California May Delay Implementation of Landmark Climate Disclosure and Financial-Risk Reporting Laws

Late last week, the Newsom administration released proposed amendments to the climate emissions disclosure and climate-related financial risk reporting laws enacted last year and discussed in our October 3, 2023 and October 10, 2023 Advisories. While the amendments remain subject to further negotiation and are not yet agreed, they signal the Newsom administration’s current position and its seriousness about addressing key concerns with the laws as enacted. The following outlines four key proposed revisions to the laws.

1. Implementation Could Be Delayed by Two Years. As enacted, Senate Bill 253 (SB 253), the Climate Corporate Accountability Act, required the California Air Resources Board (CARB) to develop and adopt new regulations to implement the requirements of the act by January 1, 2025, with Scope 1 and 2 emissions reporting to begin in 2026 and Scope 3 emissions reporting to begin in 2027. The Newsom administration’s proposal delays those deadlines by two years: CARB has until January 1, 2027 to adopt new regulations, with Scope 1 and 2 emissions reporting to begin in 2028 and Scope 3 emissions reporting to begin in 2029. The new timeline would give CARB two additional years to undertake a robust rulemaking process to develop the implementing regulations. Please see our October 3, 2023 Advisory for our thoughts on what to look for in the CARB rulemaking process. Notably, CARB has not formally commenced SB 253 rulemaking and without this amendment would face a near-impossible deadline of finalizing implementing regulations by January 1, 2025.
   
   Similarly, the Newsom administration’s amendments propose a two-year delay in the implementation of Senate Bill 261 (SB 261), which establishes the climate-related financial risk reporting requirements. The bill, as enacted, requires reporting starting on or before January 1, 2026 and biennially thereafter. The Newsom administration’s amendments would require reporting to begin on or before January 1, 2028.
2. CARB’s Regulations May Significantly Influence Scope 3 Emissions Reporting. SB 253 currently states that each covered business required to report shall “publicly disclose its Scope 3 emissions.” The Newsom administration’s proposed amendments refine that requirement for each covered business to “publicly disclose its Scope 3 emissions on a schedule specified by [CARB] as part of the regulations developed” to implement SB 253. By contrast, the law clearly states that each covered business disclose “all of the reporting entity’s Scope 1 emissions and Scope 2 emissions.” As such, CARB’s rulemaking process may elaborate how entities in various industries must comply with the Scope 3 emissions reporting requirements, potentially with phase-in periods for reporting certain types of Scope 3 emissions. Coupled with the extended timeline for Scope 3 reporting, this change allows CARB greater flexibility to adopt regulations that fulfill the fundamental purpose of the legislation.
3. SB 253 Reporting Can Be Consolidated at the Parent Company Level. The Newsom administration’s amendments include a new provision that allows emissions disclosure reporting to be consolidated at the parent company level — even if a subsidiary of that parent company would independently qualify as a “reporting entity” under the law. (SB 253 covers all businesses with more than US$1 billion in total annual revenue that do business in California.) This revision would align SB 253 with SB 261, which as enacted already included a provision that allowed consolidation of reporting at the parent company level. This is an example of a specific change pursued by covered businesses through the California Chamber of Commerce.
4. The State Is No Longer Required To Contract With Nonprofit Reporting Organizations. As enacted, SB 253 and SB 261 required the state to contract with a nonprofit “emissions reporting organization” or “climate reporting organization,” respectively, to implement the laws. The role of the emissions reporting organization in implementing SB 253, as currently written, includes accepting all of the disclosures from reporting businesses, as well as making them available to the public via the creation of a digital platform accessible by the public. Moreover, SB 253 requires CARB to contract with an emissions reporting organization. The Newsom administration’s proposed amendments, however, give CARB discretion to contract with such an organization, or not.
   
   The role of the climate reporting organization in implementing SB 261, as currently written, is to prepare a biennial public report on the climate-related financial risk disclosures completed by the covered businesses. Similar to SB 253, SB 261 as currently written requires CARB to contract with a climate reporting organization; however, the Newsom administration’s proposed amendments gives CARB discretion to contract with a climate reporting organization.

Legislature’s Reaction

The amended versions of SB 253 and SB 261 are subject to further negotiation and have not yet been agreed. State Senator Scott Wiener, the author of SB 253 and Chair of the Senate Budget Committee, responded this week indicating he opposes the Newsom administration’s amendments and underscored that it does not reflect any agreement with the legislature.

Next Steps

Negotiations on the text are expected to continue through July and potentially into August. The Newsom administration and the legislature will look to find a resolution before the August 31 deadline to pass bills to the governor for signature.

We will continue to monitor relevant developments and provide updates. For questions or additional information, please reach out to the authors of this Advisory or your Arnold & Porter contact.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.