California's Climate Corporate Data Accountability Act Will Reverberate Across the Nation
Senate Bill 253 (SB 253), known as the Climate Corporate Data Accountability Act, recently passed out of California’s state legislature. If signed into law by Governor Newsom, it will require reporting of greenhouse gas (GHG) emissions for businesses based inside and outside of California. It may sound strange that a California law would be able to require reporting from businesses based outside of California, but the size of California’s economy and the bill’s Scope 3 reporting requirements mean businesses large and small across the country will be required to report their GHG emissions if the bill becomes law.
California’s economy is the fifth largest in the world. That makes it a huge market for large U.S. companies. SB 253 mandates that partnerships, corporations, limited liability companies, and other business entities with annual revenues exceeding $1 billion that do business in California must publicly disclose their scope 1, scope 2, and scope 3 greenhouse gas emissions.
Scope 1 emissions are all direct greenhouse gas emissions that stem from sources an entity owns or directly controls, including, but not limited to, fuel combustion activities. Scope 2 emissions means indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired. And Scope 3 emissions are indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources an entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, transportation and distribution, and processing and use of sold products.
This means that even corporations that are based outside of California will be required to comply with SB 253’s reporting requirements if their total annual revenues exceed $1 billion and they do business in California. In addition, reporting companies will “push down” the reporting requirements to their vendors and customers to comply with the scope 3 reporting requirements. Certain small and medium sized businesses that supply or are customers of these large corporations will have to report their GHG emissions to the reporting companies so the reporting companies can disclose the upstream and downstream emissions in their supply chains. This chain of carbon accounting reporting will reach far beyond America’s biggest corporations.
To comply with this bill, organizations of all sizes will need to develop or hire consultants with knowledge of Greenhouse Gas Protocol’s Corporate Standard and Corporate Value Chain (Scope 3) Standard. These standards are the globally recognized standards for carbon accounting. With that knowledge, companies will need to create internal controls around collecting data, calculating emissions, and reporting those emissions. These controls will need to be rigorous as the bill also requires an assurance engagement on the annual GHG emissions report. This means that CPA firms will also need to develop expertise in carbon accounting and reporting.
Reporting companies will be required to start reporting their scope 1 and scope 2 emissions starting in 2026 for the 2025 period and their scope 3 emissions beginning in 2027 for the 2026 period. That does not give corporations much time to develop a whole new accounting and reporting system, nor does it give CPA firms much time to build the expertise necessary to provide assurance on the GHG emissions reports.
For more information about SB 253, please click on the following link: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB253. It will take you to the text of the bill. If you would like to learn more about GHG Protocol’s Corporate Standard and Corporate Value Chain (Scope 3) Standard and how to account for greenhouse gas emissions, please don’t hesitate to contact Hong Consulting at https://www.hongconsultingllc.com/contact-us.
