California’s Climate Disclosures - New Legislative Developments

California legislature rejects Governor’s proposal to delay compliance with California’s landmark greenhouse gas emissions and climate-related financial risk reporting laws.  Legislature also fails to enact expected updates to 2023 anti-greenwashing and voluntary carbon offsets disclosure law.

In late 2023 California enacted landmark disclosure requirements for greenhouse gas emissions (GHG) (SB 253; Climate Corporate Data Accountability Act; codified at Ca. Health and Saf. Code § 38533) and climate-related financial risks (SB 261; Climate-Related Financial Risk Act; codified at Ca. Health and Saf. Code § 38533) that are expected to impact thousands of businesses.  Additionally, California enacted novel anti-greenwashing disclosure requirements (AB 1305; Voluntary Carbon Market Disclosures Act (VCMDA); codified at Ca. Health and Saf. Code § 44475 et seq.) for businesses selling or marketing voluntary carbon offsets or making claims of “carbon neutral”, “net zero” or “significant reductions” to GHG emissions reductions.  Updates to those laws were widely anticipated during this year’s California legislative season.

During the final days of the 2024 California legislative season that finished August 31 2024, the California legislature rejected a proposal from Governor Newsom to delay compliance with the Climate Corporate Data Accountability Act and the Climate-Related Financial Risk Act, and instead sent a bill to the Governor’s desk (SB 219) that would delay only the required agency rulemaking on emissions reporting – effectively shortening by six months the window for affected businesses to implement the California emissions reporting requirements once the rule is published.

Additionally, the legislature failed to enact AB 2331, a package of amendments to the VCMDA from the law’s legislative sponsor that would have, among other things, pushed the compliance date to July 2025, clarified and modified various provisions, and provided for alternative disclosure methods. Consequently, the VCMDA will remain in force as originally enacted. 

At Freshfields we have been closely monitoring developments with California’s Climate Accountability Package.  For details see our prior comparison with SEC. ISSB, and EU CSRD/ESRS disclosure requirements. 

In this post, we analyze the proposed amendments to the Climate Corporate Data Accountability Act and the Climate-Related Financial Risk Act that have been sent to the governor (SB219) and the current state of the VCMDA, since the amendments in AB 2331 were not enacted.

Amendments to the Climate Corporate Data Accountability Act and the Climate-Related Financial Risk Act 

Background 

On October 7, 2023, Governor Newsom signed into law the Climate Corporate Data Accountability Act, which mandates annual public disclosure of Scope 1, 2 and 3 GHG emissions for entities doing business in California with annual revenues exceeding US$1 billion, and the Climate-Related Financial Risk Act, which requires biennial reporting on climate-related financial risks and mitigation strategies for entities doing business in California with annual revenues over US$500 million. Governor Newsom’s signing statement indicated implementation concerns and directed his administration to work with the legislative sponsors to address.  In 2024, in line with these concerns, Governor Newsom proposed several amendments as part of an expedited “trailer bill” to California’s budget that would have delayed implementation of these reporting requirements by two years and made certain technical changes (see our earlier analysis here). In response, the laws’ sponsors -- State Senators Scott Wiener and Henry Stern -- announced opposition to the delays and sponsored SB 219, which instead adopts some of the changes proposed by Governor Newsom and gives the California Air Resources Board (CARB) additional time to write its rules but does not delay compliance. 

Key changes in SB 219

• Delays by six months (until July 1, 2025) the deadline for CARB to adopt regulations.  Does not delay compliance - reporting of Scope 1 and 2 emissions still begins in 2026 (for the prior fiscal year), and 2027 for Scope 3. 
• Provides flexibility for CARB to set by regulation a schedule for reporting entities, beginning in 2027, to publicly disclose their scope 3 emissions for the prior fiscal year.  This softens the previously rigid 180-day timeline for Schedule 3 reporting and may allow CARB to consider the availability of data and assurance as part of setting the timetable. 
• Clarifies that reports may be consolidated at the parent company level.
• Allows CARB to receive reports directly or use a nonprofit entity to receive reports (previously contracting with a nonprofit to receive reports had been a requirement). 

What happens next?

Under California law, Governor Newsom has until September 30, 2024 to sign or veto the bill.

The implementation schedule also may be impacted by an ongoing federal lawsuit challenging the laws’ constitutionality, brought by industry groups, including the U.S. Chamber of Commerce and California Chamber of Commerce. The court is set to hear motions from both parties in September 2024, and Freshfields is monitoring developments closely.

Voluntary Carbon Market Disclosures Act and unsuccessful amendments

Background

Additionally in October 2023, Governor Newsom signed AB 1305, also known as the VCMDA, which regulates entities operating in California that market or sell voluntary carbon offsets or make claims regarding the achievement of net zero emissions, carbon neutral status, or significant carbon emissions reductions and imposes specific disclosure requirements for each activity, discussed below. As it was originally enacted, AB 1305 did not contain an explicit effective date, which meant that under California law the effective date defaulted to January 1, 2024. 

The bill’s sponsor, Assemblymember Jesse Gabriel, published a letter in the legislative record that his intent was that the law should not become effective until January 1, 2025. Gabriel also introduced AB 2331 in February, 2024, which would have amended the VCMDA to push the effective date to July 1, 2025 and clarify the scope of the law, but AB 2331 failed to move procedurally through the legislative process in the most recent session.  While a special legislative session has been called for gas prices, we do not anticipate AB 2331 would be addressed in that venue. Consequently, the VCMDA remains in effect as originally enacted, and we do not anticipate changes before the next legislative session.

See below for an analysis of the VCMDA as currently in force, along with key changes that State Assemblymember Gabriel had proposed for reference:

Voluntary Carbon Market Disclosures Act compliance

The VCMDA enacted broad anti-greenwashing disclosure requirements that apply in three categories of circumstances:

• Making climate-related claims: businesses that operate in California and make net-zero, carbon neutral, or significant GHG emissions reduction claims about the company or a product, must disclose on their website:
  • “All information” documenting how a “carbon neutral,” “net-zero emissions” or other similar claim was determined to be accurate or accomplished and how interim progress toward that goal is being measured. The information may include disclosure of independent third-party verification of GHG emissions, identification of science-based targets for emissions reductions, and disclosure of relevant sector methodology and third-party verification used for the science-based targets and emissions reduction pathway;
  • Whether the claims and data have been verified by an independent third-party.

• Making climate-related claims reliant on VCOs: businesses that make net-zero, carbon neutral, or significant GHG emissions reduction claims and purchase or use VCOs in connection with their claim must disclose on their websites information on each carbon offset project, including:
  • The name of the offset seller and registry, project name and identification number on the registry;
  • The offset project type, site location, and information on how the offset was achieved;
  • The specific protocol used to estimate emissions reductions or removal benefits;
  • Whether the claims and data have been verified by any independent third-party; 

This requirement only applies to businesses that operate in California or purchase or use VCOs sold within California.

• Marketing and sale of VCOs in California: businesses that market or sell VCOs in California must disclose on their website information including:
  • Details regarding VCO projects such as the specific protocol used to estimate emissions reductions or removal benefits;
  • The location of the offset project site, the project timeline, the date when the project started or will start, the dates and quantities when a specified quantity of emissions reductions or removals started or will start;
  • The type of project including whether the offsets are from a carbon removal, an avoided emission, or breakdown of offsets from each if both methods are used;
  • Whether the project meets standards established by law or a nonprofit organization;
  • The durability period for any project where the seller knows or should know that the durability of the greenhouse gas reduction or removal enhancements is less than the atmospheric lifetime of carbon dioxide emissions;
  • Whether there is third-party validation of the project's attributes;
  • The emissions reduced or carbon removed on an annual basis;
  • Details regarding accountability measures if a project is not completed or does not meet projected emissions reductions or removal benefits;
  • The data and calculation methods needed to independently reproduce and verify the number of emissions reduction or removal credits issues using the protocol.

The VCMDA provides for civil penalties of up to US$2,500 per day, for each day that the information is not available or is inaccurate, for each violation, not to exceed a total amount of US$500,000.  Enforcement actions may be brought by the Attorney General of California, a district attorney, county counsel, or city attorney in California.