California leads the way with new climate disclosure bills

In October, California approved two bills, SB 253 and SB 261, which require climate-related disclosure from companies. Taken together, the bills create a disclosure regime for climate-related information that closely resembles the contents of the Securities and Exchange Commission’s (SEC) proposed rule to require disclosure of climate-related financial information.

What disclosures do the new bills require from companies?

California’s new climate disclosure laws are primed to fulfill the baseline of investors’ demands for climate-related information. Both bills mandate regular disclosures to the state Air Resources Board (ARB) from public and private companies doing business in California (i.e., a business doesn’t have to be headquartered or incorporated in the state to fall within the scope of the disclosure package):  

• SB 253 would require public disclosure of Scope 1, 2, and 3 greenhouse gas (GHG) emissions from companies with more than $1 billion in annual revenue, with Scope 1 and 2 reporting beginning in 2026 and Scope 3 in 2027. Reporting entities would have to measure and report GHG emissions in conformance with the GHG Protocol. The bill directs the ARB to structure reporting to allow submission of reports prepared for other jurisdictions, including any reports required by the federal government, if those reports satisfy all the requirements of this section. 
• SB 261 would require biennial disclosure of climate-related financial risks from companies with more than $500 million in annual revenue, beginning in 2026 (excluding insurance companies). Disclosures would be aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Covered entities could also meet the requirements if they already prepare a different report in accordance with the requirements of SB 261, such as those aligned with ISSB recommendations. 

“California’s new rules will arm investors with the comprehensive and easily comparable information that they need to accurately price risks and opportunities and make the best long-term investment decisions for their beneficiaries.”

Implications beyond California’s borders

While these laws were adopted in California, they have much broader implications. For example, a business with $999,000,000 in Chicago-based revenue and only $2,000,000 in California would still fall within scope. Senate Bill 253 alone has been estimated to apply to up to 5,400 companies, likely more than the number of public companies that must file reports with the SEC.

While neither the SEC’s proposal nor the regulatory details of California’s proposal are final – the SEC has yet to publish its final rule, almost two years after the initial proposal, and the California bills leave the fine details to be set by the ARB – it’s likely that California’s disclosure regime will end up complementing or even exceeding the SEC’s, depending on the status of the Scope 3 disclosure mandate in the SEC’s proposal. Based on California’s $3.5 trillion GDP (as of 2022), it is the fifth largest economy in the world. As such, California’s regulatory agenda has the potential to set policy with far-reaching implications and may end up setting the national standard. It’s not waiting for the SEC to finish its rule, and it’s not waiting for the rest of the country to catch up. 

Easily comparable information for investors

Investors have long demanded consistent, comparable disclosure of such information. When the 5,500+ signatories to the Principles of Responsible Investment signed up, they agreed to Principle 1: “incorporation of ESG issues into investment analysis and decision-making processes”. But to do so, investors need access to credible and decision-useful information. Without robust policy support that ensures consistency and comparability, the information gathered from the variety of voluntary corporate sustainability reports is far less useful. California’s new rules will arm investors with the comprehensive and easily comparable information that they need to accurately price risks and opportunities and make the best long-term investment decisions for their beneficiaries.  

One of the keys to useful disclosures is interoperability. California’s rules will allow companies to publish equivalent disclosures created for other jurisdictions, so long as they meet the basic requirements of California law. For example, a company reporting in Europe will likely be able to submit the same report for both jurisdictions whereas a company filing with the SEC might find itself needing to submit a Scope 3 addendum to qualify under California law. 

Opportunity to align regulations

The SEC should take note and ensure that its final rulemaking supports California’s disclosure package. Regulatory delays and divergence only increase the costs of compliance for covered firms and could drive US markets further from the global standard for climate disclosures. While SB 253 and 261 may not pre-empt the legal challenges that the SEC is almost certain to face, their passage is a clear sign that the SEC should proceed with a strong rule. State and federal regulators should ensure alignment with ISSB recommendations wherever possible, to maximize benefits to investors and minimize costs to companies by avoiding (where possible) a patchwork of divergent regulatory hurdles. SEC staff and elected officials have already indicated that California’s disclosure package changes the underlying cost-benefit analysis of the SEC’s final rule – a clear demonstration that alignment of regulations and industry expectations is the best path forward.  

Paving the way for a sustainable financial system

Regardless of the contents of the SEC’s forthcoming climate disclosure rule, both companies and investors will continue to forge ahead, establishing disclosure of comprehensive, consistent and comparable climate-related information as the industry standard. The US has a chance to become a leader in climate disclosures, paving the way for a more informed and more sustainable financial system that rewards investors and their beneficiaries for seeing the bigger picture. California is already stepping up to the plate – regulators and lawmakers in Washington, DC and around the country should do the same.  

The PRI blog aims to contribute to the debate around topical responsible investment issues. It is written by PRI staff members and occasionally guest contributors. Blog authors write in their individual capacity – posts do not necessarily represent a PRI view.