California's new climate laws—SB 253 (Climate Corporate Data Accountability Act) and SB 261 (Climate-Related Financial Risk Act)—mandate stricter greenhouse gas (GHG) emissions and climate risk reporting for companies operating in the state, significantly impacting how businesses address sustainability and climate risks.
SB 253: Climate Corporate Data Accountability Act
Overview:
SB 253 is the first U.S. law requiring companies to publicly disclose GHG emissions (scopes 1, 2, and 3). It aims to increase transparency and accountability for businesses’ climate impact.
SB 261: Climate-Related Financial Risk Act
Overview:
SB 261 focuses on assessing and reporting climate risks businesses face and contribute to, requiring financial risk disclosures consistent with global standards.
SB 219: Adjustments to SB 253 and SB 261
On September 27, 2024, Governor Gavin Newsom signed SB 219, amending SB 253 and SB 261. Key changes include:
Critique
SB 253's comprehensive Scope 1, 2, and 3 emissions reporting requirements impose substantial compliance costs on covered businesses. Scope 3 emissions tracking is particularly onerous, as it requires companies to gather data from their entire value chain, including suppliers, distributors, and end-users. Many companies lack the existing infrastructure to collect this data accurately.
Second, the verification requirements from independent auditors create additional direct costs. Companies must hire third-party verifiers approved by the state board, which represents a recurring annual expense. The limited pool of qualified verifiers may drive up costs further.
Third, the Act creates significant operational complexity. Companies must develop new systems, train personnel, and potentially restructure supplier relationships to enable emissions tracking. This diverts resources from other business activities and innovation.
Finally, the $500,000 civil penalty provision for violations creates material financial risk, especially given the complexity of accurate emissions reporting. This could lead companies to over-invest in compliance measures out of an abundance of caution.
The USC Schwarzenegger Institute estimated compliance costs with SB 253 as folllows:
- Initial compliance costs between $300,000 to $900,000 per company
- Ongoing annual costs of $100,000 to $300,000
- Additional verification costs of $30,000 to $100,000 annually
The California Chamber of Commerce projected higher costs:
- Initial setup costs potentially exceeding $1 million for larger companies
- Annual compliance costs of $300,000 to $900,000
- Additional costs for supply chain data collection and verification
Turning to SB 261, the requirement for companies to assess both direct and indirect material financial risks from climate change demands extensive analysis across multiple business dimensions. Companies must evaluate risks from physical impacts, transition impacts, and liability concerns - a complex undertaking requiring specialized expertise many firms don't currently possess.
Second, the mandatory disclosure of adaptation and mitigation strategies forces companies to develop and publicize detailed climate planning, even when such planning may be premature or based on uncertain projections. This creates potential liability risks if actual climate impacts differ from disclosed plans.
Third, the biennial reporting requirement creates recurring compliance costs. Companies must regularly:
- Engage external consultants and climate risk specialists
- Conduct detailed scenario analyses
- Develop comprehensive risk assessments
- Prepare extensive documentation
- Update mitigation strategies
Fourth, the Act's broad definition of covered entities ($100M+ in annual revenue) captures many medium-sized businesses that may lack the resources and sophistication to conduct thorough climate risk analyses. The compliance burden falls disproportionately heavy on these smaller covered entities.
Fifth, the requirement to follow TCFD recommendations imposes a rigid framework that may not suit all business models. The standardized approach could force companies to analyze and report on risks that aren't material to their specific operations.
Notably, this burden compounds existing climate reporting requirements under SB 253, creating overlapping but distinct compliance obligations for California businesses. This regulatory layering significantly increases the total cost of climate-related compliance.
Business groups and industry analyses suggest companies will incur substantial compliance costs:
- First-time compliance costs of $300,000 to $750,000
- Recurring biennial costs of $150,000 to $500,000
- Additional costs for external expertise and risk modeling tools
Considering both bills together, California's aggressive regulatory stance may deter business investment and operations in the state. Companies may choose to limit their California presence or restructure operations to avoid triggering regulatory thresholds, potentially harming the state's economic interests.
In addition, there is a considerable risk of future problems of jurisdictional overreach and economic inefficiency. These concerns are not inconsistent with a commitment to federalism and subsidiarity. Recall that Louis Brandeis praised federalism because it allows states to experiment: "It is one of the happy incidents of the federal system, that a single, courageous State may . . . serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” Implicit in Brandeis' praise, however, is the assumption that state experimentation does not have negative externalities that put the rest of the country or even the world at risk.
Unfortunately, California's regulations often have de facto extraterritorial effects that put other states and nations at risk. When California requires companies to report on global supply chain emissions or worldwide climate risks, for example, it effectively extends its regulatory reach far beyond state borders. This creates legitimate questions about one state's authority to compel disclosure of business activities occurring entirely outside its jurisdiction.
In addition, California's climate regulation is replete with negative externalities. First, as noted above, state-level regulation of multinational enterprises creates problematic regulatory fragmentation. As climate disclosure regimes proliferate both nationally and globally, absent harmonization, companies will face duplicative but also potentially inconsistent regimes. When individual states impose distinct compliance regimes on businesses operating across multiple jurisdictions, it thus creates a complex patchwork of obligations. This fragmentation increases compliance costs as companies must track and adhere to potentially conflicting requirements across different states. If the EU, the US, Canada, and California, for example, all decide that companies (many of which will operate in all four) must file disclosures that differ from one another, companies will have to generate separate reports for each authority.
Second, state-level regulation of global businesses can interfere with federal authority over international commerce and foreign affairs. Climate and environmental issues often intersect with international agreements and federal policy. State intervention in these areas risks creating conflicts with federal objectives and complicating international business relationships.
