ESG INTEL
...On The Potential Impacts of Emerging State Climate-Related Disclosure Legislation on US Businesses
Written by Leslie Wong and Hussein Sayani
California, New York, and Washington State have worked through 2023 to advance their own climate disclosure requirements ahead of the Securities and Exchange Commission’s (SEC) climate disclosure rule, which is expected to be authorized by the end of October 2023.
California officially enacted Senate Bills (SB) 253 and 261 before the SEC authorized its rule, with Governor Gavin Newsom signing them into law on October 7, 2023. Upon signing the bills, Governor Newsom acknowledged that the reporting deadlines set forth in the bills, which start in 2026, could be infeasible and that he will work with the authors to address this issue and other concerns.
California’s Climate Corporate Data Accountability Act (SB 253) requires businesses operating in California and earning over $1 billion annually to publicly disclose GHG emissions directly produced by their operations (scope 1) and indirect emissions from the use of electricity and other energy (scope 2). Operating in California is broadly defined as engaging in any transaction for financial gain in the state. [1] The law will also require reporting of supply chain emissions (scope 3) that occur outside a company’s direct control, an aspect that may or may not be included in the final SEC rule.
The Climate-Related Financial Risk Act (SB 261) requires companies generating above $500 million in annual revenue to publicly disclose their climate-related financial risks and the steps they are taking to address these risks. Collectively, these regulations are expected to impact a wider range of businesses than the SEC's proposed rule because of California's status as the state with the largest annual GDP (approximately $3.5 trillion).
Simultaneously, New York is considering the Climate Corporate Accountability Act (SB 2023-S897A), which would require US companies operating in New York and earning at least $1 billion in annual revenue to report scope 1, 2, and 3 GHG emissions. While this legislation is in an early stage, it mirrors California’s SB 253 and will introduce unique requirements to the GHG reporting process, including independent verification requirements and new implementation dates. This legislation will likely also impact companies across the country, considering New York’s annual GDP of $1.9 trillion (third highest in the US).
Washington’s bill is in an even earlier stage. Senator Joe Nguyen responded as follows when asked if Washington would follow suit: “There will be a bill that’s introduced … I expect there to be a policy that we will take up and likely pass.” [2]
The major challenge for many companies will be complying with multiple, sometimes inconsistent, reporting requirements from various jurisdictions. While California, New York, and the SEC all base their GHG and climate risk reporting requirements on the Greenhouse Gas Protocol and the Task Force on Climate-Related Financial Disclosures, they differ in the scope of GHG emissions reporting, timelines, and assurance requirements. The same is expected of Washington. Compliance with the EU and UK's rapidly approaching ESG reporting timelines also creates challenges for US businesses working to meet their reporting criteria.
As the ESG reporting landscape continues to evolve, some key takeaways for US businesses include:
1.
2.
3.
4.
To discuss how these emerging regulations might impact your projects and how Langan can help you meet these new reporting requirements, please contact your Langan Project Manager or the ESG advisory team:
[1] See https://www.ftb.ca.gov/file/business/doing-business-in-california.html for the full list of metrics.
[2] See https://www.politico.com/newsletters/the-long-game/2023/10/10/climate-rule-copycats-urged-to-chill-00120705
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Leslie Wong
Senior Associate
lwong@langan.com
Hussein Sayani
Senior Project Manager
hsayani@langan.com
Large companies will likely be unable to avoid scope 1 and 2 (and potentially scope 3) for GHG emissions and climate risk reporting.
Businesses may need to embrace sophisticated relational databases and software, and possibly artificial intelligence capabilities, to efficiently manage varying requirements from different programs.
GHG emissions reporting requirements will trickle down to small and medium enterprises involved in the supply chains of larger companies that are required to comply with scope 3 reporting.
Direct and indirect participation in reporting will increase the number of reporting companies, leading to stakeholder pressure on non-reporting companies.