Get Ready For California's Three Sweeping New Climate Disclosure Laws

Can a requirement to simply disclose information truly be a big deal? Can a requirement that only applies to big companies, or companies that do business in California, actually impact your small business or your business in another state? Can a requirement that doesn’t take effect until next year or later really require thought and action now? Yes, yes, and yes.

Last fall, California enacted three sweeping and unprecedented laws that require companies who “do business in California” to disclose information related to greenhouse gas (GHG) emissions and carbon reduction goals. Specifically, S.B. 253 requires companies that make more than $1 billion in annual revenue and do business in California to report direct and indirect greenhouse gas emissions.

S.B. 261 requires companies that do business in California and have an annual revenue of more than $500 million to disclose financial risks from climate change impacts. Finally, A.B. 1305 requires a litany of disclosures for companies at any revenue level that either (a) sell or market voluntary carbon offsets in California or (b) operate in California and claim they are carbon neutral, have significantly reduced emissions, or make similar sustainability statements. At this point, there may be more questions than answers related to these new laws, which are currently scheduled to become effective as early as 2025.

COMMENTARY

It might be tempting to disregard these laws as inconsequential or a “future” problem, but the applicability is sweeping and consequential. The amount of data that must be gathered and analyzed is vast. The teams of personnel needed—in-house and contracted experts—will be large and multi-disciplinary.

S.B. 253 requires reporting not only direct (“Scope 1”) emissions, it also requires reporting indirect (“Scope 2” and “Scope 3”) emissions. Even if you’re already tracking the direct air emissions from your company’s operations, the law requires the tracking the GHG emissions from your power provider and from your supply chain, which constitute the Scope 2 and 3 emissions. Moreover, the law requires compilation of the data in compliance with the GHG Protocol and requires independent third-party verification.

These laws will likely demand involvement from your operations personnel, accountants, attorneys, marketing team, management team, and outside experts to properly measure and report direct and indirect emissions (S.B .253), assess and explain your company’s climate risks (S.B. 261), and explain how the company is achieving its climate sustainability claims or its carbon offsets (A.B. 1305). It’s extremely unlikely that any one person has all of the information and reporting will require a team and resources.

The direct reach of these laws is wide in terms of who must comply. While S.B. 253 and S.B. 261 only apply to companies “doing business in California,” that doesn’t necessarily mean you need a physical presence there to trigger the law. It’s likely that any transaction for pecuniary gain in California could trigger these requirements. This is especially true if “doing business” gets interpreted in regulations and by courts similarly to how that phrase is used elsewhere in California’s statutes.

Further, if you have a parent company or subsidiary company, there are yet unanswered questions about whether that affiliate’s revenue or actions could be used to trigger the thresholds of S.B. 253 and S.B. 261.

In addition, A.B. 1305’s voluntary carbon offset disclosure requirements apply even to “marketing” voluntary carbon offsets in California, and the bill’s climate sustainability claims disclosures apply so long as you make certain types of statements and “operate” in California—both regardless of revenue and sales. If your company has a sustainability report or makes other public statements saying it, its products, or its affiliates have reduced GHG emissions, are carbon neutral, or achieved net zero emissions, or if it attempts to sell voluntary carbon offsets, this law probably applies.

The indirect reach is even wider. S.B. 253 requires reporting indirect (Scope 3) emissions, which are inherently the direct emissions of another entity. Therefore, directly regulated entities are likely to ask their suppliers and purchasers for emissions information, putting a burden on them even if they’re not directly regulated.

The compliance deadlines are right around the corner. The disclosure requirements kick-in at the start of 2025 for A.B. 1305, and 2026 for S.B. 253 and S.B. 261. Granted, this timing is clouded in some uncertainty: there has been speculation about whether the California Air Resources Board (“CARB”) will receive sufficient funding to timely promulgate regulations for S.B. 253; California Governor Newsome has expressed a desire to slow down implementation of these laws; and a lawsuit was recently filed in federal court challenging the constitutionality of S.B. 253 and S.B. 261. Nevertheless, the deadlines are set in statute and changing them would require subsequent legislation or a court-ordered stay. Further, the substantive requirements of S.B. 261 and A.B. 1305 don’t expressly require an agency to promulgate regulations; those disclosure requirements directly become effective.

Enforcement and litigation risk is broad. Because California’s Unfair Competition Law gives a long leash for any injured person to challenge a company’s failure to comply with applicable laws and regulations, companies’ legal risks may not be limited to administrative enforcement—companies may face significant litigation risk from an array of unknown parties.

Takeaway Lesson—Start Hustling

Given what appears to be the inevitability of these laws, the magnitudes of effort needed to comply, and the size of noncompliance penalties (up to $500,000), the 2025 and 2026 compliance deadlines require a hustle that starts now. Companies who may be impacted—directly or indirectly—should start taking action now, both to comply and to get involved in the processes of agency rulemaking and/or follow-on legislation.

—Megan Houdeshel leads Dorsey & Whitney’s Regulatory Affairs Group and serves as co-chair of the Energy & Natural Resources Industry Group. She has a breadth of experience assisting clients through complex environmental permitting matters under the National Environmental Policy Act, Clean Air Act, Clean Water Act, Resource Conservation and Recovery Act, and community right-to-know laws. Kayla Race assists Dorsey & Whitney clients in a variety of industries with their environment, energy, natural resources, land use, and sustainability matters. This includes helping energy and natural resources clients, among others, navigate compliance with state and federal environmental regulations.