Is Your Company Prepared for California Supply Chain Carbon Emission and Climate Financial Risk Disclosures?

This year, the California Legislature is considering two major new climate policies. The first would alter the way companies collect, audit, disclose, and set carbon emission reductions goals, and the second would require companies to disclose all climate financial risk. Both bills would represent a sea change in how all companies do business—not just in California but across the globe. Both of these bills will be heard in a few days by the Senate Appropriations Committee. Many companies are making progress in tracking their carbon emissions and setting carbon emission goals. These bills take a one-size-fits-all approach to carbon accounting and risk analysis, so companies should watch closely to determine how this legislation will impact businesses across varied sectors.

The Climate Corporate Accountability Act

The legislature is considering SB 260 (Wiener), which proposes to require all companies to collect, audit, and disclose worldwide carbon emissions if they do business in California. This would apply to “Scope 1” emissions (direct emissions), “Scope 2” (indirect emissions associated with energy use), and “Scope 3” (all other indirect emissions, including emissions associated with a company’s entire supply chain). The bill was inspired by the Greenhouse Gas Protocol, a collaboration of the World Resources Institute and the World Business Council on Sustainable Development created to guide global companies on tracking climate emissions and setting carbon goals consistent with the United Nations Paris Agreement. However, unlike the GHG Protocol, SB 260 lacks flexibility for companies to adjust based on their unique sector or market.

Impacts Supply Chain Operations

Many companies are already far down the road on collecting and disclosing GHG emissions consistent with the GHG Protocol. Despite the inspiration, the bill does not contain definitions that make such collection and accounting consistent with the international protocol. The GHG Protocol was created with flexibility to account for the very different supply chains across various economic sectors. For example, collection of supply chain data for a company that manufactures a product is very different than a company that offers a service, and so the GHG Protocol allows for flexibility on how and when to collect Scopes 1, 2, and 3. Moreover, the GHG Protocol allows for modeling and statistical analysis for Scope 3 data, and suggests skipping Scope 3 where funds would be better spent reducing Scope 1 and 2 emissions.

SB 260 offers no such flexibility, and instead would require that large companies collect data from its supply chain, which are primarily small and medium businesses. These companies will be burdened with the collection and disclosure up the supply chain.

Limits the Use of Offsets in Goal Setting

Originally, the bill contained a requirement that companies also set a Paris-compliant climate reduction goal. That language was amended by the Senate Environmental Quality Committee, and now requires that the Air Resources Board study and report on feasible goals. Importantly, however, this new language would also limit the Air Resources Board from considering offsets in connection with goal setting. Cap-and-trade currently allows for the use of offsets, which reduce carbon emissions and may have non-climate benefits as well. To the extent your company uses offsets to establish Paris-compliant goals, SB 260 would remove that flexibility.

Climate Financial Risk Reporting

SB 449 (Stern) is also pending in the Senate Appropriations Committee this year. This bill will require global companies with $500 million or more in gross revenues and who are registered or have a certificate of authority to operate in California to disclose climate-related financial risks.

The bill requires a financial report consistent with the Final Report of Recommendations of the Task Force on Climate-Related Financial Disclosures, issued by the G20 Task Force on Climate-Related Financial Disclosures led by Chair Michael Bloomberg. The bill is moving forward with a California-specific disclosure despite federal action in this area, including a pending United States Securities and Exchange Commission public process on a similar rule.

SB 449 requires all companies to submit this report to the Secretary of State, and the reports will be transmitted to the newly formed Climate-Related Risk Disclosure Advisory Group formed pursuant to Governor Newsom’s Executive Order N-19-19. The Group would then use these reports to recommend legislative and regulatory actions to address climate risk.

If you don’t already meet these requirements, reach out to CalChamber to learn more about how this pending legislation may impact your company and how to express your concern to the legislature.

Leah Silverthorn, Senior Policy Advocate