California Jumps the Line ahead of the SEC and enacts two significant Climate Disclosure Bills

Last week, the California legislature passed and,  over the weekend (on October 9, 2023) Governor Newsom signed, two climate disclosure bills which focus on the financial risk of greenhouse gas emissions. Full text of the bills can be found at SB 261 and SB 253.

The bills will require that companies doing business in California will be required to state and certify their scope 1, 2 and 3 greenhouse gas emissions and to state and certify their climate related financial risks.

Given that many US companies and many EU and UK companies that do business in the US also transact in California, these laws will have a meaningful impact on many public and non-public companies alike irrespective of the pace or lack thereof from the SEC on its own set of federal climate disclosure obligations.

Bill 261 – Under SB 261, companies with annual revenues of more than $500 Million Dollars that do business in California will now be required to compile and issue a biennial climate-related financial risk report, with the first due date being January 1, 2026.

Bill Text – SB-261 Greenhouse gases: climate-related financial risk. (ca.gov)

Climate related financial risk” under SB 261 is defined as a “material risk of harm to immediate and long-term financial outcomes due to physical and transaction risks, including but not limited to, risks to corporate operations, provision of goods and services, supply chain, employee health and safety, capital and financial investments, institutional investments, financial standing of loan receipts and borrowers, shareholder value, consumer demand and financial markets and economic health.” Wow, that is a pretty wide ambit of what risks will fall within the definition of climate related financial risks!

SB 261 requires that the reports required under the Bill must be prepared in accordance with the Task Force on Climate Related Financial Disclosures (also referred to as TCFD) reporting framework. Reports that are prepared under the International Financial Reporting Standards -Sustainability Disclosure Standards (or ISSB) will also be acceptable. Failure to report under the Bill will be subject to an annual fine of up to $50,000 per year.

Bill 253 – SB 253, also known as the Climate Corporate Data Accountability Act, applies to companies that do business in California and have total annual revenues in excess of $1 Billion. The reporting requirements will not be applicable until January 2026, once the California Air Resources Board (CARB) has adopted implementing regulations, which must occur by January 1, 2025.
CARB’s implementing regulations will likely provide the key details of the reporting process, including the following:
Bill Text – SB-253 Climate Corporate Data Accountability Act. (ca.gov)

Scope 1 and Scope 2 Emissions. Beginning in January 2026, reporting entities must annually publicly disclose their scope 1 and scope 2 GHG emissions for the prior fiscal year. The bill defines Scope 1 emissions as “all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.” Scope 2 emissions are defined as “indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.” Most publicly traded companies have begun some level if not a very detailed level of Scope 1 and 2 tracking, with many actually already reporting these metrics.

Scope 3 Emissions. Beginning in 2027, reporting entities will also be required to annually disclose their scope 3 emissions for the prior fiscal year. Scope 3 emissions include “indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control,” which may include “purchased goods and services, business travel, employee commutes, and process and use of sold products.” Many in the industry are concerned about how they are going to get their supply chain to measure and report in a meaningful way data that will become the reporting entities’ Scope 3 emissions.

Annual Fees. Reporting entities will be required to pay an annual fee to CARB upon filing their annual disclosures. These fees are supposed to be used to fund CARB’s oversight of the program.

Administrative Penalties. Reporting entities that fail to timely file their annual disclosures will be subject to administrative penalties of up to $500,000 per reporting year. 

Reporting Standards. Reporting entities must measure and report their GHG emissions in conformance with the Greenhouse Gas Protocol, a set of reporting standards developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBC).  Reporting entities must also engage an independent third-party assurance provider to audit their scope 1 and 2 emissions beginning in 2026, and their scope 3 emissions beginning in 2030.

Green Sprouts – SB 253 and SB 261 make California the first state to require GHG emissions and climate risk reporting from large companies. The bills, which are now law, jump the SEC’s proposed climate disclosure rules which have not yet been finalized or released after two publicly disclosed delays in implementation.

Given the number of companies that “do business in California”, irrespective of when and how the SEC makes its climate disclosure rules final and if it does this fall, California has once again cemented its place of relevance in the climate change arena and has mandated movement in this space by larger companies doing business in California. It remains to be seen if other states follow their lead but surely New York, Washington, D.C., Massachusetts and others will take a very hard look at proceeding down this path.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on your Sustainability and ESG planning and initiatives. For more information, please contact Brad A. Molotsky, David Amerikaner, Joseph West, Sharon Caffrey, Sheila Rafferty-Wiggins, Alice Shanahan, Jeff Hamera, Nanette Heide, Joel Ephross, Jolie-Anne Ansley, Robert Montejo, Seth Cooley, or the attorney in the firm with whom you are regularly in contact.

ESG: – New York City Council Passes a Natural Gas Ban for New Buildings

Last week, New York City’s city council approved a ban on natural gas as a fuel source in newly constructed buildings.

Per reporting from NPR, nearly 40% of carbon emissions in the country — and more than 50% of New York City’s emissions — come from buildings.

The new natural gas ban in newly constructed buildings, by a vote of 40-7, applies to buildings that are up to 7-stories in height by the end of 2023; buildings that are taller than 7-stories have until 2027 to comply.

The bill contains several exceptions, including hospitals, laundromats and crematoriums.

As noted by NPR, the legislation also requires that the Mayor’s Office of Long-Term Planning and Sustainability conduct 2 long term studies. The first will examine the use of heat pump technology and the second is a study on the impact of the new bill on the city’s electrical grid.

Not surprising there has been massive pushback from the natural gas industry against these type of natural gas bans. This pushback, however, has not stopped cities around the country from proceeding with various types of natural gas ban efforts. By way of example, at least 42 cities in California have acted to limit natural gas in new buildings, and Salt Lake City, Utah and Denver, Colorado have also made plans to move toward required electrification in buildings.

Moreover, in Ithaca, New York, the city committed to ending the use of natural gas in all buildings — not just new ones.

Passing this type of natural gas ban for new buildings in New York City, the largest city in the country, marks a significant move for other cities trying to move similar legislation to attempt to cut down carbon emissions in the fight against climate change, joining cities like San Jose and San Francisco that have made similar commitments to reduce emissions.

The efforts to ban natural gas in new buildings in New York City is also being considered on a state wide basis in the New York Senate and House. Senator Brian Kavanagh (D) and Assembly Member Emily Gallagher (D) are working on legislation that would require any buildings constructed in New York after 2023 to be entirely powered by electricity. If their legislation passes, New York would become the first state to ban natural gas in new buildings on a state-wide level.

Triple Bottom Line – By passing this type of natural gas ban in new buildings, focusing on buildings as one of the largest emitters of green house gases,  New York has provided other cities with a leader to attempt to follow if they are so inclined.  As noted, California has been attempting this type of ban on a city by city basis and has passed 42 such bans throughout the state.  If New York state follows the NYC lead it will become the first state to enact such a ban and would mark a bit of a watershed moment in the fight against greenhouse gas emissions showing that buildings can indeed be constructed in this manner if reduced emissions are one of the  key goals attempting to be achieved by the builder/owner or the legislature.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on Sustainability and ESG planning and initiatives within their own space. We would be happy to discussion your proposed project with you. For more information, or if you have any questions about this post, please contact Brad A. Molotsky, Nanette Heide, Seth Cooley, David Amerikaner, Jolie-Anne Ansley, Hari Kumar or the attorney in the firm with whom you are regularly in contact.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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