California Senate Passes Greenhouse Gas Emissions Reporting Requirements

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  • ESG

Overview of California SB-260, The Climate Corporate Accountability Act

On January 26, 2022, the California State Senate passed SB-260, which would require all companies with over $1 billion in revenue that operate or do business within California to begin reporting on their greenhouse gas emissions. This law would require annual reporting, beginning in 2025 for all scope 1, 2, and 3 emissions for the prior calendar year, “in a manner that is easily understandable and accessible to residents of the state.” Additionally, these disclosures must be verified by a third-party auditor that has been approved by the state board and certified to have expertise in greenhouse gas emissions accounting.

The California Secretary of State will be responsible for receiving, reviewing, and aggregating the provided disclosures on an annual basis, allowing the office to report on the state’s progress towards its emission reduction goals. The Secretary of State will also be responsible for enforcing the law and imposing any civil penalties that have been brought forward by the California Attorney General.

The bill has not yet passed the California State Assembly and will need to be signed into law by the Governor before going into effect.

Implications of the Law

California’s Climate Corporate Accountability Act, if passed into law, will have several key implications for companies doing business in California, and how they track and report on their greenhouse gas emissions.

A Broad Geographic Impact

The law applies not only to companies that are headquartered in California, but also any company that does business in the state. The law – as currently written – makes no exception for companies that do a very small amount of business in the state; if a company does business within the state of California and has over $1 billion in annual revenue, it will be subject to the law’s requirement to report emissions, regardless of where those emissions occurred. This means the law will have an impact far outside the borders of the state, as all US-based companies that wish to sell any amount of goods in the state may need to report on their emissions.

While the law could still be changed, companies doing business within the state of California should begin planning for how they will assess their firm’s greenhouse gas emissions and begin the process of preparing to report this information on an annual basis.

Accounting for Emissions Throughout the Supply Chain

The law requires companies to account for the following types of emissions:

  • Scope 1 Emissions – All greenhouse gas emissions directly created by the reporting entity and all sources owned or directly controlled by the entity, regardless of location and not limited to fuel combustion.
  • Scope 2 Emissions – Indirect greenhouse gas emissions from electricity purchased or used by the reporting entity, regardless of location.
  • Scope 3 Emissions – Indirect greenhouse gas emissions, other than scope 2 emissions, from sources the reporting entity doesn’t control or own, but is related to the reporting entities operations, regardless of location. This includes emissions within the entities supply chain, business travel, employee commutes, water usage, etc.

While accounting for scope 1 and scope 2 emissions will be more straightforward for companies to account for, assessing scope 3 emissions will require significantly more work. The law provides guidance on tools and methodologies that can be used to calculate scope 3 emissions, but for smaller suppliers or companies within the supply chain, this may be very difficult to accurately assess. Tracking commutes, travel, waste produced, and other less obvious sources of carbon emissions could create a meaningful burden to smaller companies that contribute to a large company’s supply chain.

Companies should consider reaching out to key segments of its supply chain to determine which vendors or suppliers may struggle to account for their direct and indirect emissions. When appropriate, companies should consider how they can help these smaller entities accurately account for their emissions, to ensure accurate reporting.

Auditing of Emissions Reporting

In addition to the reporting requirements of the law, companies must also have their annual reporting audited by an independent third party approved by the state. This additional requirement will mean that companies must find and review this third party prior to the necessary filing deadlines, and coordinate with this third party to review their emissions reporting prior to submitting the report. This means companies will have to be sure to include this review period into their broader timeline and planning for creating their annual emissions reporting.

While it is likely still too early for companies to begin working to find appropriate emissions auditing firms, once the law has passed, and California begins to work through the process of certifying auditors capable or reviewing emissions filings, companies should immediately begin reviewing these vendors to ensure their reporting will not be delayed due to all necessary auditing.

How We Help

ACA’s ESG Advisory Practice will continue to monitor SB-260 as it moves through the legislative process, noting any updates or changes to the law as they occur. Once the law is finalized and becomes effective, ACA will offer additional guidance on the greenhouse gas emissions reporting requirements, and how companies can streamline their emissions monitoring and reporting.

To discuss this potential legislation and to hear our team’s perspective on trends in greenhouse gas tracking, please contact our ESG Advisory Practice.

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