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California Climate Corporate Data Accountability Act

On September 12 and 13 the “Climate Accountability Package” was passed in the California state Senate and is pending final approval by the state’s governor. The package, which contains Senate Bill 253 (commonly referred to as the Climate Corporate Data Accountability Act) and Senate Bill 261 on the climate-related financial risk of greenhouse gases, aims to create transparency around corporate carbon emissions and subsequently incentivize companies to reduce their carbon footprint.  

If signed into law, Senate Bill 253 (SB 253) will mandate the public disclosure of Scope 1, 2, and 3 greenhouse gas (GHG) emissions data by all U.S. businesses with annual revenues above $1 billion doing business in California. Approximately 5,300 companies – both public and private – are estimated to be impacted by SB 253. All impacted companies will also be required to pay an annual filing fee to the state board.  

Senate Bill 261 (SB 261), on the other hand, requires companies to disclose their estimated climate-related financial risk and prepare a report detailing the measures they have adopted to reduce and adapt to that risk. SB 261 has a lower reporting threshold than SB 253 and will require all companies doing business in California with revenues above $500 million to report their findings. At least 10,000 companies will be impacted by SB 261. The consequences for failing to comply with either bill include fines of up to $500,000.  

While the bills do not target a particular industry, sectors with complex supply chains may face disproportionate compliance challenges as they attempt to estimate their suppliers’ emissions due to the Scope 3 reporting requirement of SB 253. As California’s economy is the fifth largest in the world, it can be expected that a substantial percentage of large corporations will be impacted by the ruling. 

Challenges associated with reporting Scope 3 emissions draw concern 

Greenhouse gas emissions from a company can be divided into Scopes 1, 2, and 3. Scope 1 includes all emissions that come directly from the company (vehicle use, manufacturing emissions, etc.). Scope 2 covers the indirect emissions from the electricity and other utility generation that power the company’s operations. Scope 3 emissions include the Scope 1 and 2 emissions of all activities upstream and downstream of the company’s supply chain, as well as transportation between supplier nodes. 

Though not without their challenges, Scope 1 and 2 emissions are straightforward to estimate compared to Scope 3. For Scope 1 and 2, companies typically have the data needed to estimate direct emissions as well as utility use. Scope 3 emissions are much more challenging as companies often do not have a complete view of their extended supplier and transportation networks. 

Beyond those challenges, Scope 3 accounting can be complex as emissions must be tracked and allocated through supply chains that branch and merge. Scope 3 emissions for a company should only include the emissions that went towards the products they purchase, not other products that were produced at the same location. Accounting is further complicated as the same Scope 3 emissions are reported multiple times by different companies in that supply chain. While this helps to incentivize cooperation in emission reduction, it can also lead to multiple companies attempting to claim tax credits for an emission reduction in the supply chain. 

Different methods can be used for emissions estimates depending on data availability. The Primary Data approach involves calculations or measurements for individual activities. This is the simplest method for obtaining direct measurement of emissions, but the data is not always practical. The alternative method is to use an emission factor for each activity, such as per liter of fuel, mile driven, or kWh of electricity used. However, the granularity of this data is often not available, prompting the Secondary Data approach. Companies can refer to sources of tabulated emission estimates for products within a supply chain, capturing general emission estimates for similar products. Though this approach is much simpler to apply, it is not as accurate as the use of primary data sources. 

Industries respond to the Climate Corporate Data Accountability Act 

Since SB 253 was announced, more than a dozen companies have submitted letters in support of the Act, including Apple Inc., Salesforce Inc., Patagonia, and IKEA. Multiple companies including Unilever Plc and Walmart Inc. reportedly already voluntarily disclosed the data required by the bill.  

Opponents, on the other hand, claim the bill’s requirements are too costly and complicated to enact, with some estimates placing reporting requirement costs at $600,000 per year. Some of the most vocal opponents of the bill include the California Chamber of Commerce, the Western Growers Association and the Western States Petroleum Association, the latter of which has spent $2.38 million on lobbying and advocacy against the bill in 2023 alone. Most of the pushback to the bill surrounds the Scope 3 reporting mandates, with adversaries asserting that the rule will punish California businesses that have global supply chains. 

An estimated 81% of S&P 500 companies voluntarily reported their Scope 1 and 2 emissions as of 2020. Meanwhile, estimates suggest that around just 60% of the 500 largest U.S. public companies already voluntarily report on Scope 3 emissions. It is unclear if these companies are reporting on all Scope 3 emissions covered by the California regulation or if they will need to further discern emissions associated with their operations to reach compliance. 

The bill is also likely to put pressure on smaller businesses captured by affected companies’ value chains to disclose Scope 1 and 2 emissions. Some critics have warned large corporations may cancel relationships with smaller companies that are unable to calculate their emissions. Data collected from 2016 through 2020 suggests that, while Scope 1 and Scope 2 emissions reporting is generally increasing in most sectors, as of 2020 most companies in all sectors apart from the utilities and materials sectors still did not disclose emissions, which may make it harder for companies to calculate their Scope 3 emissions as they reach out to suppliers in their networks. 

A similar federal ruling on GHG emissions disclosures is under final review by the US Securities and Exchange Commission (SEC). The SEC rule, which was proposed in March 2022 and will likely face a final decision in October 2023, only places Scope 3 reporting obligations on public companies that have pledged to become carbon neutral or companies with “material” emissions. The SEC rule is also less particular about the standards for reporting GHG emissions, whereas companies reporting in accordance with SB 253 must use standards from the GHG Protocol, the main global standard for public and private sector emissions measurement. The SEC rule is by-and-large less-stringent than the California ruling barring a clause that would extend the federal regulations to foreign-incorporated companies. As such, it is expected that the California rule will actually serve as the standard not only for other states’ emissions reporting regulations, but also for the SEC’s rulemaking in the future. 

Everstream clients are receiving more detailed insights and recommendations about this risk. 

Contact us to learn how we can give you a complete view of the risks affecting your end-to-end supply chain and what you can do to mitigate them. 

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