The Golden State has passed a new law that will require large companies to disclose greenhouse gas emissions.
This is a significant step forward in creating accountable measures for businesses to pursue more energy efficiency, greenhouse gas reductions, as well as make investors aware of climate risks. The bill, signed into law on 7 October by the governor, Gavin Newsom, will be the USA's first of its kind, serving as a blueprint for national climate accountability.
The law requires large businesses to report their Scope 1, 2 and 3 emissions. Scope 1 emissions are those generated by fuel sources that a business owns, such as boilers, furnaces and vehicles. Scope 2 emissions are greenhouse gasses emitted to generate the electricity, steam, heat or cooling a business purchases. Scope 3 emissions are generated indirectly from the supply chain and are usually the largest pool of emissions for any business, as well as the most difficult to track.
The bill faced opposition from many quarters, including Chevron and the Western States Petroleum Association, which lobbied against it, but did not succeed. Interestingly, some large companies backed the bill, such as technology majors Apple, Google, Salesforce, Microsoft and Adobe.
Called SB 253 it empowers California regulators to create rules by 2025 for public and private companies whose annual revenues exceed $1bn. That affects about 5,300 corporations, including Chevron, Wells Fargo, Amazon and Apple.
By 2026, those companies will have to publicly disclose how much carbon is produced by their operations and electricity use. Importantly, by 2027, they will also be required to report emissions generated by their supply chains and customers, the “Scope 3” emissions, which are highly controversial among business interests, including the fossil fuel industry.
A companion bill also passed by the state’s legislature, SB-261, would also require businesses with more than $500m in yearly revenue to disclose their climate-related financial risks starting in 2026, or face annual penalties. This adds a new layer of public accountability to corporations and will mean that investors need to look at climate risks closely when analyzing investment prospects.
California's three biggest utilities: Pacific Gas and Electric Co., San Diego Gas & Electric Co., and Southern California Edison will fall under the purview of this legislation, but a lot of smaller utilities and other energy supply chain companies will be affected by the Scope 3 reporting requirements.
This law is likely to set a precedent, and other states will probably follow California's example, so that, as a matter of practicality, most companies will need to track and report their Scope 1, 2, and 3 emissions if they do business in a state which has a similar law.
In March 2023 the Securities and Exchange Commission (SEC) proposed a new rule that will require covered companies to publicly disclose climate-related information to increase transparency on their Environmental, Social, and Governance (ESG) strategies, and started a consultation. This SEC regulation has not been issued yet, although it is supposedly imminent. If more states follow the California model, then pressure will build on the SEC to come up with similar regulations for companies it supervises.
Overall, California has boldly gone where no state has gone before, leading the way to making climate risk a central part of business reporting. This will put pressure on all parts of companies' ecosystem to adopt emissions reduction and energy efficiency processes or find themselves scrutinized for their poor ESG performance, possibly leading to adverse consequences such as drops in share price or investment, negative consumer brand awareness and a lowered ability to attract high quality workers.