As discussed in a previous blog post, 2022 will be an important year for ESG regulatory activity.
While the SEC works to develop a legally-defensible proposal on disclosures of climate-related risks, California, usually the tip-of-the-spear on climate policy, is advancing ESG legislation. Recently, the California Senate passed the Climate Corporate Accountability Act (SB-260), a bill that requires public and private US-based companies that do business in California with annual revenues over $1 billion to report their Scope 1, 2 and 3 greenhouse gas (GHG) emissions to the California Secretary of State. The GHG disclosure requirements would take effect in 2025. Companies would need to follow the Greenhouse Gas Protocol Standards and guidance developed by the World Resources Institute and the World Business Council for Sustainable Development when making these GHG disclosures. The disclosures will also require independent verification by a third-party auditor, approved by the state board.
The version of the bill that passed the state Senate reflects a series of compromises: on the one hand, it expanded the bill's scope to include privately-held companies. However, the final version that passed the Senate was narrowed by scrapping a provision that required companies to establish science-based emissions reductions targets and report those targets in the GHG disclosures. The bill is now at the California Assembly for further review.
Companies should remain aware of developments in both state and federal ESG climate disclosures, which may apply to different entities, entail different reporting requirements, and require use of different methodologies to estimate reported emissions. For example, as mentioned, California's SB-260 would require companies to report Scope 3 emissions, but it is unclear whether the SEC will require companies to report Scope 3 emissions given the more tenuous nexus of those emissions to the "materiality" standard that Chairman Gensler has indicated must guide the SEC rule.
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