California Is Requiring Climate-Related Reporting for Corporations – Will You Be Impacted?
Published on by Barnes Dennig in Manufacturing, State Local Tax, Tax Services
In October 2023, California passed the Climate Corporate Data Accountability Act (SB 253) and the Greenhouse Gases: Climate-Related Financial Risk Act (SB 261), creating unprecedented climate-related reporting for companies beginning in 2026. In addition to certain climate-related financial risks and disclosures, the bills focus on reporting greenhouse gas emissions in accordance with the Greenhouse Gas Protocol.
SB 253
SB 253 sets forth reporting and public disclosure requirements for U.S. companies with revenues greater than $1 billion that do business in California as follows:
- Beginning in 2026, report scope 1 and 2 greenhouse gas emissions for the prior fiscal year and obtain limited assurance on those disclosures.
- Beginning in 2027, reporting expands to include scope 3 emissions.
- Beginning in 2030, the required assurance level on scope 1 and 2 emissions disclosures will increase from limited to reasonable assurance, and begin to require obtaining limited assurance on scope 3 emissions disclosures.
SB 261 – a lower reporting threshold
SB 261 has a lower threshold and applies to U.S. companies with revenues greater than $500 million that do business in California. SB 261 requires additional reporting and public disclosure of a company’s climate-related financial risks and measures adopted to reduce and adapt to those risks.
How many will be impacted? More than you think.
For now, the requirements of SB 253 and SB 261 will only impact U.S. companies that do business in California, but it’s not limited to just publicly traded companies regulated by the SEC. Large privately-owned companies will also need to comply – a larger scope than the requirements adopted by the SEC in March 2024 for all public companies.
Will other states follow California’s example?
It’s possible other states could follow in California’s footsteps. It’s also possible that down the road California (or others) lower the threshold and apply similar rules to companies under the $1 billion large corporation threshold.
The implementation of scope 3 emission reporting that considers emissions up and down the supply chain of the reporting entity will indirectly cause some smaller companies to track and provide information.
Am I “doing business in California”?
The criteria of “doing business in California” was not specifically defined in the bills, however, California has rules in place for income tax nexus that might serve as a good guide until additional guidance for SB 253 and SB 261 is released.
As it relates to filing income tax returns in California, several factors can trigger a filing requirement for companies organized or headquartered outside California. Companies that meet certain sales, real property, and payroll nexus thresholds would be considered to be “doing business in California” for income tax purposes.
Any company considered to be doing business in California based on those nexus thresholds that also has at least $1 billion (SB 253) or $500 million (SB 261) of total revenue should consider their need to comply with the new regulations.
What can you do to prepare?
The bills leave some questions unanswered about the specifics of when and how to apply the new rules, including questions from the start by Governor Newsom about the feasibility and cost to businesses. The California State Senate has already proposed SB 219 delaying the development of regulations by the California Air Resources Board by 180 days until July 1, 2025.
Start by contacting a specialist who can prepare you for climate disclosures and help implement any changes necessary to collect the right data before the first year of reporting. We can help you navigate these new regulations and any other issues related to climate and other environmental, social, and governance (ESG) reporting, as well as provide insights into sales tax nexus and how that might impact your filing requirements.
Contact us to set up a free consultation with one of our experienced professionals. As always, we’re here to help.
