Dive Brief:

• Companies doing business in California with annual revenues in excess of $1 billion will have to report on carbon emissions they’re directly and indirectly responsible for starting in 2026 under a bill the state legislature passed this week and sent to Gov. Gavin Newsom.
• Starting in 2027, companies will have to add so-called Scope 3 reporting, which concerns emissions the company has no control over but is responsible for like those generated by its supply chain partners. For banks, Scope 3 reporting includes emissions from companies they lend money to. 
• “Huge climate win in California,” says Scott Wiener (D), the sponsor of the bill in the state Senate. “SB 253 will make California a global leader in corporate carbon transparency.”

Dive Insight:

Should Newsom sign the Climate Corporate Data Accountability Act, it would impose the most far-reaching carbon reporting requirements in the country.

Starting in 2026, companies would have to report their Scope 1 emissions, which come directly from sources they own, and their Scope 2 emissions, which come from sources they don’t own but nevertheless use in their operations, like those from power plants whose energy they use to heat or power their offices and other facilities. 

Then in 2027, companies would have to report their Scope 3 emissions, which come from their work but are from sources they have no control over, like those from their supply chain partners. Even emissions from their employees’ commute to work would have to be measured.  

Mixed support

Influential technology companies like Apple and Microsoft have come out in favor of the bill but many manufacturing and financial services companies have come out against it, arguing it’s too much to report on emissions they have no control over and are hard to measure.

“Small and medium-sized businesses do not have the resources or expertise to accurately measure their GHG [greenhouse gas] emissions, leaving these companies without the contracts that enable them to grow and employ more workers,” says the California Chamber of Commerce. “This will create inefficient supply chains that will burden small businesses and further add costs to California families.”

Although companies with $1 billion or less in annual revenue aren’t subject to the bill, the big companies that are subject to it would have to rely on their supply chain partners, many of them small and mid-sized companies, to measure and provide their emissions to them so they can comply. 

Groups representing financial services companies are also opposed, largely because of the scope and complexity they would face reporting on emissions from companies they’ve lent money to. 

“It is extremely difficult for financial institutions to calculate and report Scope 3 emissions with a high degree of confidence,” Sonja Gibbs, a managing director and head of sustainable finance at the Institute of International Finance, told the Financial Times. 

Rule details

For companies worried about complying, they’ll have opportunities to weigh in on what compliance will look like. 

The bill requires a state governing body, called the Air Resources Board, to flesh out the requirements by 2025 using a regulatory process that allows for public input.

At the same time, there will be lawsuits, which could lead to changes in how the requirements are written. 

"I expect the legislation to be challenged in court," Steve O'Day of Smith Gambrell Russell told Reuters. 

How these regulatory and legal challenges shake out are expected to inform what’s happening at the federal level. The Securities and Exchange Commission has been writing rules that impose similar reporting requirements on public companies but those rules remain in the drafting stage. Until they’re finalized, the agency is likely to incorporate what it learns from the California experience.  

“[The state process] will begin to force analysis and disclosure of life cycle greenhouse gas emissions" ahead of the SEC's proposed federal rule, O’Day told Reuters. 

Newsom has until October 14 to act on the bill. His office didn’t comment on whether he would sign it. His administration’s finance department opposed the bill earlier this year because room hadn’t been made in the state budget yet to cover its implementing costs.