On 7 October 2023, California Governor Gavin Newsom signed the Climate Corporate Data Accountability Act (‘CCDA’) and the Climate-Related Financial Risk Act (‘CRFR’) into law. The two Acts are a part of a climate accountability package that aims to make public and private entities accurately disclose their emissions and the emissions of those over which they have either direct or indirect control in a more extensive way than was previously required.
The CCDA requires the California Air Resources Board (‘CARB’) to create regulations which will require entities organized in the United States who are “doing business” in California and have a revenue in excess of $1 billion a year to disclose their greenhouse gas emissions. The regulations would require companies, both private and public, to disclose their direct and indirect emissions, including those of companies they own or control. Additionally, entities will need to disclose the emissions from parties they do not control, such as employee commutes, business travel emissions and the emissions created in the course of the use of any products that are sold.
The CCDA requires CARB to create the regulations by January 2025, and the reporting requirements commence in 2026 for direct and indirect emissions and for those produced which are under an entity’s control. Reporting for emissions coming from sources not directly under an entity’s control commences in 2027. The Act entails a full supply chain analysis which will in turn affect any organised entity doing business with an organisation that falls into the categories of the Bill. Upon disclosing emissions to CARB, entities will need to pay an annual fee set by CARB. Violations will result in CARB issuing a penalty fee of up to $500,000 per year. Any mistakes made in reporting regarding emissions made by parties not under the control of an entity, such as employee commute, will not be subject to an administrative penalty.
The CPFR requires entities that have an annual revenue of more than $500 million who are “doing business” in California to create bi-annual reports to CARB that disclose any climate-related financial risk and the measures that could be taken to alleviate and adapt to that risk. The CRFR defines climate-related financial risk as “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks”. The goal of the CRFR is to ensure that entities are prepared for the financial risks that will arise from climate change-caused natural disasters. The report must also be made publicly available on the entity’s website. For entities that fall under the CRFR, the reports can be consolidated at a parent company level.
The CRFR will commence on or before 1 January 2026. If an entity cannot meet the requirements, it will need to submit the information it does possess as well as a detailed explanation as to the reasons why, as well as a plan to bridge the gaps in the future. Despite the leeway granted to entities that cannot meet the requirements, the CRFR does require CARB to adopt regulations which will allow it to seek administrative penalties of up to $50,000 per year if there is a failure to publish an adequate report.
This climate accountability package expands California’s influence and power as it pertains to climate change policy. The state has long been a trailblazer when it comes to climate policy and the ambitious requirements of these Acts are no exception. The applicability of the measures to private as well as public entities has made this legislation powerful. However, there has been some concern as to how California will effectively implement the Acts. This concern was noted by the Governor as he signed same into law. In relation to the CCDA, he noted: “the implementation deadlines in this bill are likely infeasible, and the reporting protocol specified could result in inconsistent reporting across businesses subject to the measure”. He also issued similar worries about deadlines pertaining to the CRFR. These concerns have been met by the California State Legislature with the claim that next year’s legislative session will involve attempts to clarify and rectify the issues.
Click here for the Climate Corporate Data Accountability Act and click here for the Climate-Related Financial Risk Act.