Are you concerned about the state of our climate? You are not alone! Across the globe, there has been a significant surge in regulatory and legislative actions aimed at curbing emissions. Last year, California released "California's Climate Commitment", an ambitious blueprint by Governor Newsom to combat pollution, transition away from heavy reliance on fossil fuels, ensure the availability of clean, dependable, and affordable energy, save Californians money, foster thriving communities, and shield residents from the growing threats of extreme heat, wildfires, and drought. This week, a closer examination of the trio of bills comprising the California Climate Accountability Package, showcasing California legislators' commitment to being at the forefront of climate-focused legislation.

What is California’s Climate Accountability Package?

In January of this year, Senator Scott Wiener (D-San Francisco), Senator Lena Gonzalez (D-Long Beach), and Senator Henry Stern (D-Los Angeles) introduced the Climate Accountability Package. This package includes three bills aimed at "improving transparency, standardizing disclosures, aligning public investments with climate goals, and raising the bar on corporate action to address the climate crisis."

While we often hear about individual actions to mitigate climate change, this package focuses on the growing need to hold corporations accountable for their environmental impact as a result of their business practices.

A driving factor in this package is the fact that 71% of all historic greenhouse gas emissions are attributable to just 100 companies (with ExxonMobil, Shell, BP and Chevron specifically called out in the report). As time has progressed, both companies and individuals have increasingly recognized the vital role that climate investments play in safeguarding future generations and bolstering future earnings. Nearly 100 companies (including Apple, Facebook, Google, and Ikea) have committed to 100% renewable power under the RE100 initiative. This shift not only reflects a concern for the environment but also acknowledges that, with time, measuring and reducing a company's environmental footprint is becoming an essential business practice.

Some definitions and other important things

What is the Greenhouse Gas Protocol?

The Greenhouse Gas Protocol is a widely recognized and influential global accounting tool for businesses and governments to understand, quantify, and manage greenhouse gas (GHG) emissions. It was developed by the World Resources Institute (WRI), the World Business Council for Sustainable Development (WBCSD), and other various stakeholders. First published in 2001, the GHG Protocol provides a standardized framework and guidelines for organizations to measure and report their emissions of GHG (gases like carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O)) that contribute to global warming and climate change. The Protocol primarily enables companies to measure emissions, set targets, reduce emissions, create reports on these activities, and make informed business decisions. The Paris Agreement back in 2015 committed all participating countries to limit global temperature rise, and most follow the GGP to help track their progress towards their climate goals.

What are Scope 1, 2, and 3 emissions?

Scope 1, Scope 2, and Scope 3 emissions are categories used to classify and account for greenhouse gas emissions associated with an organization's activities or a product's life cycle utilizing the GGP.

Scope 1: Direct greenhouse gas emissions that result from sources owned or controlled by the organization. These emissions typically include:

• Combustion of fossil fuels in company-owned vehicles
• Emissions from company-owned power plants or industrial facilities
• Emissions from chemical processes that occur on-site.

Scope 2: Indirect greenhouse gas emissions associated with the generation of purchased or acquired electricity, steam, heating, or cooling consumed by the organization. These emissions are a consequence of the organization's activities but occur at a separate location, such as a utility's power plant. Scope 2 emissions are considered indirect because the organization does not directly control the emissions source but can influence it by choosing cleaner sources of energy.

Scope 3: A broader category that encompasses all other indirect greenhouse gas emissions associated with the organization's activities, but they occur outside the organization's boundaries. Scope 3 emissions are often the largest and most complex category to account for and typically include emissions related to:

• Supply chain activities, such as the production and transportation of raw materials
• Business travel and commuting by employees
• Use of products or services by customers (e.g., emissions from the use of a company's products after they are sold)

What is the Task Force on Climate-related Financial Disclosures?

The Task Force on Climate-related Financial Disclosures (TCFD) is an international initiative established to develop a standardized framework for disclosing climate-related financial risks and opportunities. It was created in December 2015 by the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system to promote stability. The TCFD's primary purpose is to provide a consistent and transparent way for organizations to communicate to investors, lenders, insurers, and other stakeholders about how climate change impacts their business.

A few other important climate bits

It's not only California that is looking at climate related studies, disclosures, and divestments. Nationally, there are two significant federal proposals (still pending finalization): the Securities and Exchange Commission's (SEC) proposed climate disclosure rule and a federal initiative mandating major government suppliers and contractors to disclose their emissions. In May of 2021, President Biden issued Executive Order 14030, titled “Executive Order on Climate-Related Financial Risk,” directing his Administration to develop a comprehensive strategy for addressing climate-related financial risks. This strategy aims to promote consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risks. Furthermore, the 2023 Climate Change Synthesis Report from the Intergovernmental Panel on Climate Change underscores the urgency of action in the face of increasingly severe and complex climate and non-climate-related risks.

The California Climate Accountability Package includes two key measures designed to enhance transparency regarding corporate emissions and investments. A third measure within the package leverages the influence of California's two biggest public investment funds to encourage action on climate change. Notably, this package follows the unsuccessful attempts of the Climate Corporate Accountability Act and SB 1173 to pass the California Assembly just last year.

The Bills

The Climate Corporate Accountability Act

The Climate Corporate Accountability Act, known as SB 260, was proposed in January of 2021 and died in August of 2022. SB 260 was hailed as a landmark bill for carbon accounting, aiming to enhance public understanding of corporations' contributions to climate change by making well-defined data more accessible.

Under this proposed legislation, entities categorized as "reporting entities" would have been obligated to disclose their greenhouse gas (GHG) emissions for Scopes 1, 2, and 3. A "reporting entity" was defined as any business entity, such as a partnership, corporation, or limited liability company, operating under the laws of California, another U.S. state, the District of Columbia, or under federal law, with annual revenues exceeding one billion dollars and conducting business within California. The State Air Resources Board would have been responsible for establishing a program to collect these disclosures and provide public access to them through a digital platform.

The first section of the bill contains twelve legislative findings and declarations, including:

(e) Corporations play a major role in the worsening climate crisis through emissions activities that include, but are not limited to, corporate operations, employee and consumer transportation, goods production and movement, construction, land use, and natural resource extraction.

(f) Accurate, verified, and comprehensive data is required to determine a company’s greenhouse gas (GHG) emissions, also known as its carbon footprint, and to effectively identify the sources of the pollution and develop means to reduce the same.

(l) Given the corporate sector’s major role in the worsening climate crisis and given the state’s overall leadership in addressing and reducing climate emissions, it is in the interest of the state to require corporate disclosure of carbon emissions data and science-based emissions targets.

The Climate Corporate Data Accountability Act

On September 12th Climate Corporation Data Accountability Act, or SB 253, was passed. This bill, sponsored by Senator Wiener, is a first of its kind. It mandates all large corporations "doing business" within California publicly disclose their greenhouse gas emissions, aligning with the Greenhouse Gas Protocol.

Building upon the foundation of SB 260 in 2022, SB 253 instructs the California State Air Resources Board to develop and implement regulations, no later than January 1, 2025, that compel "reporting entities" to publicly disclose their greenhouse gas emissions across Scopes 1, 2, and 3 to an emissions registry. In this bill's context, a "reporting entity" again encompasses partnerships, corporations, limited liability companies, or other business entities formed under the laws of California, other U.S. states, the District of Columbia, or federal statutes, with total annual revenues exceeding one billion dollars and engaged in business activities within California.

The emissions registry will be managed by a nonprofit organization contracted by the State Air Resources Board. This registry will be tasked with establishing a publicly accessible digital platform to centralize all submitted disclosures. Furthermore, the platform must provide users with the capability to review the individual disclosures of reporting entities and conduct a variety of in-depth analyses of aggregated data elements, like multi-year data sets.

The Climate-Related Financial Risk Act 

SB 261, known as the Climate-Related Financial Risk Act and sponsored by Senator Stern, was passed just one day after SB 253. This Act imposes a requirement on covered entities to prepare biennial climate-related financial risk reports, which should encompass the following elements:

1. Assessment of Climate-Related Financial Risk: Covered entities are mandated to evaluate their climate-related financial risk using the recommended framework and disclosures established by the Task Force on Climate-related Financial Disclosures (TFCD).
2. Risk Mitigation Measures: The report must also detail the measures adopted by these entities to mitigate the disclosed climate-related financial risks. Reports that include descriptions of an entity's greenhouse gas (GHG) emissions or voluntary GHG mitigation efforts must undergo verification by an independent third-party.

The bill defines "Climate-related financial risk” as "material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health."

The idea behind this legislation is to acknowledge that the impacts of climate change, such as wildfires, sea-level rise, extreme weather events, and severe droughts, exert significant influence on California's communities and economy. The bill emphasizes that the “failure of economic actors to adequately plan for and adapt to climate-related risks to their businesses and to the economy will result in significant harm”.

In terms of defining a "covered entity," the bill includes corporations, partnerships, limited liability companies, and other business entities established under California law, the laws of any other U.S. state, the District of Columbia, or federal legislation, with total annual revenues exceeding five hundred million United States dollars and engaged in business activities within California. Notably, insurance companies are exempt from this law due to the California Insurance Commissioner's adoption of climate-related risk reporting standards in April 2022, aligning with the TFCD.

It is important to note that the financial threshold for compliance with SB 261 is lower than that specified in the Climate Corporate Data Accountability Act, meaning that some companies subject to SB 261 may not be subject to SB 253. Additionally, these entities are required to make their reports publicly available on their respective websites.

The Fossil Fuel Divestment Act

The last bill of this package, SB 252, successfully passed the Senate in May but has not progressed further. The Fossil Fuel Divestment Act aims to leverage the power of California’s two major public investment funds, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS), to shift their investment strategy to a more climate-centric approach. Modeled after another previously failed bill, SB 1173, SB 252 mandates these funds divest from the 200 largest publicly traded fossil fuel companies by July 1, 2030. The determination of which companies are included is based on their carbon content, particularly in relation to proven oil, gas, and coal reserves.

Present legislation generally restricts the boards of both CalPERS and CalSTRS from initiating new investments or renewing existing ones in thermal coal companies. Additionally, current law requires these boards to liquidate pre-existing investments in thermal coal companies.

Conclusion

While these bills have yet to be officially signed into law, Governor Newsom has made a commitment to sign both SB 253 and SB 261. These bills are particularly noteworthy, as they extend their impact to encompass both private and public companies (differing from federal proposals). Upon signature, thousands of companies doing business in California need to disclose their scope 1, 2, and 3 greenhouse gas emissions and/or climate-related financial risk information.

This development will create a significant demand for tools and resources to assist these companies in fulfilling their disclosure obligations. The processes put in place will play a crucial role in ensuring the success of these reporting requirements and in helping companies effectively navigate this new landscape.

The trajectory of this legislation and similar initiatives in future sessions will be intriguing. It reflects a growing recognition of the importance of corporate transparency and responsibility in addressing climate change. These measures signify a significant step forward in holding companies accountable for their environmental impact, promoting sustainability, and mitigating climate-related risks.

What are your thoughts on this legislation and its potential implications for businesses and environmental accountability?

Cover Photo by Markus Spiske on Unsplash

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