While much has been published on the Securities and Exchange Commission’s forthcoming Climate Disclosure - including more than 16,000 public comment letters and countless op-eds - the State of California last week moved to enact sweeping legislation with a similar intent and effect. Citing the public’s “right to know about the sources of carbon pollution,” California’s governor has publicly stated he will now be signing both SB-253 and SB-261 into law, pre-empting the SEC’s reporting requirements and mandating disclosures for thousands of private and public companies who do business in California.
SB-253 applies to “partnerships, corporations, limited liability companies, and other business entities with total annual revenues in excess of $1,000,000,000 and that do business in California.” In other words, nearly the same pool of businesses that would be bound by the SEC Climate Disclosure will now face mandatory annual reporting as well as their privately owned peers. SB-261 will apply to the subset of businesses earning more than $500,000,000 annually, and impose biennial reporting requirements.
The laws will require entities to annually (or biennially) report their emissions. Of note, reporting entities will need to disclose all emissions, including Scope 3 value chain emissions. Reports will be aligned to the Greenhouse Gas Protocol (GHGP), the leading emissions reporting methodology. While the GHGP will serve as the initial framework for reporting, the law also allows lawmakers to review, alter, and enforce reporting aligned to emerging relevant standards as frequently as every five years.
Maybe the most critical component of the regulation is the requirement to disclose Scope 3 emissions data - the emissions associated with an entity's upstream and downstream supply chain activities. While there is no obvious regulatory parallel for this reporting requirement, we can almost imagine how it would apply to financial reporting. If companies were required to produce annual financial statements, not just for their own operations, but the operations of each of their suppliers, we begin to see the web of complexity that concerns so many boardrooms.
And yet - supply chain leaders and lenders routinely carry out financial due diligence on suppliers. They seek to mitigate the risks of working with fiscally precarious partners, by imposing capital requirements where necessary, and often by reviewing financial positions before entering into partnerships. The leadership that secures the most financially robust partners are rewarded with long-term, durable, stable relationships. Those that take on exceptionally risky supply chain partners or borrowers eventually develop significant corporate ulcers.
Against this backdrop, of an increasingly environmentally-conscious investing public and regulatory requirements, there is then an opportunity for a new sustainable competitive advantage.
The business leaders that act quickly - to analyze their supply chains, identify sustainable suppliers, and mitigate emissive intensity - will likely be rewarded for their prudence. As laws like these (and the EU’s Carbon Border Adjustment Mechanism, effective 01 Oct 2023) hit the books, sustainable suppliers will provide increasing commercial value.
A more sustainable supply chain will likely mean:
The California State Air Resources Board has until 01 Jan 2025 to provide the framework for emissions reporting across all three scopes. Beginning in 2026, reporting entities are required to begin measuring and reporting Scope 1 & 2 emissions data, in accordance with the GHG Protocol.
Finally, in 2027, reporting will be required across all 3 scopes, with the first Scope 3 reports due no more than 180 days after disclosure of Scopes 1 & 2, in any given reporting year.
The CarbonGraph team is here to help you make sense of emissions measurement, as you prepare and refine your disclosure process. With a focus on supplier data by design, we provide the highest granularity with a focus on automation and scale, throughout your value chain.