The “California effect” is in motion yet again, advancing environmental transparency for the good of the nation and the rest of the world. With the passage of SB 253 and SB 261 through the state legislature, California essentially now requires major corporations that do business in the state to disclose their greenhouse gas (GHG) emissions and provide other key climate-related financial risk data to the public.
It’s a remarkable move, notably going even further than the proposed rule set forth by the SEC last year – unlike the SEC’s disclosure rule, California’s bills SB 253 and SB 261 would include both public and private companies, impacting those worth $1 billion and $500 million in revenue respectively.
However, although they have broad global impact, as CDP data shows, these bills won’t be nearly as burdensome to companies as opponents may make them out to be.
California is the fourth-largest economy in the world, already operating as a major policy player on the global stage that makes economic waves worldwide. In passing these dual bills, California is bolstering an already fast-rising trend of mandatory disclosure policy. Between the EU’s CSRD, ISSB, TCFD, SEC and FAR among others, a multitude of regulations and frameworks will soon (if they don’t already) require major companies to disclose climate-related financial risks, opportunities, emissions data and targets. Many, if not all of the companies that will be subject to the new California laws are likely already being asked for this information by these other various international regulators and frameworks.
CDP’s recent policy brief, Shaping High-Quality Mandatory Disclosure, found that although climate-disclosure regulation is fast becoming the norm across the G20, much regulation still omits key components of a corporate net-zero journey. So, it’s positive to see California’s legislation include Scope 3 emissions, moving it closer toward the high-quality mandatory disclosure CDP advocates for.
After California’s new environmental transparency laws come into effect, disclosure through CDP will remain the best way for companies to navigate growing requirements for such information. CDP disclosure already covers almost all of the requirements of the California bills. SB 253 requires GHG emissions reporting in compliance with the Greenhouse Gas Protocol, and SB 261 mandates climate-related financial risk reporting in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). CDP’s climate questionnaire has been aligned with the TCFD since 2018, so companies that already disclose through CDP are already well-prepared for compliance to California disclosure as well as SEC disclosure and the EU’s CSRD, which decreases the reporting burden.
The lion’s share of companies that will be impacted by the California legislation are already disclosing this information through CDP. For years, investors and customers have requested critical environmental data from major corporations – and these companies have obliged. CDP’s signatories (740 financial institutions representing over US$130 trillion in AUM, including Aviva, the European Investment Bank, New York State Common Retirement Fund, Storebrand and CPP Investment) and CDP Supply Chain members (340+ organizations with over US$6.4 trillion in procurement spend, including Microsoft, NIKE and the US General Services Administration) request environmental information annually from companies through CDP. In 2022, over 18,700 companies (including over 80% of the S&P 500) responded to CDP’s climate change, water security and forests questionnaires. And 45% of US and Canadian publicly registered companies with US$1 billion+ revenue currently disclose through CDP.
And these companies are not simply disclosing due to investor pressure. What the California bills and the proposed SEC rule are asking for is already underway among most public companies, especially among corporate leaders who have understood that the climate crisis is a risk to their entire value chain. Forward-thinking private companies have been preparing as well. Tracking climate risk illuminates both hidden costs and opportunities, helps companies set ambitious climate goals and measure their progress toward them, and builds resilience in an increasingly competitive global marketplace.
Financial institutions can and should use CDP’s data in line with the information that will be available upon passage of California bills SB 253 and SB 261. Investors are increasingly asking companies, as well as municipal bond issuers, to provide a clearer picture into how they are managing climate impacts, as climate change is plainly material to investment performance. Financial institutions already rely on CDP data to select stocks and to pick future winners and losers, to help assess the carbon footprint of their own portfolios and assess risk, to create investment products and strategies, including custom indices, and more. Once investors have access to the additional data that California’s bills will provide, the financial sector (and the wider economy as a result) will benefit from better, safer, more financially sound decision-making.
At CDP, we know that strong policy like California’s will ultimately make an enormous difference in advancing our collective mission to transform the global economy into one that is sustainable and just. Although CDP has revolutionized environmental disclosure over the past 20+ years, leading to an incredible wave of voluntary disclosure, regulation has a vital part to play, as too many high-impact companies still do not disclose their environmental data despite growing calls to act.
We commend California’s lawmakers for taking this step forward. It will set a baseline requirement leading to even more ambitious corporate goal-setting and action – raising the floor as CDP continues to raise the ceiling for disclosure.