Everything you need to know about California’s new climate legislation, the CCDAA and the CRFRA
Latest news: Governor Gavin Newsom signed both SB 253 and SB 261 into law on October 7, 2023. Updated October 11, 2023.
Listen up, large companies
Climate action in California has repercussions around the globe; the state has the fifth-largest economy in the world. For this reason, the state’s recent passage of corporate climate accountability legislation is making global news. California’s new climate legislation, the CCDAA and the CRFRA, stand to elevate climate action and greatly impact the food and consumer goods industries, for both large companies and their suppliers.
SB 253 will now be known as the Climate Corporate Data Accountability Act (the CCDAA) and SB 261 as the Climate-Related Financial Risk Act (the CRFRA). The two bills, SB 253 and 261, apply to companies that do business in California, and require thousands of companies doing business in California to disclose their scope 1, 2, and 3 greenhouse gas emissions and climate-related financial risk information.
Though these bills focus on US companies that do business in California, they are part of a global movement towards legislation that requires robust climate reporting from companies, including the SEC’s proposed climate disclosure rule in the US, and the Corporate Sustainability Reporting Directive (CSRD) in the EU. And, like the EU, California took an expansive approach to capturing companies; instead of focusing on companies with headquarters or the majority of their business in California, the state will require disclosures from any company with business there.
The first disclosures will be due in 2026, and “business in California” is a lower threshold than companies might expect; the state defines it here.
Scope 1 emissions are those that result directly from a company’s activities, while scope 2 are those released indirectly, for example, from electricity purchased and used by the company. Scope 3 encompasses all indirect emissions produced from a company’s entire supply chain.
What does SB 253 (the Climate Corporate Data Accountability Act, CCDAA) require?
The CCDAA bill mandates that companies with a revenue of at least $1B per year doing business in California disclose their greenhouse gas emissions annually starting in 2026. The bill would demand greater transparency from large companies (approx. 5400), ensuring that they report their direct emissions (Scope 1), indirect emissions from purchased electricity (Scope 2), and emissions from their broader supply chain (Scope 3).
The Scopes 1 and 2 disclosure will be mandatory by 2026 on a date to be determined by the California Air Resources Board (CARB) and Scope 3 disclosure will be mandatory by 2027 on a date to be determined by the board. Scopes 1, 2 and 3 emissions reporting to CARB will be required annually thereafter.
The addition of Scope 3 is noteworthy here as it makes up the largest portion (avg 90%) of a food or consumer goods company’s total emissions and is the most complex set of factors to measure.
Reports must conform to the Greenhouse Gas Protocol standards and guidance developed by the World Resources Institute and the World Business Council for Sustainable Development.
Emissions disclosures would have to be independently verified and would be housed on a new publicly available digital registry administered by an organization contracted by the California State Air Resources Board (CARB). This registry would enable users to review individual reporting entity disclosures and analyze underlying data elements in a variety of ways.
This bill will have far-reaching impacts across the globe and supply chain. Due to the interconnectedness of the food and consumer goods industry, compliance to the reporting requirements by large enterprises will require participation and emissions reporting of upstream and downstream suppliers, processing partners, co-manufacturers, etc. to the reporting companies.
Who is impacted by SB 253?
SB 253 impacts U.S.-based partnerships, corporations, limited liability companies, and other entities. The bill compels public and private companies doing business in California with annual revenue in excess of $1 billion to disclose their emissions as outlined above. It is estimated that over 5,000 companies doing business in California will be required to make disclosures.
What are the liability implications of SB 253?
The bill authorizes the State Board to bring civil actions against subject companies and seek civil penalties for violations of the act, with a maximum fine of $500,000. Amendments in the Assembly have scaled back the liability for scope 3 emissions via the introduction of a safe harbor. Under the amended bill, businesses would not be subject to administrative penalty for misstatements about scope 3 emissions made with reasonable basis.
Will disclosures under SB 253 require assurance?
Assurance on emissions will be introduced in the first year of disclosure. Specifically, scope 1 and 2 emissions disclosures will require limited assurance, beginning in 2026, then moving to reasonable assurance in 2030. For scope 3 disclosures, limited assurance will begin in 2030 subject to a review by CARB in 2027.
What does SB 261 (the Climate-Related Financial Risk Act, CRFRA) require?
SB 261 impacts U.S.-based partnerships, corporations, limited liability companies, and other entities. The CRFRA, or SB 261, requires certain entities doing business in California to prepare and submit climate-related financial risk reports that cover climate-related financial risks consistent with recommendations from the Task Force on Climate-Related Financial Disclosure (TCFD) framework. It is estimated that over 10,000 companies doing business in California will be required to make disclosures.
The CRFRA bill emphasizes the need for companies to be prepared for the financial implications of the climate crisis and to transparently report risks to investors, shareholders, employees, and other stakeholders.
For example, businesses would have to disclose whether they’ve budgeted for increased compliance and insurance costs and quantified potential opportunities and strategic priorities.
Who is impacted by SB 261?
The SB 261 bill requires any company with total annual revenue above $500M that does business in California to submit a climate-related risk report to the CARB. Reporting will be mandatory by January 1, 2026 and will be required every other year. The financial risk report can be consolidated at the parent company level, so subsidiary companies do not need to prepare a separate climate-related financial risk report.
Beginning on or before January 1, 2026, reporting companies will need to post a publicly accessible disclosure report on their website.
What are the liability implications of SB 261?
In addition to submitting these climate-related financial reports risk reports to the California State Air Resources Board, subject companies will need to make the reports available on their websites. Companies subject to regulation by the California Department of Insurance or that are in the business of insurance in any other state would be excluded.
What do these bills mean for companies doing business in California?
Thousands of companies doing business in California need to disclose their scope 1, 2, and 3 greenhouse gas emissions and/or climate-related financial risk information.
Notably, the financial threshold of SB 261 ($500M in revenue) is lower than that of SB 253 (>$1B in revenue). Therefore, some companies that are not required to report their emissions under SB 253 would still have obligations to report their climate-related financial risk under SB 261.
