We’re Not “California Dreamin”: What We Still Don’t Know About California’s Climate Disclosure Rules

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Background 

In October 2023, California enacted three laws that sought to impose broad new climate-related disclosure requirements on many companies conducting business in the state.  As a reminder:

• SB 253 (The Climate Corporate Data Accountability Act) requires the California Air Resources Board (CARB) to adopt regulations requiring U.S. public and private companies with total annual revenues in excess of $1 billion during the prior fiscal year that are “doing business” in California to disclose their Scopes 1, 2 and 3 emissions calculated in accordance with the Greenhouse Gas (GHG) Protocol. Disclosure of prior-year Scopes 1 and 2 emissions is first required in 2026, with limited third-party assurance, and Scope 3 emissions and stricter assurance requirements are phased in starting in 2027.  Consolidated parent-level emissions disclosure is permitted.  Companies that do not timely file their emissions disclosures, or otherwise fail to meet the requirements of SB 253, are subject to a fine of up to $500,000.
• SB 261 (The Climate-related Financial Risk Act) requires CARB to adopt regulations requiring U.S. public and private companies with total annual revenues in excess of $500 million during the prior fiscal year that are “doing business” in California to publish on their website a climate-related financial risk report in accordance with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). A consolidated parent-level climate-related financial risk report is permitted.  The first such risk report must be posted on the company’s website on or before January 1, 2026, and companies that do not post their report or post an inadequate report are subject to a fine of up to $50,000.
• AB 1305 (The Voluntary Carbon Market Disclosures Act) imposes certain disclosure requirements on public and private companies that (i) market or sell voluntary carbon offsets (VCOs) within California or (ii) operate in California and either make claims within California regarding net zero emissions, “carbon neutral” products or any similar claims, or purchase VCOs sold in the state to support such claims. Companies have until January 1, 2025 to make the required disclosures.  This client alert does not address AB 1305 due to its limited applicability among our client base.

Current Status   

On September 27, 2024, Governor Newsom signed into law SB 219, which made some relatively minor adjustments to SB 253 and SB 261.  Most notably, SB 219 requires CARB to adopt regulations by July 1, 2025 (delayed from January 1, 2025) implementing SB 253’s requirement that in-scope entities disclose their Scopes 1 and 2 emissions beginning in 2026.  So, while CARB has more time to adopt implementing regulations, companies are still required to disclose prior-year emissions starting in 2026.  Additionally, SB 219 provides that CARB will set a schedule for companies to disclose their Scope 3 emissions, as opposed to the prior requirement that companies disclose their Scope 3 emissions no later than 180 days after disclosing their Scopes 1 and 2 emissions.  Finally, SB 219 clarified that parent-level-only reporting is permitted for SB 253 GHG emissions reports, which aligns SB 253 with the consolidated parent-level reporting allowed under SB 261 for climate-related financial risk reports.

What We Still Don’t Know 

Unfortunately, there is still a lot that we don’t know:

1. What does it mean for a company to be “doing business” in California? It is possible that CARB could create a new definition of “doing business” in California, but most practitioners expect an existing definition to be used instead.  Two potential definitions are as follows:

• Section 191(a) of the California Corporations Code (the “Corporations Code”): A company is “doing business” in the state by “entering into repeated and successive transactions of its business in [the] state, other than interstate or foreign commerce.”
• Section 23101(a) of the California Revenue and Taxation Code (the “Tax Code”): A company is “doing business” in the state if it is “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.”  A company satisfies this test if it meets any of the following: (i) the company is organized or commercially domiciled in California, (ii) 25% of the company’s total sales, real and tangible personal property, or total compensation are in California, or (iii) the company has California sales, real and tangible personal property, or compensation exceeding certain thresholds that are indexed annually for inflation.  For 2023, these thresholds were $711,538 of sales, $71,154 of real and tangible personal property, and $71,154 of compensation.

2. If a subsidiary is “doing business” in California, is the parent company deemed to be doing business in California as well? Under the Corporations Code, a parent company is not deemed to be doing business in the state just because a subsidiary is, but does that separation apply if the subsidiary’s income is attributed to the parent for purposes of the Tax Code (and the parent, therefore, is subject to the Tax Code)? 

3. For purposes of SB 253, we know that disclosure of prior-year Scopes 1 and 2 emissions is first required in 2026, but when in 2026 is the first report due?

4. Will SB 253 and SB 261 survive the current legal challenges? The U.S. Chamber of Commerce has brought suit in the U.S. District Court for the Central District of California, arguing that the laws violate the First Amendment by compelling corporate speech.  The motion for summary judgement filed by the U.S. Chamber and co-plaintiffs in May 2024 is under review.  The laws are not stayed pending the case’s determination, and CARB is continuing to push forward with its rulemaking for now.

Next Steps 

Despite the various scoping issues and the unresolved legal challenges, it would be prudent for companies to evaluate their status and determine whether they are likely to be in-scope entities for purposes of SB 253 and SB 261.  If your company is almost certain to be in-scope, then it is time to implement processes for gathering the required Scopes 1 and 2 emissions data for 2025 and for producing the first TCFD-based risk report.  If you are unsure whether your company will be subject to the laws and would prefer to wait for the CARB rulemaking and a definitive answer from the ongoing litigation….well, we just hope you aren’t left “California Dreamin.”

For additional information about any of the above developments, or to discuss any questions that you may have, please contact a member of Maynard Nexsen’s Public Company Advisory Group.