California Enacts Climate Disclosure Laws, SEC Rule Still Pending

On October 7, 2023, California Governor Gavin Newsom signed SB 253 (Climate Corporate Data Accountability Act) and SB 261 (Greenhouse Gases: Climate-Related Financial Risk) into law, the first of its kind in the United States.^[1] Both bills place new climate disclosure requirements on companies doing business in California if they meet certain monetary thresholds.

Climate Corporate Data Accountability Act
SB 253 applies to companies (partnerships, corporations, limited liability companies, or other business entities formed under the laws of California or any other U.S. state or the District of Columbia or under an act of the U.S. Congress) that conduct business in California, and whose revenue exceeded $1 billion in the prior fiscal year. Starting in 2026 for Scope 1 and 2 emission and 2027 for Scope 3 emissions, the new law requires such companies to publicly disclose their green-house-gas (GHG) emissions:^[2]

• Scope 1 emissions means all direct GHG emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.
• Scope 2 emissions are indirect GHG emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.
• Scope 3 emissions means indirect upstream and downstream GHG emissions, other than Scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.

In addition to being the first law in the  nation to require such disclosures, SB 253’s enactment anticipated the Security Exchange Commission’s (SEC) long-delayed climate disclosure rule, first announced in March 2022. It is also broader in scope than the SEC’s proposal since it applies to public and private companies equally, and also requires Scope 3 disclosures without the caveat of a materiality exception.^[3]

California’s recently adopted SB 253 will not only apply to large publicly-traded private equity firms like Apollo, Blackstone, KKR and Carlyle,^[4] but also to their privately owned peers if they meet the revenue threshold (e.g. Warburg Pincus, Silver Lake Management).^[5] As PESP wrote in its June 2022 letter to the SEC, regulatory parity between public and private companies is important because private companies are susceptible to the same climate related investment risks as the publicly-traded companies.^[6] Further, there have been numerous examples of private equity firms buying dirty fossil fuel assets publicly from publicly-traded companies looking, thereby reducing disclosure. In this way, California’s law does more to capture the full range of firms contributing to the climate crisis than the SEC’s proposal.

Greenhouse Gases: Climate-Related Financial Risk
SB 261 also applies to companies that do business in California, regardless of publicly or private ownership, although it provides a lower reporting threshold of $500 million. The act does not apply to insurance companies since they already have similar reporting requirements under California law.^[7]

Covered firms must prepare and submit climate-related financial risk reports to the California Air Resources Board biannually. The report must disclose (1) the covered firm’s climate-related financial risks, in accordance with the recommendations of the Task Force on Climate-Related Financial Disclosures, and (2) measures adopted by the covered firm to reduce and adapt to climate-related financial risks. SB 261 also requires a covered firm  to make its climate-related financial risk report available to the public on its corporate website.^[8]

Due to the lower threshold, it is likely that SB 261 will apply to more private equity firms than will SB 253. Additionally, SB 261 provides a covered firm with the option to prepare consolidated climate-related financial risk reports at the parent company level rather than for each subsidiary.^[9]

Conclusion
SB 253 and 261 constitute landmark climate disclosure legislation, making California an overnight leader in this space. In anticipation of the SEC’s final  climate disclosure rule, California is a salient example of the feasibility of providing regulatory parity between private and public companies. It also shows that it is politically realistic to require strong Scope 3 disclosures, without regard to materiality. Regulators should pay special attention to efforts by private equity managers to circumvent the new disclosure laws, and thus craft strong regulations to prevent firms from exploiting any loopholes.

^[1]https://www.politico.com/news/2023/10/07/newsom-california-climate-disclosure-00120474

^[2]https://www.sidley.com/en/insights/newsupdates/2023/10/california-enacts-landmark-climate-accountability-package

^[3]https://www.sec.gov/news/press-release/2022-46

^[4]https://www.citizen.org/article/california-sec-climate-disclosure-report/

^[5]https://www.privateequityinternational.com/pei-300/#pei-300-full-ranking

^[6]https://www.sec.gov/comments/s7-10-22/s71022-20131786-302221.pdf

^[7]https://www.sidley.com/en/insights/newsupdates/2023/10/california-enacts-landmark-climate-accountability-package

^[8]https://www.sidley.com/en/insights/newsupdates/2023/10/california-enacts-landmark-climate-accountability-package

^[9]https://www.sidley.com/en/insights/newsupdates/2023/10/california-enacts-landmark-climate-accountability-package