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Keeping you in-the-know on environmental, social and governance developments

Things moved pretty fast in the California legislature ahead of its Interim Recess. Yesterday I wrote about the state’s climate disclosure bill that went to the Governor’s desk. After that bill was passed, the legislature passed a second climate bill – SB-261 Greenhouse gases: climate-related financial risk. One quick correction to yesterday’s blog: when the legislature is heading into a break, the Governor has 30 days to take action (rather than 12 mentioned previously). Regardless of the timing, the bill becomes law even if the Governor doesn’t sign it.

SB-261 is unique in that it requires companies to determine, evaluate and disclose “climate-related financial risk.” Key “need to know now” provisions of the bill are:

“Climate-related financial risk” means material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health. It is worth noting that (a) “material” is not separately defined (or perhaps “re-defined”) for this law, and (b) employee health and safety is an explicit risk companies must consider in this context.

Like SB-253, this law would apply to any US company that does business in California and has total annual revenues greater than $500,000,000 – half the revenue threshold of SB-253. The law’s applicability is likewise not limited to California-based or publicly traded companies, the revenue threshold is company-wide and reporting is on the entity level, not just California operations.

On or before January 1, 2026, and biennially thereafter, a covered entity must prepare a climate-related financial risk report disclosing both:

– Its climate-related financial risk, in accordance with the recommended framework and disclosures contained in TCFD, or any successor thereto, or pursuant to an equivalent reporting requirement; and

– Its measures adopted to reduce and adapt to climate-related financial risk disclosed.

If a covered entity does not complete a report consistent with all required disclosures, the covered entity must provide the recommended disclosures to the best of its ability, provide a detailed explanation for any reporting gaps, and describe steps the covered entity will take to prepare complete disclosures. This is a bit confusing as the language states that “recommended” disclosures are to be provided in lieu of the “required” disclosures, but I am not clear what is meant by “recommended disclosures” as that is not defined. It may refer to the TCFD framework as that is incorporated by reference, although as the mandatory reporting framework. Or it may mean this:

A covered entity satisfies the requirements if it prepares a publicly accessible biennial report that includes climate-related financial risk disclosure information either:

– Pursuant to a law, regulation, or listing requirement issued by any regulated exchange, national government, or other governmental entity, including a law or regulation issued by the United States government, incorporating disclosure requirements consistent with ISSB; or

– Voluntarily using a framework that meets TCFD or the ISSB standards.

Emissions disclosures are not required; however to the extent a climate-related financial risk report contains a description of greenhouse gases or voluntary mitigation measures, the state board may consider those claims if they are verified by a third-party independent verifier.

The report must be made available to the public on the company’s internet website.

Penalties: The law requires administrative penalties for failure to make the report publicly available on its internet website or for publishing an inadequate or insufficient report. Penalties are not to exceed $50,000 in a reporting year – 10% of the maximum SB-253 penalties.

Obviously, this law is explicitly about financially material climate risk, which is inconsistent with EU’s move toward double materiality. We will have to wait and see if that becomes an issue and, if so, how big. In next week’s 2023 Annual Practical ESG Conference, Persefoni’s Kristina Wyatt will talk about this soon-to-be law, along other important climate reporting matters. If you haven’t already registered, hurry up – the conference starts Tuesday morning.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile