California Lawmakers Approve the Country’s Most Sweeping Climate Disclosure Rule
Tuesday, September 19, 2023
September 2023
California Lawmakers Approve the Country’s Most Sweeping Climate Disclosure Rule

How SB-253 could redefine corporate emissions reporting in California and impact businesses and investors around the world

by Melissa Banigan, director of Content Strategy at Ethic 

Key Notes

  • The California State Assembly and Senate passed the Climate Corporate Data Accountability Act (SB-253). California Governor Gavin Newsom has until October 14 to sign the bill into law. On Sunday, he said publicly that he plans to sign. 
  • The bill would require all businesses that do business in California with more than $1 billion in annual revenue to publicly disclose their Scope 1, 2, and 3 carbon emissions over a series of years.
  • The requirement to report Scope 3 emissions, which include indirect emissions from activities in companies’ supply chain and the use of their products, is controversial.
  • Yet naysayers of the bill are in the minority as there is broad public and investor support for increased disclosure around climate risk, and many big companies, such as Apple and Microsoft, support the bill. 

While we wait for the finalization and release of the federal Securities and Exchange Commission’s (SEC) proposed Climate Risk Disclosures Rule for Public Companies, expected in October, California has taken matters into its own hands. 

Last week, the California State Assembly and Senate passed a landmark bill addressing climate change: The Climate Corporate Data Accountability Act (SB-253). This bill may have wider implications for companies than the SEC’s proposed Climate Risk Disclosures. The proposed SEC rule will require companies to disclose their Scope 1 and 2 greenhouse gas (GHG) emissions. It also includes reporting Scope 3 emissions, which are emissions from activities in companies’ supply chains and the use of their products. These emissions are far more difficult to measure, and there are loud whispers that SEC chair Gary Gensler is considering removing them from the plan. SB-253, on the other hand, would require public and private companies in California with annual revenues of at least $1 billion to publicly disclose their Scope 1 and Scope 2 reporting by 2026 and Scope 3 reporting by 2027.

The implications of this are massive. Many thousands of companies would be impacted in California, which has the largest economy of all the U.S. states and ranks among the top five economies of the world. Passing the bill into law would send a strong message across the global business community that evaluating companies’ climate risk and their impact on global warming are top priorities. 

Why were the bills in California and proposed SEC regulation around climate disclosure drafted? And what can investors and businesses expect to happen next? Let’s explore.

Giving Investors and the Public What They Want

While the California State Assembly and Senate have passed SB-253, Governor Gavin Newsom has until October 14 to sign the bill into law. Speaking at a panel in New York City on September 17, he said that he “of course” plans to sign the bill. In the meantime, industry and government critics aren’t shy about vocalizing their judgment of the bill. Opponents have voiced that it could be too difficult to determine all of the mandated Scope 3 emissions, which include indirect emissions from activities in a company’s supply chain and the use of its products. 

While it’s true that it’s difficult to measure Scope 3 emissions, it’s by no means impossible. For example, if a company can’t get information about emissions from their suppliers, they can lean on the Greenhouse Gas (GHG) Protocol, which lets them use proxies, industry averages, and multiple other sources to calculate emissions. 

Yet critics do have a point. Scope 3 reporting requirements are hard to get right because the GHG Protocol gives companies a lot of leeway in what they decide to report on. If regulations are vague and preserve that ambiguity, then the data that is disclosed may not be all that helpful for investors and the public, as we still wouldn’t be able to make apples-to-apples comparisons between companies. 

But while there are still some fundamental measurement challenges that need to be ironed out, Scope 3 emissions often represent the majority of a company’s total GHG emissions. Public and investor demand for insights into company environmental impacts has increased, and with it comes a growing need for reliable information about how companies address climate change.  A whopping 87 percent of Americans across demographics (including regions, age groups, races, and political affiliations) support federal requirements for corporate climate disclosures. And in 2022, 532 investors representing nearly $39 trillion in assets under management called for governments around the world to strengthen climate disclosure standards across the financial system.

Also worth noting is that opponents to the two new bills sit firmly in the minority. More than a dozen major companies doing business in California, including Apple, Microsoft, IKEA USA, and Patagonia, have expressed their support. Their sentiment reflects a nationwide trend concerning climate risk disclosure — 70 percent of companies have said they plan to comply with SEC’s proposed rule regardless of when it becomes law.

With such strong public, investor, and company support for gaining a better understanding of the full impact of companies’ emissions on the environment, it’s vital that companies attempt to measure them. This makes the inclusion of Scope 3 in SB-253 necessary. 

What’s Next — From Voluntary to Required

Again, Governor Newsom has until October 14 to sign SB 253 into law. It should come as no surprise that he plans to sign the bill, as he has already made clear to his state’s Legislature that climate change is one of his biggest priorities. It’s also expected that he will pass a second climate-related bill, the Climate-Related Financial Risk Act (SB 261), which to date has gone through the state Assembly but not the Senate. This bill would require companies to publicly disclose their climate-related financial risks in a report and how they would mitigate such risks. 

If, indeed, SB 253 is passed, companies will need to scramble to comply because of new reporting requirements — but it's ultimately a tremendous opportunity for those who embraced emissions disclosure and climate risk mitigation when doing so was purely voluntary. Investors prefer companies that disclose environmental data. A report issued last week suggested that companies with higher measured ESG ratings, which are often informed by emissions disclosures, “generally outperformed” those with lower ratings over a nine-year period. 

Ethic firmly believes that stronger regulations and laws at the state and federal levels will offer greater systemic transparency and accountability in the investment landscape. As companies are held accountable for what they disclose on climate risk and emissions, investors will be able to make more informed decisions. 

Don’t wait. Contact your relationship manager to learn more about how Ethic can help you and your clients prepare for climate disclosure.

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Ethic Inc. is a Registered Investment Adviser located in New York, NY. Registration of an investment adviser does not imply any level of skill or training. Information pertaining to Ethic Inc’s registration or to obtain a copy of Ethic Inc.’s current written disclosure statement discussing Ethic Inc.’s business operations, services and fees is available on the SEC’s Investment Adviser Public Information website – or from Ethic Inc. upon written request at Information provided herein is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Any subsequent, direct communication by Ethic Inc. with a prospective client shall be conducted by a representative of Ethic Inc. that is either registered or qualifies for an exemption or exclusion from registration in the state where a prospective client resides. Information contained herein may be carefully compiled from third-party sources that Ethic Inc. believes to be reliable, but Ethic Inc. cannot guarantee the accuracy of any third-party information.

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Melissa Banigan is a content strategist with over 15 years of communications experience working with global companies and nonprofits. Also a journalist and author, her work appears in The Washington Post, CNN, the BBC, NPR, and the Independent, among other publications, and she's written three books for youth.

Travis Korte is the associate director of Sustainability Research & Data at Ethic. Previously, Travis organized civic-minded technologists at Hack for LA and advised a wide range of clients on data science, data policy, and quantitative methods. You can follow him on Twitter at @traviskorte.