Did you know that starting in 2026, large companies doing business in California will be required to comply with new climate reporting mandates? These mandates, signed into law by California Governor Newsom, are set to have a significant impact on US businesses, regulations, compliance, transparency, and sustainability.
Scope of Climate Reporting Mandates in California
The climate reporting mandates in California have a broad scope, encompassing greenhouse gas emissions and financial risks. These mandates are outlined in the Climate Corporate Data Accountability Act (CCDAA) and the Climate-Related Financial Risk (CRFR) bill, signed into law by California Governor Newsom on October 7, 2023.
CCDAA Reporting Requirements
The CCDAA applies to companies with more than $1 billion in annual revenue. These companies are required to disclose their greenhouse gas emissions, including Scope 1, Scope 2, and Scope 3 emissions. Scope 1 emissions refer to direct emissions from sources owned or controlled by the reporting entity, while Scope 2 emissions are indirect emissions from purchased electricity or heat. Scope 3 emissions encompass indirect upstream and downstream emissions, such as those from purchased goods and services, business travel, and employee commutes.
CRFR Reporting Obligations
The CRFR applies to companies with annual revenues exceeding $500 million. These companies are required to publicly report their climate-related financial risks and mitigation measures. The reporting obligations cover four pillars: governance, strategy, risk management, and metrics and targets. Companies must provide information regarding board and management-level oversight of climate issues, assess climate-related risks and impacts, develop strategies to mitigate risks, and disclose the metrics and targets used to assess climate risks.
To ensure compliance with these reporting mandates, affected companies in California need to plan early, assess their emissions and financial risks, and develop appropriate reporting strategies. By disclosing their greenhouse gas emissions and climate-related financial risks, companies can contribute to a more transparent and sustainable business environment.
Adoption of Global Reporting Standards: TCFD and ISSB
The Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB) have emerged as globally recognized reporting standards for climate disclosures. The TCFD, established by the Financial Stability Board, developed a framework in 2017 that is widely adopted by companies worldwide. The TCFD framework asks companies 11 core questions about their emissions and climate planning, serving as the global baseline for climate reporting.
The UK and EU have incorporated TCFD-style disclosures into their climate disclosure regulations, making it mandatory for certain listed companies. The ISSB, launched in 2023, has released its own set of standards that draw directly from the TCFD framework. These standards are being adopted by many countries in the G20, including Hong Kong and Singapore. Companies that have already prepared TCFD responses can leverage their work for compliance with the ISSB standards.
Reporting Requirements and Compliance Considerations
The Task Force on Climate-related Financial Disclosures (TCFD) has established comprehensive reporting requirements that companies must adhere to in order to ensure transparency and accountability in their climate-related disclosures. These requirements are divided into four key pillars: governance, strategy, risk management, and metrics and targets.
Under the governance pillar, companies are required to describe the board and management oversight of climate issues within their organization. This includes demonstrating how climate-related risks and opportunities are incorporated into decision-making processes.
In the strategy pillar, companies must assess climate-related risks and develop strategies to address them. This involves identifying potential impacts of climate change on their business, as well as outlining measures to mitigate those risks.
The risk management pillar requires companies to disclose their approach to identifying, assessing, and managing climate-related risks. This includes conducting scenario analysis and stress testing to evaluate the resilience of the organization’s business model in different climate scenarios.
Lastly, under the metrics and targets pillar, companies need to disclose their greenhouse gas emissions data, as well as their targets for reducing emissions. The TCFD emphasizes the importance of providing relevant, specific, complete, clear, and objective information in these disclosures.
Reports that meet the TCFD reporting requirements should be made publicly available, typically through the company’s annual financial report and website. It is important for companies to not only comply with TCFD reporting obligations but also consider other climate reporting requirements in different jurisdictions, such as the European Corporate Sustainability Reporting Directive, to ensure comprehensive compliance.
As companies navigate the reporting landscape, they should assess their current reporting practices and identify any gaps or limitations. Seeking support from internal and external teams is essential to ensure accurate and thorough reporting on sustainability efforts, and to effectively plan for a sustainable future.
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