California Leads the Way: New Climate Disclosure Laws Set the Standard for Sustainability Reporting

Get prepared for the climate disclosure wave

We have long been arguing that quality sustainability data reporting is a crucial step in helping businesses and investors compare ESG efforts, benchmark achievements against targets, and create a more robust environment for ESG investing and sustainable finance issuance.

At New York Climate Week, California Governor Gavin Newsom announced that he would sign into law two first-of-a-kind state bills – the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261) – that passed the California Legislature. SB 253 would require public and private companies conducting business in California and have a revenue of $1bn or more to disclose Scope 1-2 emissions data starting 2026 and Scope 3 emissions data beginning 2027. SB 261 would require public and private businesses with revenues of at least $500 million to release reports on climate-related financial risks.

 

California's passed climate bills

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The two bills would have a significant impact as California is the world’s fifth-largest economy as well as a pioneer in climate legislation. It is estimated that SB 253 would affect more than 5,000 companies, while SB 261 would influence some 10,000 companies. Voluntary reporting of sustainability data is already happening, but with the new bills, companies will need to manage their supply chain emissions more actively and deploy more resources toward monitoring and data aggregation. It will not be easy – nor cheap – to do it, but quality climate disclosure is itself a positive long-term investment.

California could trigger more states to introduce similar laws, as evidenced by a flurry of state mandates to phase out internal combustion engine car sales in roughly a decade following California’s announcement in 2020. It could also improve the outlook of the Securities and Exchange Commission (SEC) releasing the final proposed rules on climate-related disclosure, although the SEC’s rules will likely have a less comprehensive scope (e.g. excluding Scope 3 emissions reporting) and run a higher risk of being challenged in court.

As the US prepares mandate sustainability reporting, we expect an eventual convergence of disclosure mandates around the world. It is because rules such as the EU’s Corporate Sustainability Reporting Directive (CSRD) would require eligible companies worldwide to comply if they conduct business in the jurisdiction. It is also because of the increasing need for substantially comparable data across regions. Thus, no matter where a business is, it needs to start thinking now about becoming on par with these standards.

 

Infrastructure, infrastructure, infrastructure

Infrastructure is crucial to make sure that clean energy can be delivered to customers, and that clean technology products such as EVs can be properly charged. But now, infrastructure is far from sufficient. This is the case in the transport, electricity, and hydrogen sectors.

In the transport sector, there are 3mn EVs on the road today in the US but only 144,000 public and private charging ports – that is about 20 EVs per charging port. The National Renewable Energy Laboratory forecasts there will be 33mn EVs in the US in 2030 in the mid-adoption scenario, which will require 28mn charging ports (26.8mn private and 1.2mn public). In the power sector, transmission lines need to be expanded by 60% by 2030 and triple by 2050 to meet the growing demand for renewable energy. On top of that, as of last year, more than 2,000 GW of renewable generation and storage capacity – higher than the existing capacity in the US – need permitting debottlenecking to be connected to transmission lines. In the hydrogen sector, a combination of constructing dedicated pipelines, repurposing natural gas pipelines, and developing shipping and trucking alternatives to transport the element.

Such infrastructure expansion needs strong policy support. Various government incentives and initiatives can help de-risk investment, as some investors might be realistically unwilling to finance new technology infrastructure unless there is an outlook for higher profitability or economies of scale. Regulation modernisation is also needed to streamline the permitting process. This year, the Biden administration has rolled out phased reforms to the National Environmental Policy Act (NEPA), the building block that shapes energy project permitting processes. These reforms would entail, among others, capping the time for a project’s environmental reviews, limiting the scope of reviews, and simplifying the reviewing procedure. This will not solve the infrastructure problems overnight but is expected to have a positive impact in the long term.