Understanding California’s climate disclosure regulation

As attacks on ESG become a recurring theme in the United States and anticipation for the final SEC rules on climate-related disclosures mounts, the state of California has taken bold action. By introducing a set of bills that lay the foundation for a comprehensive ESG disclosure architecture, California’s most recent sustainability-related legislation will unequivocally have an impact on the industry’s credibility and will set precedents influencing the direction of other state and federal level ESG-related regulations.

Our analysis outlines the key implications stemming from California’s latest three pieces of ESG legislation: (i) AB 1305 – Voluntary Carbon Market Disclosures Act, (ii) SB 253 – Climate Corporate Data Accountability Act, and (iii) SB 261 – Greenhouse gases: Climate-related financial risk.

AB 1305: Enhancing voluntary carbon markets

California’s AB 1305 aims to infuse a much-needed injection of credibility into the voluntary carbon market.

Starting in 2025, the bill establishes disclosure obligations for both buyers and sellers of voluntary carbon offsets sold or marketed within the state. While both types of stakeholders are required to disclose details regarding the underlying carbon offset projects, sellers face heavier reporting requirements. They must report on accountability measures ranging from non-completion to reversals and failure to achieve emissions reductions. Sellers will also need to disclose information on data calculation methods to allow for independent reproduction and verification of the reduction and removal claims.

AB 1305 also addresses greenwashing practices by requiring entities making “net zero emission”, “carbon neutral”, and other similar claims to provide documentation showing how such claims are substantiated. Additionally, in scope firms must disclose how interim progress towards their decarbonisation goals is measured.

The interaction of these requirements will provide insightful evidence about the robustness of a firm’s decarbonisation pathway, revealing whether the use of carbon offsets is contributing to transformative actions, including efficiency measures, adoption of cleaner technology, and supply chain management.

SB 261 and SB 253: Procuring climate-related data

The call for transparency is also embedded at the core of SB 261 and SB 253, both of which require the State Air Resources Board to adopt regulations and establish climate-related disclosure requirements for firms doing business in California. Where SB 261 establishes disclosure requirements on climate-related financial risks, SB 253 focuses on greenhouse gas (“GHG”) emissions disclosures.

More precisely, under SB 261, starting January 2026 and biennially thereafter, firms “doing business” in California will be required to report on climate-related financial risks if their total annual revenues surpass a US $500 million threshold.

In addition, under SB 253 requirements, firms “doing business” in California with total annual revenues surpassing a US $1 billion threshold will also be expected to disclose their GHG emissions, annually. Required reporting in 2026 is limited to Scope 1 and 2 emissions, while the requirements will expand to Scope 3 in 2027. Moreover, reporting entities will have to engage an independent third-party assurance provider. Beginning in 2026, assurance for Scopes 1 and 2 emissions disclosures will be conducted at a limited assurance level, escalating to a reasonable assurance level by 2030. The state board is mandated to set an assurance level for Scope 3 emissions disclosures by January 2027.

These requirements have been perceived by some market players as ambitious, especially the inclusion of Scope 3 emissions disclosures. However, the bill allows for over three years of lead time and is flexible in terms of the depth of the associated analysis, as no penalties arise from disclosures that have a reasonable basis and are prepared in good faith. Companies that prepare in advance for these requirements and allow for iterations over the next few years will be well-positioned to comply.

The consequences of non-compliance

Failure to comply with either bill could result in the state board seeking penalties, which reinforces the urgency for reporting companies to promptly initiate their ESG integration journey.