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What does California’s Climate Corporate Data Accountability Act Mean for ESG?

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Signed into law in October 2023, the California Climate Corporate Data Accountability Act, or SB 253, is a gamechanger for ESG in North America. A first of its kind in the USA, all companies operating in California, whose annual revenue exceeds $1 billion, must now disclose their greenhouse gas emissions data in line with GHG Protocol standards.

Why is SB 253 important?

California is the world’s fifth largest economy. And while ESG has become entangled in America’s culture wars, the blue state has been at the forefront of progressive climate legislation for decades.

“It is very significant that the fifth largest economy in the world – the state of California – now requires large corporations to publicly disclose greenhouse gas emissions across their entire value chain. This landmark legislation will have ripple effects far beyond California’s borders and can serve as a model for national and subnational governments to follow,” attests Director of Greenhouse Gas Protocol Pankaj Bhatia.

SB 253 will function within a suite of complementary measures and regulations aimed at promoting renewable energy and the use of electric vehicles, reducing emissions, and spearheading the widespread adoption of clean technologies. These efforts, combined with ongoing investment in renewable energy infrastructure, position California’s economy to reap the rewards of the transition to net zero while strengthening investor trust.

As similar frameworks emerge both globally and in North America, such as the US SEC’s proposed climate disclosure rule, California’s actions are likely to influence broader regulatory landscapes, promote standardized reporting and foster a more resilient approach to climate risk management in the corporate sector.

What does SB 253 entail?

To successfully comply with SB 253, affected companies will have to:

  • Report their direct emissions, i.e., Scope 1 and Scope 2, for the previous 2025 year
  • Report their indirect emissions, i.e., Scope 3, resulting from their supply chain, in 2027
  • Hire external, independent auditors to verify their disclosures
  • Submit climate reports to a forthcoming digital platform, making this information publicly available

Furthermore, misreporting of Scope 1 and 2 emissions – whether intentional or not – may result in penalties of up to $500,000.

Compliance and implementation

Companies, especially public U.S.-based companies, report on many ESG disclosures and follow many different formats or combinations of frameworks. There is no standardization to reporting yet, which makes it difficult for investors and stakeholders to compare the non-financial information disclosed by different companies. Even though ESG reporting has become the standard, some companies publish this information in different places too. For example, some companies release impact reports that may have a larger focus on their social impact and giving;

some companies release sustainability reports with a larger emphasis on environmental sustainability; and others release DEI reports which separate out DEI initiatives and human capital information.

There is a growing movement toward more reporting and more transparency, standardization, and consistency in reporting. The Corporate Sustainability Reporting Directive (CSRD) and accompanying European Sustainability Reporting Standards (ESRS) as well as the SEC Climate Disclosure Rule are making this movement law. Companies must comply with EU reporting as laid out in the ESRS and continue to assess developing regulations from the SEC.

Fortunately, much reporting will align with the Taskforce on Climate Related Financial Disclosures (TCFD) framework, likely the same framework to be used by the SEC.

Reporting of Scope 3 emissions, as required by SB 253, will perhaps be the most difficult. Scope 3 emissions refer to indirect emissions originating from business operations by sources that are not directly owned or controlled by an organization, such as supply chain, transportation, product usage, or disposal. While calculations laid out by GHG Protocol are most widely used, mapping out and calculating emissions for large companies with revenues exceeding $1 billion should not be underestimated.

The power of the cloud

The passing of SB 253 provides yet more evidence of the urgent need for organizations to harness technological innovation to succeed in an economic age where climate resiliency is key to doing business.

ESGTree’s Carbon Calculator allows companies to automatically generate their Scope 1, Scope 2 and Scope 3 emissions by inputting readily available company information, saving time and eliminating the need for external consultants. In tandem, ESGTree’s platform automates TCFD’s reporting framework, automatically generating a TCFD report once users have answered a simple set of multiple-choice questions, along with recommendations on improving performance.

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About ESGTree

ESGTree provides powerful cloud-based data solutions to help private equity (PE) and venture capital (VC) firms gather, collect, analyze, benchmark and report their ESG data and that of their portfolio companies. Our carbon calculator, customizable and automated ESG frameworks, multi-level report viewing, trends analysis dashboard, and other features turn ESG into a value creation tool rather than a reporting burden.

Click here to learn more about ESGTree’s data management and reporting software for private capital investors. 

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Co-authored by Tia Aftab and ESGTree

Summary

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Why is SB 253 important?

What does SB 253 entail?​

Compliance and implementation

The power of the cloud

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