PKF O'Connor Davies Accountants and Advisors
PKF O'Connor Davies Accountants and Advisors
Insights

California Governor Signs SB 253 and SB 261 Into Law

By Parth Parikh, Senior Associate

In light of recent comments from the U.S. Securities and Exchange Commission (SEC) regarding obstacles in their plan to implement proposed climate disclosure rules, one state has enacted laws that will expand reporting on greenhouse gas emissions.

On October 7, 2023, California Governor Gavin Newsom signed two bills into law that would require all covered public and private companies that do business in the state of California to disclose their carbon emissions from all scopes, as well as disclose all climate-related financial risks associated with their business:

  • California State Bill 253 – Climate Corporate Data Accountability Act

  • California State Bill 261 – Climate-Related Financial Risk Act

Climate Corporate Data Accountability Act (SB 253)

According to SB 253, every “reporting entity” is required to disclose their greenhouse gas emissions. A reporting entity is defined as a company formed in the United States, “with total annual global revenues in excess of $1 billion dollars … and that does business in California.” As part of the disclosure reporting, companies must provide an annual report to the California Air Resources Board (CARB) on the accounting of Scope 1, Scope 2 and Scope 3 emissions as soon as 2026.

Scope 1 emissions are known as “direct emissions” that stem from sources directly in the company’s control, such as fuel combustion activities.

Scope 2 emissions are known as “indirect emissions” and relate primarily to the purchase and consumption of electricity, heating and cooling.

Scope 3 emissions consist of indirect upstream and downstream emissions over which the company does not have direct control. Examples of Scope 3 emissions are business travel, purchased goods and services, waste and water usage. They are likely to be the largest source of greenhouse gases for a given company.

All measurements and reporting for the annual report on scope emissions will be performed according to the Greenhouse Gas (GHG) Protocol, which is consistent with emerging regulations.

For Scope 1 and Scope 2 emissions, annual reports will begin in 2026 and be subjected to a limited assurance engagement from an independent third-party auditor in accordance with applicable standards. Starting in 2030, Scope 1 and Scope 2 emissions will subject to a reasonable assurance engagement. Scope 3 emissions reporting will begin in 2027. In 2030, a limited assurance engagement over Scope 3 emissions disclosures will be required.

Climate-Related Financial Risk Act (SB 261)

According to SB 261, all “covered entities” (public and private companies that do business in California and are formed in the United States, with annual global revenues exceeding $500 million) are required to disclose climate-related financial risks, along with detailed measures that they will undertake to adapt and/or mitigate these risks.

SB 261 defines climate-related financial risks as, “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks,” such as risks to corporate operations, capital and financial investments and employee health and safety.

These climate-related financial risks are to be published on the company’s website, in accordance with various frameworks such as the IFRS Sustainability Disclosure Standards and the Task Force on Climate-Related Financial Disclosures (TCFD). The four pillars of the TCFD laid the groundwork for the IFRS Sustainability Disclosure Standards and consist of governance, strategy, risk management and metrics and targets.

Climate-related financial risk reports are expected to be published in 2026, with an updated report due every two years thereafter.

Timelines for SB 253 and SB 261 reporting are subject to change, as Governor Newsom expressed concern during the signing ceremony over potential inconsistent reporting by companies and the CARB’s ability to carry out the requirements of both Bills in time.

Contact Us

Please reach out to us for advice as you’re assessing the readiness of your business to comply with this legislation. Our team of experts is here to help. For more information, please contact your PKF O’Connor Davies client engagement partner or:

Media Contact
Posted In:
Posted On: