California’s new climate disclosure laws take effect soon. Here’s what companies should know

On Feb. 9 the comment period on the final draft regulations for California’s new climate disclosure laws ended. The first deadlines for compliance are coming up later this year — giving investors what they have long sought: standardized, comparable data on companies’ exposure to financially material climate risks. 

Pending any changes to the California Air Resources Board’s regulations, the Climate Corporate Data Accountability Act and the Climate-related Financial Risk Act will take effect at the end of February. Most companies doing business in California will need to report on their Scope 1 and Scope 2 emissions by August 10.  

Enforcement of the second law, on financial  risk, is currently under a court-ordered pause as the Ninth Circuit Court considers arguments for an injunction sought by the U.S. Chamber of Commerce, which argues that reporting on climate risk would violate companies’ First Amendment rights by compelling speech. 

Nevertheless, many companies are well on their way to assessing and measuring both emissions and risk. Systems evaluation and transparency can win over investors and uncover value to operations. Studies have shown that emissions levels are a proxy indicator of some risks, such as transition risk and certain physical risks. That’s why the vast majority of large, publicly traded companies already produce such reports.

“Companies that report can often get better access to capital,” said Julia Millot, who leads carbon accounting and target setting at consultancy Carbon Direct. “It is a derisking mechanism.”  

“We think consistent sustainability disclosure is critical information for investors,” said Edward Mason, head of public markets engagement at asset manager Generation Investment Management. While “it would be preferable to have regulation done at the national level,” he said, “…it is very welcome to us that California is taking action to mandate disclosure.” 

Visibility = success 

The new regulations direct companies to use the International Sustainable Standards Board’s (ISSB) IFRS-S2, which requires companies to disclose risks and opportunities that could affect their cash flow and access to capital, as their reporting framework. Companies operating in Europe also use the ISSB standard to comply with the European Union’s disclosure regulation, which took effect last year. 

As physical risks from extreme weather disasters increase within a global economy dependent on complex supply chains, companies that understand what’s going on across their value chains will succeed. “The companies that can articulate this, are the ones that will retain investors’ confidence,” said Mason. 

More than half of the comments received by the California Air Resources Board supported the rules, according to a Ceres analysis, and only 9 percent expressed outright opposition. Opponents include the Western States Petroleum Association and some oil and gas drillers, along with the American Farm Bureau Federation, the Western Growers Association and the California Chamber of Commerce, which joined the lawsuit filed by the U.S. Chamber. Farm groups have said collecting data on Scope 3 emissions would be too complicated and costly.

Institutional investors overwhelmingly support climate disclosure rules. When the US Securities and Exchange Commission (SEC) held proceedings to consider a rule mandating that public companies disclose climate risk and emissions, 310 institutional investors commented in favor, according to an analysis by the nonprofit Ceres.

“More investors wrote to the SEC on this issue, climate disclosure, than anything else since the SEC was established in 1933 – and over 95 % of investors supported it,” said Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets. Nearly all of the commenters favored requiring disclosures aligned with TCFD.

The California Public Employees Retirement System (CalPERS), which manages $495 billion in retirement assets for current and former state employees, was among more than a dozen institutional investors who commented in support of the proposed rules. 

CalPERS wrote that as a fiduciary for 2.4 million people, it cannot ignore the financial risks posed by climate change.

What California’s laws require 

California’s Climate Corporate Data Accountability Act requires companies with more than $1 billion in revenue and doing business in California to report Scope 1 and 2 emissions this year and Scope 3 in 2027 (with a safe harbor against shareholder lawsuits).

The Climate-related Financial Risk Act would require companies with more than $500 million in revenues and doing business in California to report biennially on financially-material climate risks. 

In its lawsuit challenging the laws, the U.S. Chamber said they “unconstitutionally compel speech in violation of the First Amendment and seek to regulate an area that is outside California’s jurisdiction.” A federal district court denied its petition for injunction against both laws; the Chamber has appealed.  

The new regulations define “doing business” in California as engaging in any transaction for the purpose of financial gain and either based in California or with sales in the state of $735,000 or more. They exempt regulated insurance companies, wholesale electricity sellers, and companies whose only transaction is payroll to California employees.

Still upward of 4,000 companies — both public and privately owned — will be covered by the two California laws. That is a large swath of the U.S. economy, although it is roughly half the number that would have been covered by the SEC disclosure rule. 

What companies should do 

Here are the next steps for sustainability teams, based on responses from consultants and other observers:

• Assess the laws’ applicability to your company.
• Engage C-Suite, finance, legal, operations, procurement and other departments.
• Inventory which operations and supply chains likely emit greenhouse gases.
• Develop systems aligned with ISSB standards to measure emissions and to identify and measure the financial risks and opportunities climate change poses to your company.
• Integrate existing data systems in finance, operations, legal, R&D, with climate data collection to find efficiencies.
• Include climate data reporting within financial reporting to satisfy investors.

A Bain & Co study found that 25 percent of corporate emissions can be eliminated from projects with a positive return on investment.

Implementing systems to measure emissions and assess climate risk can help companies uncover cost savings and market opportunities, said Jay Ruckelhaus, co-founder of Gravity Climate, a data integration and carbon management company. 

“Almost all companies we work with are proceeding with both articulation of risks and opportunities and with reporting greenhouse gas emissions,” he said. “A lot of them are using the process as leverage to unlock savings.”