The latest on California and Europe's advancing climate disclosure requirements

On May 30th, two landmark climate disclosure bills passed the California State Senate, making their way one step closer toward Governor Gavin Newsom’s desk to possibly be passed into law. While the bills still have additional votes to pass before then, they are quite momentous in their own right, as they surpass the U.S. Securities and Exchange Commission’s (SEC) Proposed Corporate Climate Disclosure in comprehensiveness.

What are these bills?

California Senate Bill 253 ‘Corporate Climate Data Accountability Act’ (introduced by Senator Scott Wiener) and California Senate Bill 261 ‘Climate-Related Risk Disclosure Act’ (introduced by Senator Henry Stern) are the two main pieces of proposed legislation affecting climate disclosure for businesses and financial institutions in the state.

The Corporate Climate Data Accountability Act (SB 253) seeks to require companies to measure and disclose their greenhouse gas emissions and climate risk management practices, moving California forward as it continues on the path towards a net zero economy.  The bill is very similar to SB 260 ‘California’s Climate Corporate Accountability Act’, which narrowly failed to be adopted in the 2022 CA legislative session. It would require a corporation, partnership, limited liability company, or other business entity formed under the laws of California state, the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the United States with total annual revenues in excess of one billion dollars that does business in California to report their scope 1, 2, and 3 emissions and receive independent verification of those emissions reports. According to the California Revenue and Taxation Code, a business is doing business in California if it actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California, among other requirements such as:

• The business (taxpayer) is organized or commercially domiciled in California
• The business’s sales exceed $500,000 or 25% of the business’s total sales total property
• The property of the business in California exceeds $50,000 or 25% of the business’s total property
• The amount paid in California by the business for compensation exceeds $50,000 or 25% of the business’s total compensation

To address the additional physical and transitional risks associated with climate change, the Climate-Related Risk Disclosure Act (SB 261) would require companies with total revenues over $500,000,000 doing business in California to report in line with the Task Force on Climate-related Financial Disclosure framework. Additionally, companies would have to disclose the measures adopted to reduce and adapt to the disclosed climate-related financial risks.

How will this make an impact?

The most notable aspect of these bills is their scope, which extends beyond the reach of the SEC. While the SEC's proposed Corporate Climate Disclosure rule focuses primarily on public companies, California's legislation encompasses a broader scope, impacting both private and public companies. If signed into law, the bills will spur over 7,000 companies to share their climate data. Additionally, SB 253 would require scope 1, 2, and 3 data – whereas, as proposed, the SEC has only included scope 3 if it is material to the company or if it has set reduction targets that include scope 3. This expanded coverage highlights the state's commitment to addressing climate change holistically and emphasizes the significance of corporate accountability in combating the climate crisis.

Crucially, the passage of these bills would ensure that California (and U.S. companies more broadly) do not fall behind as global capital markets continue to move forward with adopting climate disclosure policies. As the European Union introduces requirements through the Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB) develops the baseline for international sustainability standards, many other jurisdictions are considering adopting further climate disclosure regulations aligned with the ISSB. California's proactive approach keeps U.S. businesses advancing in alignment with global trends and fosters a harmonized framework that facilitates cooperation and consistency in climate-related reporting, ultimately helping these companies retain capital and properly manage their climate risks.

Given California's status as a major economy that ranks among the largest in the world, when the state takes action, companies are forced to pay attention. The implementation of these bills will send a strong signal to U.S. corporations, prompting them to reevaluate their climate-related practices regardless of what happens with the SEC’s proposed rule.

Where do these bills go next?

After passing the Senate, the bills are now in the Assembly. Next steps are for the bills to be presented in front of the Natural Resources and the Judiciary committees for votes. From there, the bills would need to be passed again through the Senate and the Assembly before making their way to the Governor. As proposed, businesses could expect the initial round of reports to be due by December 31st, 2024.

There is optimism for SB 253 and 261 due to several compelling factors. The intensified impact of climate disasters on California, the U.S., and the world has created a sense of urgency for comprehensive climate action. Companies voluntarily disclosing their climate initiatives and an increasing number of investors committing to net zero targets reflect a growing corporate and investor engagement in sustainability. Additionally, the coalition supporting the bills has expanded significantly, with organizations like Ceres joining as cosponsors, forming a broader and more diverse alliance of businesses and advocates. This growing support and shift in market norms improves the likelihood of the bills being enacted, highlighting the pressing need for comprehensive, comparable climate disclosure legislation.

Climate & ESG News Roundup

European Commission releases first draft of European Sustainability Reporting Standards

The European Commission (EC) has issued its draft Delegated Act with the revised European Sustainability Reporting Standards (ESRS) that will shape the content of disclosure obligations under the CSRD. The EC draft Delegated Act is based on the technical advice developed by the European Financial Reporting Advisory Group (EFRAG) and submitted to the EC last November after a public consultation process.

The EC draft includes a summary of its proposed modifications to EFRAG’s technical advice.  A topline takeaway is that the disclosure requirements contained in the General Disclosures (ESRS 2) will remain mandatory. These include the cross-cutting sustainability disclosures based on the core TCFD architecture related to (1)  governance, (2) strategy, (3)  impact, risk, and opportunity management, and (4) certain metrics and targets. For the topical standards, the EC has proposed that  “all standards and all disclosure requirements and data points within each standard will be subject to materiality assessment.” This would include the Climate Change Standard (ESRS E1) and certain workforce-related disclosures, which EFRAG had recommended requiring regardless of materiality. It is important to note that the materiality assessment must still take into account a “double materiality” perspective, which includes impact. For climate-change-related disclosures, companies will need to consider the broader context shaped by Europe’s many other climate-change-related regulations and policies. The General Requirements standard (ESRS 1) includes Application Requirements for applying the concept of double materiality when making disclosure determinations, and the EC has also asked EFRAG to prepare additional guidance.

Along with extending materiality assessments to all the topical standards, the EC proposed making certain data points subject to phase-ins to help companies “apply the standards effectively.”  For the climate change standard, the EC proposed a one year phase-in of scope 3 emissions data for companies with less than 750 employees. This phase-in is similar to the ISSB’s approach to implementing scope 3 in a scalable way, and is also intended to help companies build capacity. The EC also proposed that some of the more challenging data points be voluntary or subject to additional flexibilities, explaining that its “specific aim” is to make the overall reporting process more proportionate.

The draft Delegated Act including the ESRS is now open for feedback for four weeks, until July 7, 2023. The CSRD and this Delegated Act will impact companies, investors, and other stakeholders around the globe, and all organizations, regardless of location, are encouraged to participate.

Canadian wildfires impact the Northeast US and impact climate sentiments

Recent Canadian wildfires have painted the Northeast U.S. orange, leaving the region with a renewed sense of climate consciousness. The wildfires have been linked to climate change, highlighting the escalating impact of increased global temperatures on extreme weather events. The fires have resulted in hazardous air quality and significant smoke pollution, posing health risks to residents in affected areas. The fires have engulfed regions in Nova Scotia and Quebec, and there are still ongoing efforts to control and extinguish the flames. Scientists and experts warn that rising temperatures and drier conditions, exacerbated by climate change, have created favorable conditions for the rapid spread of wildfires in Canada.

These devastating wildfires have not only posed immediate threats but have also influenced public sentiment on climate change. The BBC explores how the Canadian wildfires could change attitudes towards climate change, particularly on the US East Coast. The sheer scale and intensity of the fires have captured public attention, amplifying concerns about the urgency of addressing climate change. The smoke from the Canadian wildfires has traveled across North America, affecting air quality in various regions. This widespread impact has increased public awareness of the interconnectedness between climate change, extreme weather events, and health consequences. The visible consequences of the fires have the potential to shift public opinion, garner support for climate action, and foster a greater sense of urgency in addressing the underlying causes of climate change.

Greenwashing Risks on the Rise

Greenwashing litigation persists as companies fail to meet stakeholder demands for more sustainable operations. Last week, the District Court of Amsterdam greenlit a full hearing for greenwashing claims against KLM Royal Dutch Airlines. The airline, which offers customers the option to purchase carbon offsets when booking flights to reduce their impact, is under criticism for misleading marketing. The complaint argues that the corporation does not exercise climate solutions that sufficiently balance its environmental impact and that its target to be net zero by 2050 does not align with the airline’s plans for growth.

Also facing greenwashing consequences are Shell, Petronas, and Repsol. The Advertising Standards Authority of the UK has banned several misleading ads by these energy companies. The regulator decided the companies were breaching advertising codes, giving an inaccurate impression that the businesses are more sustainable than they actually are, and intentionally omitting information about their extensive greenhouse gas emissions.

Banks and asset managers are at risk as well, according to the European Supervisory Authorities’ latest reports. They found that insurance and pension providers are at risk for misleading product claims, banks for ESG claims, and asset managers for sustainability and company engagement claims. As demand for sustainable products and investment options increases, the risk for greenwashing also increases, as some corporations are inclined to make empty or misleading statements about their ESG efforts.

Australia Integrates Climate Considerations into Financial System

Australia’s financial regulator will now be required to consider climate-related risks as it works to ensure the stability of the country’s financial system. In early June, the Australian Prudential Regulation Authority (APRA), which oversees institutions across banking, insurance, and superannuation, received an updated mandate from the Australian government directing the regulator to actively consider the impacts of climate on the financial system.

APRA’s updated Statement of Expectations from the government instructs the regulator to “promote prudent practices and transparency in relation to climate-related financial risks and the adoption of climate reporting standards by regulated entities.” As ESG Today has noted, this is not the first indication that APRA considers climate-related issues to be material financial risks: this news of the agency’s updated mandate comes on the heels of an APRA-led Climate Vulnerability Analysis with the country’s five largest banks to assess those institutions’ financial resilience in the face of climate-related risks.

Australia’s move builds off of global momentum to safeguard against the systemic financial risk posed by climate change, including Canada’s March release of Guideline B-15: Climate Risk Management, which created a requirement for Canadian financial institutions to report on Scope 3 financed emissions.

Events You Can't Miss

• Early registration is open for this year’s Amplify conference, hosted by Workiva. Industry leaders will be providing expert insight on the future of sustainability and innovative solutions on the market. This event takes place in-person and online September 19-21.
• Reuters will be hosting this year’s Sustainability Reporting USA, The Road to Regulatory Compliance in New York, October 2-3. This year’s topics include data exchange, scope 3 reporting, and navigating the regulatory framework, with sessions hosted by leadership from Hanesbrands, Colgate-Palmolive, IFRS, and more. Register here today.