The new California ESG disclosure requirements, and why your company should care about them

By Shamitha Kuppala
January 29, 2024
8 min read

In recent decades, there has been a discernible shift in global corporate interests towards a heightened commitment to social and environmental responsibility. Concepts like intersectionality, sustainability, and corporate social responsibility have emerged and are displacing the conventional single-minded pursuit of an isolated bottomline, and more and more companies are seeking to uphold purpose on top of maintaining profit. Legislative and regulatory activity at both the federal and state levels have increasingly promoted the use of ESG disclosures to ensure private interests are aligned with the public good.

Given this trend, it comes as no surprise that California recently passed a slew of sustainability and diversity laws intended to ensure transparency and accountability for companies doing business in the state. This blog post will outline some of the noteworthy initiatives passed this month—primarily SB 253 and SB 54—and how they can empower your company, whether or not you operate on the West Coast.

The Climate Corporate Data Accountability Act

Senate Bill 253, also called the Climate Corporate Data Accountability Act, was signed by California Governor Gavin Newsom on October 7, 2023 in the pursuit of “full transparency and consistency.” The law expands the requirements for companies with over $1 billion in total annual revenue that operate in California to annually disclose their greenhouse gas emissions. Moreover, an accompanying bill, SB 261, applies to companies that do business in California and have an annual revenue over $500 million and requires them to biennially disclose climate-related financial risks and measures taken to mitigate them.

This process comes in two stages. First, the California Air Resources Board (CARB) will work with an environmental impact reporting organization to develop a list of regulations and a platform where consumers and investors can see disclosure details. Second, beginning in 2026, applicable companies must report their Scope 1 (direct, i.e., from operations) and Scope 2 (indirect, i.e., from energy use) greenhouse gas emissions and/or climate risk assessments to the CARB program. Disclosure of Scope 3 emissions (indirect, i.e., from other entities in the value chain) will become mandatory starting in 2027. All CARB standards adhere to the Greenhouse Gas Protocol and World Resources Institute’s guidelines. While noncompliant firms will be subject to fees, they will not face civil or criminal liabilities.

Investing in Equity

Senate Bill 54, nicknamed Investing in Equity, was signed by Governor Newsom on October 8, 2023. The law requires all venture capital firms that are located in, or have significant operations in, California or that make investments in business with substantial operations in California to report aggregated leadership demographics of the companies they finance each year. Starting March 2025, covered VC firms will need to annually survey the founding teams of all the companies they invest in to assess gender, race, ethnicity, disability status, LGBTQ+ identity, veteranship, and California residency. While investee founders can opt out of survey participation, the bill authors hope that general disclosure of demographic information will encourage diversity evaluations by both the affected VC companies and their stakeholders. Noncompliant firms will be subject to a fine.

Broader Implications

While SB 253, SB 261, and SB 54 are limited to disclosure and do not mandate any remedial action to inadequate outcomes, they could still have a significant effect on companies’ policies. For one, reporting the required DEI and climate risk information entails an assessment of current impact, which prompts business owners and funders to acknowledge trends they may not have actively recognized before. Additionally, with public disclosure, companies will feel more pressure from customers, investors, government agencies, and competitors to improve their visible ESG impact. Finally, disclosure laws create legislative momentum and open the way for more comprehensive, actionable regulations. We may soon see California implementing more progressive corporate impact and accountability laws, and other jurisdictions could follow suit in the coming years.

Impact on Your Business

Of course, your company may not be a venture capital firm or have any operations in California. So how do these two laws influence your path?

The focus on ESG disclosures in California SB 253, SB 261, and SB 54 is proof of a general regulatory trend towards greater emphasis on diversity and sustainability in business. The provisions in these bills will likely be mirrored by other states in the future as adoption of ESG frameworks become more widespread, evidenced earlier this year by the Biden administration’s rule allowing employee retirement plans to consider ESG factors in investment decisions. Even without looming legal compliance issues, companies will continue to face pressure from investors and consumers alike to report and enhance ESG outcomes. By voluntarily implementing sustainability and DEI programs, small and medium-sized businesses can avoid scrambling to find solutions in the near future. Measuring and reporting environmental and social impact is the first step to recognizing gaps in ESG initiatives and satisfying stakeholders’ needs.

Ecolytics’ full suite of sustainability services can help your business get ahead of the curve and meet all the requirements and objectives listed above and more, no matter your company size or sector. Our sustainability management software provides a single platform for measuring everything from GHG emissions to employee diversity metrics, offers data-driven insights and actionable recommendations for how to improve, and gives you custom-built reporting tools to showcase your sustainability performance and ESG impact to all your stakeholders. With Ecolytics, your company has access to ready-to-use templates and resources for ensuring compliance with several leading certifications and standards, as well as the ability to set and track progress towards goals like reaching net-zero or becoming carbon positive. Interested in learning more? Request a demo from our team today to learn more about the platform and its features.

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