastate business, or has other specified corporate relationships with a California partnership or LLC. See Cal. Corp. Code §§ 191(b); 17708.03(b); (c).

What must a reporting entity disclose under SB 253, the Climate Corporate Data Accountability Act?

Beginning in 2026, SB 253 requires all covered entities to disclose their Scope 1 and 2 emissions to an emissions reporting organization, a non-profit organization contracted by the state with experience in greenhouse gas emissions reporting. Beginning 2027, all covered entities will need to include Scope 3 emissions in their reporting.

• “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.

CARB is directed to adopt regulations implementing these emission disclosure requirements by January 1, 2025. CARB’s regulations must initially require the covered entity to measure and report GHG emissions in conformance with the Greenhouse Gas Protocol standards and guidance developed by the World Resource Institute, but CARB may assess whether there are more suitable GHG accounting and reporting standards starting in 2033 and every five years thereafter.

The Climate Corporate Data Accountability Act’s Scope 3 reporting is less onerous than a prior similar bill introduced by the California legislature in 2021 by providing entities with more time to report these emissions, allowing the use of industry data, and foregoing administrative penalties for Scope 3 emissions disclosures made with a reasonable basis and in good faith.

What must a covered entity disclose under SB 261?

The second disclosure law, SB 261, aims at increasing “transparency to policy makers, investors, and shareholders… [and] improve[] decision making on where to invest private and public dollars.”

Beginning January 2026, covered entities must prepare a biennial report disclosing (1) their climate-related financial risks and (2) measures they adopted to reduce and adapt to the disclosed climate-related financial risks. The bill defines climate-related financial risk as 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.” The disclosures must be made in accordance with the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017) published by the Task Force on Climate-related Financial Disclosures. Any required disclosures not made by a covered entity’s report must be explained with steps describing how the covered entity will complete the disclosure report.

Covered entities must submit these reports to a climate reporting organization and make the reports publicly available on a website. Parent companies can consolidate reports at the parent level, even if the subsidiary would otherwise meet the threshold for reporting.

SB 261 provides for alternative compliance if the entity already prepares an analogous report voluntarily or pursuant to another law or regulation.