California goes first: Responding to state-led ESG regulations

May 15, 2024

A blog post by Beth Kaplan, Katie Glynn and Brian Jobe

California goes first: Responding to state-led ESG regulations

The release of new environmental, social, and governance (ESG) legislation from California sparked a new level of urgency among organizations working to iron out their ESG-related programs. As the first US regulation that requires companies to have emissions data ready for assurance, the advent of state-led regulations presents a new paradigm in disclosure regulations, and it will likely have broad impacts as other states likely follow suit.

Looking at some of the new rules and their impacts on ESG reporting, companies can take steps to prepare for state-led legislation, including leading practices for regulatory sensing and monitoring for California state-led regulations and other states as they are introduced.

Overview of new California ESG regulations

In October 2023, the California governor signed Assembly Bill 1305 and Senate Bills 253 and 261 into state law requiring climate-related disclosures from public and private US companies with operations in California. Let’s go over the summary of these regulations.

Assembly Bill 1305: Voluntary carbon market disclosures

Who is affected?
Entities operating in California that market, sell, purchase, or use voluntary carbon offsets (VCOs) or make “emissions claims” regarding net-zero emissions, carbon neutrality, or significant emissions reductions.

Reporting requirements

• An entity that markets or sells VCOs shall disclose applicable carbon offset project details, accountability measures, and pertinent data and calculation methods needed for verification.
• An entity that purchases or uses VCOs and makes emissions claims shall disclose the seller and applicable carbon offset program details and the protocol used for estimations.
• An entity that makes emissions claims shall disclose how such claims were determined to be accurate or accomplished, and how one is measuring the interim progress toward that goal.

Assembly Bill 1305: Voluntary Carbon Market Disclosures

Senate Bill 253: Climate Corporate Data Accountability Act

Who is affected?
Private and public US businesses with total annual revenues exceeding $1 billion that do business in California.

Reporting requirements

• Publicly disclose emissions from scopes 1, 2, and 3 in accordance with the GHG Protocol starting in 2026 (2027 for scope 3) and annually thereafter.
• Obtain limited assurance over scope 1 and 2 emissions in 2026 phased into reasonable assurance beginning in 2030, with scope 3 assurance requirements to be determined by 2027.
• Structure the emissions reporting to minimize duplication of effort and allow a reporting entity to meet other national and international reporting requirements.

Senate Bill 253: Climate Corporate Data Accountability Act

Senate Bill 261: Greenhouse gases: Climate-related financial risk

Who is affected?
Private and public US businesses, excluding those in the business of insurance, with total annual revenues exceeding $500 million and that do business in California.

Reporting requirements

• Prepare a climate-related financial risk report by January 1, 2026 (and biennially after that), disclosing the entity’s climate-related financial risk in accordance with the Task Force on Climate-related Financial Disclosures (TCFD) framework and measures adopted to reduce and adapt to risks disclosed.
• Submit climate-related financial risk reports to the California Air Resources Board (CARB) and make them publicly available on its website.
• Submit affirmation report to California Secretary of State.

Senate Bill 261: Greenhouse gases: Climate-related financial risk

New York and other states proposing legislation

With California leading the way, other states will likely continue to follow suit with new state-proposed legislation. For example, New York Senate Bills S897A; the Climate Corporate Accountability Act; and S5437, the Climate-related financial risk and required disclosures are proposed legislation for companies doing business in New York. As companies grapple with the broad and complex impacts these state-led ESG laws will have, there are some leading practices for regulatory sensing and monitoring to help companies with their emerging state-led ESG programs.

Leading practices for navigating state-led ESG legislation

Monitor external data feeds to collect regulations and market trends

With New York’s proposed regulations and additional states, including Illinois and Washington state, also preparing to follow suit with similar legislation, there will undoubtedly be a ripple effect around climate-related disclosures influencing the scale and complexity of data coming out of the regulatory landscape.

The influx and increase of climate-related disclosure data may produce a lot of noise, so the first step in filtering that noise is identifying the data to be collected. Identify various external data feeds that act as inputs to an analytics and monitoring strategy—including regulatory websites, news outlets, regulatory blogs, and even social media inputs. It is essential to gather and monitor a broad spectrum of data for global and industrywide regulations and state-led legislation as they roll out into law.

Filter and analyze meaningful data

The second step to creating leading practices in sensing and monitoring is to consolidate and filter the data in order to catalog meaningful data points and identify impacts.

Through analytics, profiling, and human or artificial intelligence, companies can catalog the data that matters, identify risks and opportunities, and monitor rules affecting the business or emerging regulations to look out for in the future.

Insights and actions for regulatory sensing

After consolidating and filtering data inputs, there are some things to keep in mind and actions to take that may help derive tangible benefits from emerging regulations and insights.

Most importantly, proactively analyzing and supporting data curation of insights into potential impacts is crucial to early detection of possible regulatory changes, the anticipation of compliance requirements, and monitoring of emerging regulations.

This regulatory sensing is enabled with an ongoing and consistent support for data curation of insights and potential impacts of state-led ESG regulations, including the ongoing monitoring of data inputs and conversations around climate-related disclosures at all state, national, and global levels.

For a deeper dive into insights for developing regulatory sending and monitoring leading practices, listen to our Dbriefs webcast: California goes first: Responding to state-led ESG regulations: Dbriefs webcast.