During the week of September 11, 2023, the California Legislature passed a series of bills known collectively as the “California Climate Accountability Package” (“CCAP”). The CCAP is comprised of three bills: S.B. 252 (applicable only to two California state pension funds, and not discussed further herein), S.B. 253 (the “Climate Corporate Data Accountability Act” of “CCDA”) and S.B. 261 (the “Climate-Related Financial Risk Act” or “CFRA”). If Governor Newsom follows through on his stated intention to sign the entire CCAP into law, and if the package survives the inevitable legal challenges that are sure to come, these new disclosure laws could prove to be highly disruptive to companies across the United States—many of which are likely unaware it impacts them.
Under the CCDA, U.S. companies “doing business in California” with total revenues in excess of $1 billion (not limited to California-related revenue) will have to begin measuring and publicly reporting their company-wide greenhouse gas (“GHG”) emissions, starting in 2026. In the first year, this will include scope 1 and 2 emissions (those emanating from sources that a company owns or directly controls, regardless of location (e.g., from fleet vehicles, manufacturing operations, etc.) (scope 1), and those a company causes indirectly and that come from where the energy it purchases and uses is produced, regardless of location (e.g., emissions caused when generating the electricity, steam, heating or cooling that is used in company buildings) (scope 2)). Starting in 2027, they will also have to measure and report scope 3 emissions: those not produced by the company itself, but for which it is indirectly responsible both upstream and downstream (e.g., via the goods and services it buys, from business travel and employee commutes, and from the processing and use of products it sells, etc.).
Under the CFRA, U.S. companies doing business in California with total revenues in excess of $500 million will have to begin preparing a biennial climate-related financial risk report, starting January 1, 2026. The report must disclose the entity’s climate-related financial risk and the measures it has adopted to reduce and adapt to climate-related financial risk, and must be posted to the company’s website.
Failure to comply with these new laws will carry potential civil penalties of up to $500,000 (CCDA) and $50,000 (CFRA), respectively.
Trap for the Unwary
The thresholds for “doing business in California” are remarkably low for companies with revenues at or near the CCDA and CFRA thresholds. A U.S. company with such revenue levels will be subject to the CCDA and CFRA if it:
- Is organized or commercially domiciled in California;
- Has sales in California in a given tax year that exceed the lesser of $690,144 (for 2022) or 25 percent of the entity’s total sales (including sales by an agent or independent contractor of the entity);
- Has real and tangible personal property in California in a given tax year valued in excess of the lesser of $69,015 (for 2022) or 25 percent of the entity’s total real and tangible personal property; or
- Pays compensation in California in a given tax year in excess of the lesser of $69,015 (for 2022) or 25 percent of the entity’s total compensation paid.
For some companies, a single sale to a California counterparty could potentially cross this threshold. The only exception to either law is for insurance companies, which are excused from the climate-related financial risk reporting of the CFRA.
Compliance Challenge
For publicly traded companies subject to the pending SEC climate reporting rules, or for companies subject to the EU’s Corporate Sustainability Reporting Directive (“CSRD”), CCDA and CFRA compliance may not prove to be a significant challenge (or at least not a significant added burden). The CCDA will require measurement and reporting of emissions in conformance with the “GHG Protocol,” a standard developed by the World Resources Institute and the World Business Council for Sustainable Development. The CFRA will require assessment of climate-related financial risk in accord with a framework published by the Task Force on Climate-related Financial Disclosures (“TCFD”). Those standards are the basis for the CSRD’s comparable disclosure requirements, and the leading global standards for relevant measurement and reporting of emissions and climate-related risks.
However, many private U.S. companies not otherwise subject to comparable emissions and climate-related measurement, assessment and reporting requirements may find themselves faced with a steep learning curve and operational challenge, based on relatively limited exposure to the California market.
Uncertainty Ahead
While Governor Newsom appears committed to signing the CCAP into law, it is less certain whether and when it might actually take effect, and how California market participants will react. First and foremost, it would be surprising for some or all of the CCAP to go into effect without legal challenges being filled by multiple parties. The CCAP had staunch opposition on its way to passage, and litigation could potentially delay its taking effect on time, if at all. Second, as companies with exposure to the California market wake up to the reach and obligations of the CCDA and CFRA, there is a chance some will chose to forego or substantially alter the manner in which they engage with California markets. At least some degree of market displacement can be expected.
It is also possible that the CCAP signals a broader trend, and that other states may follow suit. It seems clear that at least one purpose for enactment of the CCAP is to flex California’s muscle as the largest economy in the United States and nearly the fourth largest in the world, and to prod action more widely across the country.
For now, U.S. companies that do business in California at any appreciable level need to start paying attention to the CCAP and preparing for the possibility that they could soon have significant obligations to meet under either or both. Please refer to our California Climate Accountability Package – Overview and Implications handout for further information on the basic structure, triggers and contours of the CCDA and CFRA.