California Legislation

What does the law require?

In October 2023, California passed the Climate Corporate Data Accountability Act (SB 253), which will require covered companies to report on Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions per the guidance provided by the GHG Protocol. The reporting entity will be required to produce annual reports and disclose them on a digital platform to be created by the California Air Resources Board. The law will also eventually impose certain assurance requirements starting with limited assurance and moving to reasonable assurance. (Limited assurance attests that the auditor is not aware of any material modifications that should be made presently; reasonable assurance is a higher level of assurance with auditors confirming that the reported information is materially correct). Failure to comply with the law will result in fines of up to $500,000 in a reporting year.

Who does the law cover?

The law covers all public and private U.S. businesses with total annual revenues exceeding $1 billion and that conduct business within California. While the law does not clearly define what it means to 'do business in California,' an examination of the concept under California tax law suggests that this threshold may be low.

When does the law go into effect?

In 2026, companies must report and provide limited assurance for Scope 1 and Scope 2 GHG emissions for the prior fiscal year.

In 2027, companies must also disclose their Scope 3 GHG emissions for the previous fiscal year within 180 days of disclosing their Scope 1 and Scope 2 GHG emissions; but, companies will not be required to provide assurance for Scope 3 GHG emissions.

Starting in 2030, companies must disclose and provide reasonable assurance for Scope 1 and Scope 2 GHG emissions for the previous fiscal year, and may be required to provide limited assurance for Scope 3 GHG emissions (with the Scope 3 assurance to be determined in 2027).

Litigation

On January 30, 2024, a coalition of businesses let by the U.S. Chamber of Commerce and the American Farm Bureau Federation filed a lawsuit to block this and a related law (SB 261) from going into effect.

What does the law require?

In October 2023, California enacted the Climate Related Financial Risk Act (SB 261), which will require covered companies to report on their material climate-related financial risks. Climate related financial risks are defined 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.” Reporting entities will be required to publish reports biennially on their company website; the report may be consolidated at the parent-company level. Companies must frame their risk assessment in accordance with the Task Force of Climate-Related Financial Disclosures (TCFD) guidelines or an equivalent reporting requirement such those issued by the International Sustainability Standards Board (ISSB). Covered Companies will also be required to disclose what measures they are taking to either reduce or adapt to the risks they identified. Failure to comply will result in fines of up to $50,000 in a reporting year.

Who does the law cover?

The law will cover all public and private U.S. companies with total annual revenues exceeding $500 million and that conduct business in California, excluding companies in the insurance industry that are already subject to similar requirements. While the law does not clearly define what it means to do business in California, looking at the concept under California tax law it is possible that this threshold may be low.

When does the law go into effect?

The initial round of climate risk disclosure reports will be due on January 1, 2026.

Litigation

On January 30, 2024, a coalition of businesses let by the U.S. Chamber of Commerce and the American Farm Bureau Federation filed a lawsuit to block this and a related law (SB 253) from going into effect.

California’s Fair Investment Practices by Investment Advisers Act (SB 54), passed on October 8, 2023, will require certain investment advisers to submit annual reports to the state's Civil Rights Department containing detailed demographic data. These reports should offer a breakdown of demographic data for the founding teams of companies in which venture capital investments are made. Demographic data includes gender identity, race, ethnicity, disability status, LGBTQ+ identification, veteran status, and residency status in California. The law also mandates the disclosure of both the number and total amount of venture capital investments made in businesses primarily founded by diverse team members, categorized by each demographic category. The reports should also indicate the total investment amount and the principal place of business for each business receiving investments.

The law covers a broad range of "Covered Entities," which include venture capital companies that have significant operational and geographical connections to California. Specifically, it applies to companies where at least fifty percent of their assets are in venture capital investments, including those defined those classified as venture capital funds or venture capital operating companies under relevant U.S. laws. The law encompasses entities primarily engaged in investing in startups, early-stage, or emerging growth companies, or those managing third-party investors' assets. Geographically, it also applies to firms that are headquartered in California, have a significant presence in the state, invest in California-based businesses, or solicit or receive investments from California residents. This broad definition potentially extends beyond traditional venture capital funds to include private equity funds, real estate funds, and subsidiaries of corporations investing in emerging technologies, especially if they have some form of management rights and a connection to California.

The law is scheduled to take effect with the first report due on March 1, 2025, and subsequent annual reporting requirements thereafter.

The California Voluntary Carbon Market Disclosure Act (AB 1305), signed on October 7, 2023, mandates specific disclosures from businesses involved in the voluntary carbon market. Entities selling voluntary carbon offsets are required to disclose extensive information about the carbon offset project on their websites, including details about emissions reductions or removals, adherence to specific standards, contingency plans for project failures, and methodologies used for calculating credits. Entities that purchase carbon offsets and claim to be net-zero or carbon neutral must disclose comprehensive information — including details about the offset registry/program, the type of offset project, the protocol used to estimate emissions reductions or removal benefits, and any third-party verifications of company data and claims.

AB 1305 applies to a broad range of businesses operating within the voluntary carbon market in California. It encompasses entities that market or sell voluntary carbon offsets within the state, as well as entities that purchase voluntary carbon offsets and make public claims about their climate commitments (such as achieving net-zero emissions or carbon neutrality). The requirements apply irrespective of the size or location of the business, meaning both California-based and foreign entities engaged in these activities can fall under the law's purview. The law's application is subject to interpretation, complicated by undefined key concepts such as what constitutes 'operating' in California, making climate-related claims “within” the state, or offering offsets “within” the state.

The Act is set to go into effect on January 1, 2024. This date marks the beginning of the legal obligations for the covered entities to comply with the disclosure requirements stipulated in the Act. Businesses involved in the voluntary carbon market in California will need to have their disclosure mechanisms in place by this date to avoid penalties for non-compliance – which may be $2500 per day, up to a $500,000 maximum.