John B. Quinn is the founder of Quinn Emanuel Urquhart & Sullivan LLP, the world’s largest law firm devoted solely to business litigation.
In 2023, California became the first state in the U.S. to pass climate disclosure laws, which will impose significant climate-related reporting obligations on businesses operating in the state. These laws aim to increase corporate accountability and transparency concerning greenhouse gas emissions and climate-related financial risks.
Barring court action on pending legal challenges, the laws will take effect within 12 months—impacting many companies that do business in the state. Despite pending litigation and regulatory uncertainties, I believe companies should begin preparing for compliance with these comprehensive mandates.
In this article, I will summarize the laws, the pending legal challenges and some other considerations for businesses.
Overview Of SB 253 And SB 261
California’s Climate Corporate Data Accountability Act, SB 253, requires companies with annual revenues exceeding $1 billion that conduct business in California to report their greenhouse gas (GHG) emissions annually.
Starting in 2026, companies must disclose scope 1 and scope 2 emissions, and by 2027, they must also report scope 3 emissions. Scope 1 emissions are direct emissions from sources owned or controlled by the company; scope 2 emissions are indirect emissions from purchased energy; and scope 3 emissions encompass all other indirect emissions throughout a company’s supply chain.
The California Air Resources Board (CARB) is tasked with developing regulations to ensure accurate and standardized reporting, with third-party verification becoming mandatory.
On the other hand, California’s Greenhouse Gases: Climate-Related Financial Risk Act, SB 261, applies to companies with annual revenues over $500 million operating in California.
These companies must prepare and publicly disclose biennial reports on their climate-related financial risks starting in 2026. Reports must outline both the material risks posed by climate change to the company’s financial outcomes and the measures adopted to mitigate these risks. SB 261 covers over 10,000 businesses, most of which are privately held. These new laws reflect a global trend toward mandatory climate disclosures.
The European Union’s Corporate Sustainability Reporting Directive (CSRD), effective since January 2023, requires extensive sustainability reporting from large EU entities and foreign companies with EU subsidiaries.
Recent Amendments
On September 27, 2024, Senate Bill No. 219 (SB 219) was signed into law, making some important updates to SB 253 and SB 261. The changes include:
1. Extending the deadline for CARB to adopt regulations from January 1, 2025, to July 1, 2025, though business compliance deadlines remain the same.
2. Giving CARB the option to receive disclosures either directly or through an emissions reporting organization it contracts with.
3. Allowing large companies to report emissions at the parent company level for easier compliance.
4. Letting CARB set a timeline for scope 3 emissions disclosures, giving businesses more time to meet this challenging requirement.
Legal Challenges
SB 253 and SB 261 face significant legal challenges. The U.S. Chamber of Commerce and California Chamber of Commerce filed a lawsuit claiming these laws infringe upon the First Amendment by compelling speech and overstep state jurisdiction in regulating emissions, which they argue falls under federal authority.
As of this writing, a motion for summary judgment on the First Amendment claim was denied due to the need for further factual development. A partial motion to dismiss these claims is still pending.
This ongoing litigation creates uncertainty around the laws’ future enforcement, highlighting the need for business leaders to stay informed on regulatory changes that could impact corporate responsibility and compliance strategies in the years ahead.
Compliance Challenges And Preparatory Steps
To begin preparing for increased compliance, despite pending litigation and regulatory uncertainties, here are some recommended steps:
Entity Classification Assessment
Companies must determine if they qualify as a “reporting entity” under SB 253 or a “covered entity” under SB 261. This involves reviewing revenue thresholds and assessing business operations in California.
Emission Data Collection
Companies lacking GHG tracking systems should develop robust processes for measuring scope 1, 2 and 3 emissions, aligning methodologies with the Greenhouse Gas Protocol.
Third-Party Verification
I think it’s important for businesses to start engaging independent firms for emissions verification now as required for scope 1 and 2 emissions by 2026 and scope 3 emissions by 2030.
Climate Risk Analysis
Covered entities under SB 261 must analyze and document climate-related financial risks, ensuring their reports meet disclosure standards.
Gap Analysis
Companies with existing climate disclosures should evaluate discrepancies between current reports and SB 261 standards, planning to address gaps.
Supply Chain Engagement
Companies must coordinate with suppliers to gather scope 3 emissions data, potentially renegotiating contracts to ensure data access.
Reconciliation With Other Regulations
Companies subject to both California and EU regulations should harmonize their reporting frameworks to meet all compliance requirements.
Broader Legal And Financial Risks
California’s disclosure laws expose companies to new legal and financial risks. Ones to have on your radar include:
Administrative penalties: Non-compliance may result in penalties up to $500,000 annually for SB 253 violations and $50,000 for SB 261 violations.
Contract disputes: Demands for emissions data from supply chain partners could lead to contract disputes, breach claims or loss of business relationships.
Securities and consumer fraud: Inconsistent or misleading disclosures could trigger securities fraud and consumer protection lawsuits, especially if the SEC’s stalled climate disclosure rule takes effect.
Activist and shareholder litigation: Increased transparency may invite lawsuits from activists or shareholders alleging mismanagement of climate risks or inaccurate reporting.
Reputational harm: Public disclosures could expose companies to reputational damage, fueling litigation over alleged harm to brand reputation.
Future Outlook And Considerations
Despite the pending litigation, I urge companies to prepare for the first compliance deadlines in 2026. Companies should continue to keep an eye on legal updates and, no matter the conclusion to current legal challenges, adjust their climate strategies to stay in line with changing global standards, helping to reduce potential risks down the road.
Proactive preparation will not only ensure compliance but also position companies to respond effectively to future regulatory developments and stakeholder expectations regarding environmental accountability.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
Read the full article here
