Driving Corporate Climate Accountability: California's Commitment to ESG and Sustainability Disclosure
In the ever-evolving landscape of sustainability reporting, California has taken a step forward by committing to enforce Environmental, Social, and Governance (ESG) reporting for large corporations by 2026. Governor Gavin Newsom recently confirmed his intention to sign the bill, making California the first state in the U.S. to mandate such disclosure. This transformation is a response to the global priorities set by the Paris Climate Change Agreement and the United Nations, particularly the UN Principles for Responsible Investing. As California sets a new standard, we explore the implications of this pioneering legislation.
Leading the Way: The European Union's Model
The European Union has been at the forefront of sustainability reporting, having adopted the European Sustainability Reporting Standards (ESRS) on July 31. These standards are designed to standardize how companies in the European Union report on climate change and other ESG-related actions, with implementation scheduled for January 1, 2024. Importantly, the ESRS aligns with the International Financial Reporting Standards (IFRS) Foundation's Sustainability Disclosure Standards, making them the global standard for sustainability and climate change reporting.
California's Approach
California's approach to sustainability reporting involves a pair of bills known as the Climate Accountability Package, which sets new standards for climate reporting:
Senate Bill 253: This bill mandates annual reporting for Scope 1 and Scope 2 emissions for companies doing business in California with annual revenues exceeding $1 billion, starting in 2026. Scope 3 reporting will commence in 2027, with reporting guidelines to be established by the State Air Resources Board by January 1, 2025.
Senate Bill 261: This bill requires companies with annual revenues exceeding $500 million to submit a biennial climate-related financial risk report, following the recommendations of the Task Force on Climate-Related Financial Disclosures.
A Bold Leap Forward for Climate Disclosure:
California's new regulations signify a significant shift from the existing federal and state reporting requirements, which primarily focus on certain emissions from companies' direct operations. These laws will require comprehensive reporting of both direct and indirect greenhouse gas emissions, setting a higher bar for corporate accountability.
It's worth noting that many of the multinational corporations affected by California's legislation are already accustomed to such reporting requirements. The majority of S&P 500 companies voluntarily report to the Carbon Disclosure Project (CDP), which surveys companies about their carbon management and emission reduction plans on behalf of institutional investors.
The Wider Impact of California's Mandate
California is the world's fifth-largest economy, which amplifies the global influence of its climate disclosure rules. Its regulations will extend to subsidiaries of companies previously exempt from such requirements.
The state has a history of pioneering policies that subsequently become federal standards. As the U.S. government considers expanding emissions reporting mandates, California's regulations set a higher bar compared to both the proposed corporate climate disclosure rules by the U.S. Securities and Exchange Commission and President Joe Biden's proposed rules for federal contractors.
The Scope 3 Challenge
One of the most contentious aspects of the new disclosure rules is the inclusion of Scope 3 emissions, which encompass emissions from a company's suppliers and consumers' use of its products. These emissions are notoriously challenging to track accurately. However, California's approach provides flexibility for companies reporting Scope 3 emissions as long as it's done reasonably and in good faith.
Conclusion
As California forges ahead with its groundbreaking climate disclosure regulations, the world is watching. The state's commitment to comprehensive sustainability reporting is a significant leap forward in the fight against climate change. While the implementation may take time and face challenges, California's bold move sets a new standard that has the potential to reshape corporate behaviour, not only in the U.S. but across the globe.
How we can help
Orbis Advisory work across a broad range of sectors to develop and support ESG strategies to meet investor demands, prepare for upcoming legislative changes, and create tangible benefits both now and in the future. For any inquiries, send an email to info@orbisadvisory.com, or fill out an online enquiry form.