Climate transparency extends beyond California

In September of 2024, California set a precedent for U.S. climate policy with the introduction of its groundbreaking Climate Accountability Package. This package, which consolidates the Climate Corporate Data Accountability Act and the Climate-Related Financial Risk Act, aims to implement new greenhouse gas (GHG) emissions reporting requirements to shed light on the environmental and financial impacts of climate change. Despite the U.S. Securities and Exchange Commission’s (SEC) decision to halt defending federal climate-related disclosure rules in February, California’s actions showcase how multiple U.S. states are proposing their own sustainable regulations, aligning with global standards in other regions. The movement towards transparency initiated by California is part of a larger trend that seems irreversible, as states like New York and Illinois are following suit with climate-related legislation. Similar regulations can also be observed on the international stage with mandates like the European Union’s Corporate Sustainability Reporting Directive and the UK’s Sustainability Reporting Standards demanding comparable disclosures.

While the future legislative landscape may be unclear, California’s pioneering laws lay out a roadmap for companies to not only stay ahead and be prepared but also to foster long-term value creation and risk management. Getting a head start on compliance measures now can bolster companies’ reporting capabilities and readiness to deal with upcoming disclosures regardless of where they may arise, providing a valuable framework for understanding both the risks and opportunities associated with climate change.

The new California regulations are on the horizon, bringing with them a set of expectations for public and private entities conducting business within the state. Starting next year, these entities will be obligated to disclose their scope 1 and 2 GHG emissions, as well as information on climate-related financial risks, or face penalties. While this rule is state-specific, its broad applicability criteria mean that companies across the U.S. will need to abide by the following guidelines:

1. From 2026 onwards, companies with annual revenues exceeding $500 million globally will need to report climate-related financial risks in line with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations or a comparable framework on a biennial basis. Failure to comply could result in fines up to $50,000.

2. Also starting in 2026, companies with global annual revenues surpassing $1 billion must disclose their scope 1 and 2 GHG emissions data from the previous year, followed by scope 3 emissions the following year. Non-compliance could result in penalties up to $500,000.

3. By 2030, limited assurance will be required for scope 1 and 2 emissions, while reasonable assurance will be necessary by that same year for scope 3 emissions.

Enforcement of these regulations will be overseen by the California Air Resources Board (CARB), which has until July 1, 2025, to clarify further guidelines for implementing the Climate Accountability Package. CARB has indicated some leniency in the early stages of enforcement by offering companies in their first year of reporting a grace period. This grace period includes not penalizing incomplete reports and allowing the use of older data as long as efforts to comply are evident. Despite some adjustments provided by CARB, the implementation guidance remains broad. Along with potential modifications from CARB, the law has faced legal challenges, with the Trump administration raising concerns in April.