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California now has a sweeping climate initiative. The Golden State joins a wave of new environmental, social and governance (ESG) regulations around the world, including the recently adopted Securities and Exchange Commission (SEC) climate disclosure rules and the EU’s Corporate Sustainability Reporting Directive (CSRD).
Although the new SEC climate rules don’t apply to private companies, California’s sustainability laws do. And some provisions are already effective — so the time to act is now.
There may be thousands of private and family-led companies that do business in California, the world’s fifth-largest economy by gross domestic product, and meet the specified revenue thresholds to be included. And this may represent the first sustainability reporting requirements for many — if not most — of the companies in scope.
For an in-depth view of the sustainability laws, see PwC’s full report on California’s climate sustainability laws.
Can you give a quick overview of California’s climate disclosure bills?
The three landmark climate disclosure bills signed by California Governor Gavin Newsom include Assembly Bill (AB) 1305, requiring disclosure on the marketing or selling of carbon offsets; Climate Corporate Data Accountability Act or Senate Bill (SB) 253, calling for mandatory climate emissions disclosure across the entire value chain; and SB 261, which mandates disclosure of climate-related financial risk in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Lastly, for some private companies, there is another bill they may need to think about. Implications from Venture Capital Diversity Disclosures (SB 54) may apply to emerging growth, early-stage companies, startups and investment houses, and in some cases, may apply to private equity firms. This law requires venture capital companies to survey their investees and report demographic information to the Civil Rights Department about the founders of their investees, including their gender identity, race, ethnicity, and disability and veteran status.
What does “doing business in California” mean according to climate disclosure laws?
Whether your company is publicly traded or privately held, the first test to determine compliance with California’s disclosure requirements is to assess whether you do business in the state. And you may be surprised by what "doing business" in California means. Put simply, California considers you to be “doing business” if you engage in any transaction for the purpose of financial gain within the state, are organized or commercially domiciled in California or have California sales, property or payroll that exceed specified threshold amounts.
If you think the rules won’t apply to you, you may be disappointed. Engaging in transactions for financial gain may be broadly interpreted. And thresholds for applicability are shockingly low — in 2023, it was just over $710,000 for sales, and just over $70,000 for property and payroll.
If you are doing business in California, the next step is to see if you meet much larger revenue thresholds. SB 253 applies to US business entities with annual global revenue over $1 billion; for SB 261, the threshold is $500 million. Although there are some limited exceptions — for example, insurance companies that already report under TCFD and so are exempt from SB 261 — California estimates that over 10,000 companies will be impacted.
Will my company’s preparations for other sustainability frameworks help me in California?
While California is the first in the US to pass legislation on climate disclosure of this significance, private companies need to be alert to additional jurisdictions. Other states are considering similar legislation around greenhouse gas (GHG) emissions and other ESG metrics. New York and Illinois, for example, have bills under consideration that mirror SB 253.
The good news is that many private multinational companies have been paying attention to the EU’s CSRD requirements — as well as applicability to their business — and preparing accordingly. It’s likely that those efforts will help companies prepare for the California requirements. The not-so-great news is that the timing of California’s bills may trigger sustainability reporting requirements before the first CSRD reporting is due. Even once a company is reporting under CSRD — or any other framework for that matter — it’s not a given that other reports can be used to satisfy California’s requirements.
California laws and the “big three” frameworks: What’s the same, what’s different
| Theme | European Commission | ISSB | SEC |
| Topics in scope | Standards span a broad list of environmental, social, and governance topics, including one dedicated to climate disclosures |
Standards address climate and other sustainability risk Additional thematic standards are expected in the future |
Proposed rule addresses climate-related risks A rule addressing human capital is expected in the future |
| Industry standards | Ten sector-specific standards have been announced and are in development |
A company is required to “refer to and consider” the applicability of the disclosure topics in the SASB standards |
Industry-specific disclosures are not required |
| Location of disclosures | Disclosure would be included within a dedicated section of the management report No financial statement footnote disclosure would be required |
Disclosures would be included as part of general purpose financial reporting — such as in management commentary No financial statement footnote disclosure would currently be required |
Disclosure would be included in a separate section of the annual report or registration statement A financial statement footnote would include disclosure of the impact of severe weather and transition-related activities |
California requirements may have a degree of interoperability with the big three ESG frameworks — the European Sustainability Reporting Standards under the CSRD, the ISSB’s IFRS Sustainability Reporting Standards and the SEC’s climate-related disclosure rules. Interoperability — or the ability to use reporting under one framework to satisfy another framework’s requirements — is the new efficiency buzz word. The big three disclosure frameworks each detail expansive sustainability disclosure requirements, but they were all developed on a base of the TCFD. So, although specific reporting requirements vary from framework to framework, you may be better prepared than you think.
While none of the big three frameworks have true interoperability, the commonalities among them mean that the data gathered for one requirement — supported by processes and controls — can be leveraged to support other requirements.
Understanding the requirements: What do I need to know about greenhouse gas emissions?
If your company is a multinational or proactive on sustainability disclosure standards for the likes of the big three frameworks, you probably have a good understanding of GHG emissions. For everyone else, here’s a summary:
Understanding scope 1, scope 2 and scope 3
The challenges of gathering information and data about GHG emissions, especially scope 3, should not be underestimated.
Lessons learned: 6 next steps for private companies doing business in California
Private companies can use lessons learned from California’s laws to start preparing for reporting obligations today.
- Assemble a cross-functional team. Employ C-suite collaboration to determine applicability, evaluate scope and establish the extent to which the rules apply. Move forward with a discussion on the potential to leverage disclosures prepared under other reporting frameworks that satisfy the California requirements.
- Determine scope. While there is some overlap between ESG regulations, the companies in scope and the timelines for compliance can be different, depending on which set of rules your company is assessing. As your company evaluates these regulations, it will need to consider applicability at multiple levels of the organization to determine if all reporting obligations are being identified.
- Understand the requirements. Clarify the differences between the California laws and the big three frameworks and how they apply. Assess if or how your company is aligned on reporting obligations with other frameworks and where it makes sense to address multiple regulations at the same time.
- Create an inventory of existing climate commitments and related data. Identify data sources, process and controls, and parties responsible for monitoring, collecting, sharing and storing information for reporting.
- Assess the gaps between existing inventory and required data. Figure out what’s missing and how to source that information. Keep third-party assurance providers in the loop on your assessments of what satisfies the reporting requirements.
- Create a project plan that embeds climate and sustainability reporting across your organization. Evaluate existing tech capabilities for accurate data aggregation, analysis and reporting across your company. Integrate sustainability reporting requirements into existing processes firmwide where possible. Acquire talent or upskill roles to lead sustainability processes for the future.
For an in-depth view, see PwC’s full report on California’s climate sustainability laws.
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