On the heels of the SEC ruling on March 6, 2024 requiring approximately 2,800 U.S.-based and over 500 foreign-based companies to report greenhouse gas emissions, it's time to revisit the what and why of emissions reporting. In addition to the new SEC rules, there has been a growing trend of government regulation requiring emissions reporting in recent years. These policies aim to increase disclosures on environmental impact to cause longer-term focus on activities that will reduce adverse impact by businesses. While many argue the SEC’s ruling is not strong enough to force change, it is still anticipated to send waves across the business community.  

Despite the attention to this new ruling, the SEC is not the only actor in the force pushing for increased transparency and reporting.

California's Legislative Leap 

California is an example of the direction in which GHG policy is heading. The state recently enacted two groundbreaking bills, SB 253 (The Climate Corporate Data Accountability Act) and SB 261 (The Climate-Related Financial Risk Act). The two bills mark a significant step towards transparency and responsibility in corporate environmental impact.  

California has long been a bellwether for progressive environmental legislation in the country. For example, the state’s stronger car emissions regulations in the 1970s drove Congress to pass the Clean Air Act. California then implemented stronger emissions regulations, forcing car makers to further reduce emissions across the country. 

As the world’s fifth-largest economy, California’s legislation holds significant weight, and the recent passing of SB 253 and SB 261 will likely impact national-level policy. The impact of these bills will reverberate across the United States, and all businesses, regardless of state, should be aware of how this legislation may impact their GHG reporting and corporate sustainability requirements.   

SB 253: The Climate Corporate Data Accountability Act 

The Climate Corporate Data Accountability Act mandates companies doing business in California with a gross annual revenue of over $1 billion to publicly disclose their greenhouse gas emissions data following the Greenhouse Gas Protocol. The law comes into effect in 2026, with companies reporting on their Scope 1 and 2 emissions created in 2025. Scope 3 emissions reporting starts in 2027 for emissions generated during 2026. 

California defines “doing business in California” as a company that meets any of the following criteria: 

• Engages in any transaction for financial gain within California. 
• Is organized or commercially domiciled in California. 
• Has California sales that exceed California’s annual threshold or account for over 25% of the business’s sales. 

This is estimated to include over 5,000 companies that span across industries. Some of the largest companies based in California that may be subject to SB 253 include Google’s parent company, Alphabet, Wells Fargo, and Chevron.   

Important to Note: A key point of the bill is that it includes supply chain emissions — Scope 3. Scope 3 emissions often account for the highest share of emissions, accounting for over 70% of a company’s total emissions inventory. Supplier’s direct emissions (Scope 1 and 2) are reported as Scope 3 emissions for their client. Any company that supplies goods or services to a company subject to SB 253 will need to provide their emissions information to the California-based company. This perpetuates greenhouse gas emissions inventorying and reporting far beyond those legally required to do so in California.

SB 261: The Climate-Related Financial Risk Act 

Complementing SB 253 is The Climate-Related Financial Risk Act, which comes into effect in 2026. SB 261 requires companies doing business in California with annual revenue of $500 million to submit a climate-related financial risk report biannually to the state-run Climate-Related Disclosure Advisory Group and make it publicly available on the company website. One notable exception in SB 261 is that it does not apply to companies in the insurance industry. Insurance companies are regulated by the National Association of Insurance Commissioners, which has its own climate-related financial risk reporting requirements.  

Climate-related financial risk reports need to follow the Task Force of Climate-Related Financial Disclosure framework. It will require businesses to disclose financial risks related to climate change that the company is facing and how they are working to mitigate and adapt to those issues.  

Ultimately, the goal of SB 261 is to increase consumer transparency on climate change-related risks that companies face. This will help consumers decide which companies to invest in and purchase goods from. For businesses, this requires in-depth internal assessment and future planning on the effects of climate change, which is often a core component of sustainability reporting. 

The Federal Perspective and SEC's NEW Rules 

On the federal front, the United States is also making strides toward incorporating climate disclosures into its regulatory framework. The Securities and Exchange Commission (SEC) issued a new ruling on March 6, 2024, requiring publicly traded companies to report Scope 1 and Scope 2 emissions that are materially significant to operations. Scope 1 direct emissions reflect any company-controlled emissions including on-site fuel burning (i.e. manufacturing processes), fuel used in company fleets, and fuel used to heat or cool buildings. Scope 2 indirect emissions are those caused by another entity for energy used by the company (i.e. electricity produced offsite by a utility). The ruling requires publicly traded companies to say more in their financial statements about the risks climate change poses to their operations and their own contributions to the problem.

In a 3-2 vote by SEC commission members, many argue the requirements are too far-reaching while others say they are too weak. At issue was the inclusion of Scope 3 emissions, the indirect emissions caused by upstream and downstream activities. While Europe and California are both tackling Scope 3 since they are known to be the most significant impact a company has, the SEC stopped short. Regardless of opinion on the new rules, SEC's move aligns with the broader global shift towards sustainability and underscores the importance of climate disclosures in financial and corporate governance. 

Europe's Response to GHG Reporting 

Parallel to California's initiatives and the SEC’s new legislation, Europe has been even more proactive in its environmental regulatory framework. The recent adoption of the Corporate Sustainability Reporting Directive (CSRD) requires companies operating in the EU with over 250 employees, € 40 million in annual turnover, or € 20 million in total assets to publicly report their greenhouse gas emissions annually. 

The policy takes effect in stages starting in 2025, with later start dates for small/mid-sized companies and subsidiaries of non-EU parent companies. Non-EU-based companies with over € 150 million in annual revenue and an EU subsidiary must start reporting in 2029. In total, this regulation will require over 50,000 companies to report on their GHG emissions annually. 

This is a step above California’s GHG reporting requirements, encompassing a much larger group of businesses. However, even companies that don’t operate within the EU should be aware of how this may influence the activities of U.S. companies that are part of any multinational’s value chain.

The Importance of Compliance and Preparedness 

The evolving regulatory landscape presents both challenges and opportunities for businesses. Compliance with these new requirements is not just a legal obligation but a strategic imperative that can drive innovation, enhance reputation, and open new avenues for growth. Companies must proactively engage with GHG reporting and sustainability programs to navigate this new era effectively. 

Partnering with knowledgeable sustainability consultants, like Emerald Built Environments, can help businesses prepare for these changes. We stand at the forefront of this transition, offering expertise in GHG reporting and sustainability programs. With a deep understanding of the regulatory nuances and a commitment to environmental stewardship, we will assist your company in navigating these changes and embracing sustainability.