The California State Senate and State Assembly recently approved two climate disclosure bills, SB 253 and SB 261, which Governor Newsom has stated they intend to sign. This new legislation is a significant step forward for climate related disclosures in the USA and exceeds what the SEC had proposed in its draft climate disclosure legislation which still remains under review. The new California legislation is anticipated to apply to over 5,000 public and private companies.
[Differs from SEC: SEC applies only to public companies and requires disclosure of Scope 1 & 2 only,Scope 3 are only reported if they are material to the company or if the company has set a scope 3 reduction target]
Let’s take a quick look at these two pieces of legislation and explore how they are likely to impact private equity firms and their portfolio companies.
SB 253 is the Climate Corporation Data Accountability Act and will apply to public and private companies with annual revenue exceeding $1 billion and doing business in California. SB 253 mandates that:
- Applicable companies will be required to publicly disclose their greenhouse gas (GHG) emissions annually.
- Scope 1 and Scope 2 GHG emissions must be reported beginning in 2026 for the prior year. Scope 3 GHG emissions are to be included beginning in 2027 for the prior year.
- GHG emissions are to be reported in accordance with the Greenhouse Gas Protocol standards, and allowance is made for modeling and assumptions to be incorporated when calculating Scope 3 emissions.
- The reporting company is responsible for obtaining a verification or assurance of their GHG emissions disclosure from an independent third-party auditor.
- Non-compliance could lead to penalties of up to $500,000 per reporting year, however reporting entities will not be subject to penalties for errors or misstatements in Scope 3 emissions made with reasonable basis and in good faith.
SB 261 is the Climate-Related Financial Risk Act and will apply to public and private companies with annual revenue exceeding $500 million and doing business in California. SB 261 mandates that:
- Applicable companies will be required to publicly report climate-related financial risks.
- The initial report would be due on or before January 1st, 2026, and biennially thereafter
- Reports are required to be prepared in accordance with the Task Force on Climate-Related Financial Disclosures (TCFD) and include the reporting company’s climate-related financial risks as well as the measures adopted to reduce and adapt to climate-related financial risks.
Who Does This Apply To? Both SB 253 and SB 261 apply to public and private companies exceeding respective annual revenue amounts and ‘doing business’ in California. Within the state’s interpretation, ‘doing business’ in California means any company that meets any of the following:
- Is engaging in any transaction for the purpose of financial gain within California;
- Is organized or commercially domiciled in California;
- Has California sales, property, or payroll exceeding stated amounts, available here (https://www.ftb.ca.gov/file/business/doing-business-in-california.html).
This legislation clearly takes a generous view of what constitutes doing business in California and hence why it is anticipated to apply directly to approximately 7,000 companies upon implementation.
This emergent legislation carries direct and indirect implications for many of your portfolio companies.
- Portfolio companies which meet the revenue standards and are doing business in California must comply with these new mandates, with reporting under SB 261 commencing on or before January 1st, 2026 and reporting under SB 253 commencing in 2027 based on 2026 data. With proper planning, these reporting requirements need not be overly strenuous nor costly, however they could prove quite disruptive if left to the last minute.
- Portfolio companies which do not meet the applicability criteria may still feel pressure to assess their GHG emissions. Larger companies that are now mandated to report Scope 3 emissions will need to coordinate across their supply chains to access relevant data. Any portfolio company that is selling a product or service to these larger companies can now reasonably expect to be asked to provide their respective GHG emissions data–either retrospectively within established sales relationships or proactively as a condition of procurement due diligence by a prospective client. These smaller companies that do not meet the applicability criteria do not need to make the GHG emissions assessments public nor do they need to make any grandiose climate pledges, but they should have the applicable GHG emissions data readily available for when their important clients request it.
- We are generally advising most portfolio companies which are considering publishing an inaugural ESG or Sustainability Report to consider adopting the ISSB Standards as their reporting framework. The ISSB Standards have incorporated the Greenhouse Gas Protocol Standards as well as the Task Force on Climate-Related Financial Disclosure standards. SB 253 and SB 261 formalize these latter, and other emergent climate-related legislation in the EU, UK, Canada, and Australia is also demonstrating a gradual harmonization toward the ISSB Standards or toward individual components internalized within the ISSB Standards. Portfolio companies just launching ESG or Sustainability Reporting programs now are less likely to need to restructure such programs in the future if they already align with the ISSB Standards.
These three key implications are material to many portfolio companies and should be addressed. Please note, however, that addressing these should not be unduly inconvenient or costly in most cases–if a portfolio company is in discussion with an ESG service provider that states otherwise, please connect with us directly to verify the claims being made.