California Sets a New Standard for Greenhouse Gas Reporting

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On October 8, Gov. Gavin Newsom of California signed two bills into law that will change the sustainability landscape in his state – and potentially the rest of the nation.

The new laws will require approximately 5,400 businesses that are active in California to publicly disclose their contributions to climate change and their vulnerability to its impacts. The new reporting requirements will be a first of their kind in the U.S., and with California holding the title as the world’s fifth largest economy, the new laws will have significant impacts well beyond the state’s borders.

SB 253 – Climate Corporate Data Accountability Act

The Climate Corporate Data Accountability Act (CCDAA), which passed through both chambers of the California legislature with strong support after falling one vote shy of passage in 2022, will require both public and private businesses that are active in California with annual global revenue greater than $1 billion to publicly disclose their annual greenhouse gas (GHG) emissions beginning in 2026.

The CCDAA will only require Scope 1 and Scope 2 emissions reporting in 2026 but adds Scope 3 reporting beginning in 2027.

The CCDAA requires that reporting be verified by a third-party assurance provider to ensure the report’s accuracy. The assurance will require an increasing level of scrutiny over time, from “limited assurance” in 2026 to “reasonable assurance” by 2030. The California Air Resource Board (CARB) will be charged with developing standards for third-party assurance providers during the implementation process.

If companies covered by the CCDAA fail to comply, they could face fines of up to $500,000 per disclosure year. While this figure is the stated maximum amount in the law, a number of factors would be considered when determining the actual penalties, including individual company circumstances and track record of reporting, among others.

SB 261 – Climate-Related Financial Risk Act

The Climate-Related Financial Risk Act (CRFRA) applies to public and private entities doing business in California that have an annual revenue greater than $500 million. CRFRA will require covered entities to prepare a report that identifies the company’s climate-related financial risks. The law does allow for the report to be consolidated at the parent company level, even if a subsidiary would qualify as a covered entity that exceeds the revenue minimum.

The new law defines climate-related financial risks as “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks.” This includes risks to companies’ operations, supply chains, safety, investments, and shareholder value, among others.

This definition closely mirrors the language used by the U.S. Securities and Exchange Commission’s (SEC) disclosure rule proposed last year.

The first report is currently slated to be submitted by January 1, 2026, and will be required biennially thereafter. The report will need to follow the Task Force on Climate-Related Financial Disclosures (TCFD) framework and be publicly accessible on the company’s website.

If an entity fails to submit an adequate report or does not make a report publicly available on its website, the law allows for fines of up to $50,000 per reporting year.

How Will California’s New Laws Impact Businesses?

The new laws expand the requirements for companies to report on their carbon emissions and the risks that climate change poses to their business in several important ways. Most notably, they will require reporting by private companies who until now have largely been able to avoid such reporting. In other ways, however, these mandates are simply catching up with best practices that are already being embraced by leading companies in California, and around the world. Companies and investors alike recognize that climate risk is business risk, and that those risks are already impacting businesses – and investors – in material ways. Mandating disclosures, and improving the quality and reliability of those disclosures, is essential to enabling companies and investors to manage emissions and make prudent business and investment decisions.

For companies that already have ambitious climate goals, including the reduction of Scope 3 emissions up and down their value chains, the new law could make achieving these targets easier. That is why many leading companies with large California operations, including Apple, Google, Microsoft, IKEA USA, REI Co-op, and others, all publicly advocated for the passage of one or both bills.

Globally, over 6,100 companies have committed to setting science-based emissions targets (SBTs) through the Science Based Targets Initiative (SBTi) and over 3,500 of those have had their targets approved. SBTs, with a few narrow exceptions, commit companies to measure and reduce Scope 3 emissions. For these companies, California’s sweeping new requirements are already business as usual.

One of the biggest challenges companies face in reducing supply chain emissions is the availability of quality emissions data from suppliers. By requiring more companies to report their own emissions as well as those in their supply chain, and requiring that data be verified, the California law will substantially increase both quantity and quality of available emissions data. This will make the task of measuring and reducing supply chain emissions a simpler one, as well as increasing companies’ and stakeholders’ confidence in that data.

In addition to voluntary commitments like SBTs, the EU’s recently enacted Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose information around climate-related risks, including Scope 3 emissions. This has spurred companies with substantial European operations (or with customers there) to achieve results similar to those required by the California law.

The reality is that increased expectations for disclosure of carbon emissions, including Scope 3, as well as climate risks, is a trend that has been underway – and accelerating – for years before the passage of California’s laws, as climate risks to businesses, supply chains, and the communities they serve have grown in scope and visibility.

What was initially driven by investor demands and voluntary commitments is increasingly becoming the law of the land. That is good news for leading companies, as it levels the playing field, and good news for all of us as it is essential to avoiding the worst impacts of climate change. It is also a business opportunity for companies who are not immediately impacted by these laws. If you are a supplier, undertaking efforts to measure and reduce your emissions can make your products more attractive to customers in California and the EU compared to companies who do need to comply.

What Happens Now? “Cleanup” and Legal Challenges

Despite garnering robust support, proponents of the landmark law have concerns around potential changes that could weaken reporting requirements. Gov. Newsom indicated prior to signing that the bills would potentially be “cleaned up” during the next legislative session. The California Chamber of Commerce, who opposed the bills, has already jumped on this comment and indicated they would push for clean-up legislation next year.

In addition to potential cleanup, legal challenges to both new laws are expected. Suits challenging CARB’s authority to regulate companies’ emissions beyond the state’s borders are the most likely culprit, but are seen as more likely to delay implementation than result in wholesale changes to the law.

SB 253 and 261 are now the law of the land, but with other states seeking to follow California’s lead, the SEC is working to finalize their own regulations. And with California considering “cleanup” legislation in the coming session, this remains a rapidly evolving space. If you are a corporate entity looking to understand how disclosure regulations may impact you, or a climate leader looking to what’s next, Edison Energy’s Sustainability team can help.

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