Podcast | Understanding the California Climate Laws – with Alyse Mauro Mason, Ricardo Buitron, Michael Littenberg and Marc Rotter

Alyse Mauro Mason: Welcome to the Board Perspectives podcast, brought to you by Protiviti, a global consulting firm, where we explore numerous challenges and areas of interest for boards of directors around the world. I am Alyse Mauro Mason, and I help lead the ESG and Sustainability practice at Protiviti. I’m joined today by Michael Littenberg and Marc Rotter from Ropes & Gray and my Protiviti colleague Ricardo Buitron.

Michael is a senior partner at Ropes & Gray, based in the New York office. Michael is the global head of the firm’s ESG, CSR, and business and human rights practice and a member of the securities and public companies practice. He has more than 30 years of experience advising in these areas. Michael advises a significant number of leading companies, asset managers, asset owners and trade associations on ESG, CSR, and business and human rights disclosures, along with other matters. He also publishes and speaks extensively on these topics and is included on numerous top practitioners’ lists.

Marc Rotter is a counsel at Ropes & Gray, based in New York. Marc is a member of the securities and public companies practice and has extensive experience advising leading companies and sponsors on their mandatory and voluntary ESG disclosures, including to meet U.S., state and federal, European Union, and UK requirements, as well as to conform to voluntary frameworks and standards. Marc also has been a lead author on several industry-group comment letters on ESG disclosures.

Ricardo Buitron is a financial services leader in our sustainability practice to support clients in their sustainability journey. His experience ranges from first-, second- and third-line program standup and enhancement to sustainability-report delivery.

Today, we’re going to discuss the recently adopted climate laws from California, how they may impact your organisation, some other regulatory considerations, and the application of these laws — the idea of moving from the theory of these regulations to the practice and discipline of these regulations. We are joining you today in our personal capacity to share our experience, expertise and insights with you. Michael and Marc are both lawyers, and throughout this conversation, they are not providing legal or financial advice. Thank you all for being with us today.

Well, I’m excited about this conversation today and to be having it with all of you. And Marc, to help ground us in this conversation today, please provide a brief summary of the recent California climate laws.

Marc Rotter: I’m happy to. Last fall, California adopted three laws that require climate-related disclosure. The first is the Climate Corporate Data Accountability Act, which is often referred to by its bill number, SB 253. Second is the Climate-Related Financial Risk Act, which is often referred to as SB 261, and the third is the Voluntary Carbon Market Disclosures Act. It’s often referred to as AB 1305. Each of those three statutes addresses different topics and applies to different sets of companies.

I’ll start by talking about the one that applies to the largest set of companies, which is AB 1305. Unlike SB 253 and SB 261, AB 1305 doesn’t have a revenue threshold. At core, it’s an anti-greenwashing law. AB 1305 requires any entity that fits into one of the following two buckets to publish disclosure on its website: The first bucket covers entities that market or sell voluntary carbon offsets, or VCOs, in California. The second bucket of companies caught by AB 1305 is much broader

That requires disclosure by any entity that operates or makes claims in California, and it requires them to publish disclosure on its website if the company makes claims about itself or related or affiliated entity or product that implies or states that it does not add net greenhouse-gas emissions or that it has made significant reductions to greenhouse-gas emissions. The statute requires that companies subject to it provide all information as to how a carbon-neutral, net-zero emission or similar claim was determined to be accurate or accomplished, how interim progress is measured, and if there’s independent third-party verification of the data and claims.

AB 1305 presents a lot of interpretive questions. It’s a very short statute that covers a very wide swath of behavior and claims, and unfortunately, it includes very little in the way of guidance or definitions.

The second bill we’ll discuss is SB 261, which mandates biennial reporting on climate-related financial risks. It applies to entities that are organised in the U.S., that do business in California and that have revenue of at least $500 million. Note it’s not limited to public companies. In other words, unlike as with the recently adopted SEC rules, privately held companies that don’t make any other public disclosures but that are organised in the U.S. and meet the $500 million revenue threshold would be required to make public disclosures about climate-related financial risks under SB 261.

The statute does have a comply-or-explain element that allows companies that can’t complete a report with all the required disclosures to comply to the best of that company’s ability, so long as they also provide a detailed explanation for reporting gaps and steps they’ll take to prepare complete disclosure.

Public companies that report under the SEC’s rules won’t have to separately report under 261. Note, however, that the first disclosures under 261 would be due on January 1, 2026, though that could get delayed.

Finally, the last of the three bills is SB 253, the greenhouse-gas-emissions reporting rule. It applies to entities that are organised in the U.S., that do business in California and that have revenue of at least $1 billion — the revenue threshold is twice as high as under 261. Note that like 261, it’s not limited to public companies. In other words, unlike as with the recently adopted SEC rules, privately held companies that meet the revenue threshold would be required to publicly disclose their greenhouse-gas emissions. It requires that, beginning in 2026, reporting entities publish their Scope 1 and Scope 2 emissions data.

Scope 1 emissions are a company’s emissions from its own operations. Scope 2 emissions are emissions from purchased energy. Scope 3 emissions are emissions of other entities in the company’s value chain. That typically includes, for example, suppliers and users of the company’s products. Scope 3 emissions would need to begin receiving limited assurance in 2030 and would not, under the statute, move to reasonable assurance.

When signing 253 and 261, Governor Newsom stated that he had concerns about the timeline and costs of 253 and 261 and planned to work with the legislature to address those issues. No legislation has been moved on yet that would push back deadlines for reporting or otherwise amend those statutes, but there’s some optimism that Newsom will take steps in that direction. Both 253 and 261 also require the California Air Resources Board — commonly referred to as CARB — to adopt implementing regulations. Whether and when CARB will receive funding to draft those regulations is unclear, as such funding was not included in the most recent budget.

Finally, 261 and 253 have both recently been challenged in court by the Chamber of Commerce and a number of other plaintiffs. That lawsuit asks that the court declare 261 and 253 null and void, alleging that both of those laws violate the First Amendment by compelling speech and that they are preempted by the Clean Air Act.

 Alyse Mauro Mason: About AB 1305, you mentioned a few times that it’s an anti-greenwashing-regulation law. When companies are thinking about the commitments they’re making, the disclosures they’re making, how do you navigate a commitment versus an aspiration?

Marc Rotter: That’s a good question, and it’s one we’ve been talking to a number of companies about. It’s something that’s unclear in the statute itself. Is this the kind of thing a consumer would look at and think, “I care about these issues — I care about carbon emissions”? Would they take the relevant statement into account when deciding whether to buy a product or engage a particular provider for a service? In the absence of any guidance, that broad understanding of what a claim is, is how we see people thinking about it. That would imply that in many cases, aspirational statements could get captured here because they are the kind of thing a company could make with the intent or with the effect of having a consumer decide to go for their product instead of somebody else’s product.

Alyse Mauro Mason: You were talking a lot about the interpretation and the lack of guidance in the new California climate laws. When there is ambiguity or room for interpretation, there’s the spirit of the law and the letter of the law. How can companies and boards navigate the ambiguity with more certainty around their decision-making and the way they’re going to disclose?

Marc Rotter: That’s another good question a lot of companies are struggling with right now. Companies are largely looking to the spirit of the law to help inform how they’re thinking about ambiguities, and looking very hard at what peers are doing. Companies don’t want to be outliers here. They don’t want to be saying a lot more or a lot less than what their peers are saying. There are a lot of discussions going on between companies and their advisers and within industry groups as to what these things mean and how different types of companies are complying with them and should be complying with them.

Ricardo Buitron: Marc, do they also take a look at what they’re communicating about their interpretation — effectively, disclosing what their interpretation would be in that manner and providing some level of information to the public where there is some ambiguity: “This is how we interpreted this requirement, and this is what we’re disclosing for that purpose”?

Marc Rotter: Companies do think about that. There are certainly instances, especially in connection with 1305, where companies have made affirmative statements that they’ll start complying with the law in 2025, which clearly implies that the company believes that the law comes into effect in 2025. More important than that, companies are thinking about “How are we communicating our climate and general ESG efforts and commitment to the public? Do we want to be a best-in-class actor on these issues? Do we think there’s value to the company in that?” and, if so, potentially taking a more conservative reading of what the statutes require and providing full disclosure in response to that.

Alyse Mauro Mason: Michael, now that Marc has provided the context of the laws, could you share more about how the laws impact organisations?

Michael Littenberg: I’m going to give you two answers to the question. The first is very lawyerly: It depends. There are different jurisdictional requirements for each of the three California climate-disclosure laws. A company can be subject to one of the laws but not subject to the others, or they can be subject to two of them but not to the third. In other words, it’s not an all-or-nothing proposition. SB 253 and 261 won’t impact every company that does business in California, as companies also need to hit the applicable revenue threshold, and they also need to be organised under the laws of the U.S.

For AB 1305, companies need to be making a covered claim, or they need to be marketing or selling voluntary carbon offsets in California to be picked up there to have an impact. However, for companies subject to at least one of these laws, there will be a compliance impact since they’re going to need to meet specific disclosure requirements. There also can be fines for not making required disclosures, and in some cases, those fines can be pretty substantial.

The compliance impact is going to be especially significant for companies that are not subject to the new SEC climate rules or the EU’s Corporate Sustainability Reporting Directive and that don’t otherwise publish robust voluntary climate disclosure. And that’s because those companies are going to be starting from a much lower baseline and in some cases even starting from scratch.

SB 261, which are the climate-risk disclosures, those are going to perhaps be less onerous and have less impact, since many companies are going to be able to satisfy those requirements through other climate disclosures they voluntarily make or they’re going to be required to make pursuant to other requirements, such as the SEC’s rules, which were recently adopted, or the EU’s Corporate Sustainability Reporting Directive. But again, for companies starting from scratch or at a lower baseline, it’s going to be a pretty big compliance lift for SB 261 as well.

The second answer to your question of how the California laws will impact companies is, we don’t know for sure. When Governor Newsom signed SB 253 and 261, he indicated he didn’t think that the time frame for compliance is reasonable, and he’s seeking to push back the compliance dates, and we also don’t have the implementing regs under 253 or 261.

Alyse Mauro Mason: Thank you, Michael. Some of the companies that are at that early stage, and this would be a very heavy lift to be in compliance, it’s important for them to not take their foot off the gas. How can they continue to be working toward these elements? None of us have a crystal ball, but there’s probably more regulation to come from a state perspective in the U.S., and there are other global regulations that could apply to them. With this uncertainty, does that give anybody a window of opportunity to say, “I’m going to wait on this”?

Michael Littenberg: There will be companies that will wait, but even for companies that are going to wait on some of the compliance steps, there are things companies should be doing now. For companies that haven’t done so yet, you still want to start, at least by first digesting the rules. The good news is that compared to the SEC’s climate rules, the California laws are a pretty breezy read. It doesn’t take long at all to go through them.

However, AB 1305 is the most immediate of the three laws to focus on from a compliance standpoint. As we noted, it’s in effect, but even if it gets amended back to 2025, that’s going to be coming up quickly, so that doesn’t give companies a lot of time there. For larger companies, we’ve been finding that it isn’t necessarily easy to identify which claims have been made that might come under AB 1305, since companies haven’t had to track those before. That’s where those companies want to start, and you need to see if you’re making any covered claims and, if so, whether you already have disclosures that are responsive to AB 1305. That should be a 2024 exercise for companies.

Also, those companies that do have claims that come under AB 1305 should be putting together disclosure that’s responsive so it’s ready to be posted when it’s required. Companies that would come within AB 1305 also are going to want to put in place controls to ensure that new claims that may require responsive disclosure don’t fall through the cracks. However, AB 1305 should only be a modest lift for most companies. All that work I described, I don’t think that’s going to be a big deal in most cases. For many companies, 253 and 261 are going to be a much bigger lift.

I don’t want to minimise the work involved for some of those companies and the time and thought that it will take. But there’s going to be enough time to do that work. And as we noted already, at this point, we don’t even know for sure when the requirements will apply or exactly what all the requirements will be. But for companies that will be subject to 253 or 261, a good place to start now, in 2024, is with a gap assessment. It should look at both disclosure and process gaps.

And, as part of the gap assessment, companies should take into account other climate-disclosure requirements they will or may be subject to, as you noted. Those include the SEC’s climate rules, as well as the CSRD, among others. After the gap assessment, companies will then be ready to develop a compliance plan with timelines, with responsibilities for complying with 253 and or 261 as applicable.

Alyse Mauro Mason: Ricardo, to build on what Michael just shared, what should companies be focused on to operationalise compliance? And then, how can they make that an enabler for value creation?

Ricardo Buitron: Segueing off of what Marc was calling out, and part of the same process, is the importance of that materiality assessment as well. The rules will, to a degree, largely indicate this, and the market will provide indicators. We talked about looking at what competitors are doing in the market. That says one major element of it, but largely, an organisation still needs to conduct that assessment for themselves, and that’s where they’ll lean into that.

The term we just called out, in terms of materiality, it’s all over the SEC rule. With that materiality assessment, the organisation will be able to understand who the stakeholders are and what are the risks to the financials, and then this will support the data collection and, ultimately, reporting and the disclosure. Now, this can be difficult, but it’s not impossible. This can be broken down a couple ways, but at the heart of this is an understanding of what’s impactful to the value-creation process of the organisation.

There are a couple of ways to break that out: internal and external stakeholders. For externals, we have examples of regulators, shareholders and, from an internal perspective, employees. An extrapolated example of this is if there’s a significant percentage of investors wanting to see disclosures around Scope 1 and Scope 2 — that’s one example. Then there’s the value chain and what that consists of. These are your inputs and your outputs and how climate risk, for instance, intersects with those inputs and outputs and, specifically, assessing scope around Scope 1 and Scope 2 in terms of what is material to the organisation.

An example of this would be if you provide a service to a large retailer that wants you to begin disclosing Scope 1 and Scope 2 by a certain timeline, and you might be exposed to that transition risk. Or, if a large portion of your portfolio has exposure to some level of climate risk through wildfire or regional natural disasters, that might also be material.    
Finally, with respect to materiality, it’s also important to understand that severity and likelihood of impact is also relevant. If it’s something that’s likely to occur but does not have a significant impact on the operations, that’s also an element that needs to be assessed and addressed as part of that materiality.

This can seem burdensome, and I understand that this is a lot of effort, especially depending on the size of the organisation. But we need to call out that the flip side to every risk is an opportunity. By identifying what’s relevant to the risk of the organisation, you’re not only protecting what’s important and what drives value for the organisation, but you’re also able to identify opportunities to either differentiate yourself in the market or create new products that address a market need.

Alyse Mauro Mason: Marc, we’ve talked about compliance impact. We’ve talked about operationalising some of these elements within your climate program and in your sustainability program. What should boards be focused on to address the rules and laws around climate-disclosure reporting?

Marc Rotter: The first key thing for boards is that you need to be thinking globally about these issues. There’s a whole alphabet soup of mandatory and voluntary reporting regimes. On the mandatory side, as Michael mentioned, the SEC rules are coming online, the CSRD, the European rules are coming online, the California rules we just spoke about. There are rules in the U.K., rules are being considered in Australia and other jurisdictions, and other U.S. states are considering their own climate disclosure rules. There’s a lot there, and a lot of it has overlapping but not identical requirements.

When faced with all those overlapping requirements, companies are going to want to make sure they have an approach that’s consistent across the organisation, that allows them to gather data in an efficient way and subject it to the same series of robust controls and, maybe most important, make sure they’re being consistent globally when reporting under different regimes. That’s the kind of thing boards are going to want to do to make sure they have processes and procedures in place to govern, because it will have to be done on an enterprise wide level.

As part of doing that, boards are going to need to ensure that management and external advisers are conducting a thorough scoping analysis. You can’t plan unless you know which of those new regimes your company is subject to and, as part of that, do a gap analysis, which has, in this context, two parts.

First, see the gaps between what you currently do and what you will be required to do, but then also see the gaps between different regimes you’re going to need to comply with so you can come up with an efficient and consistent way to address overlapping disclosure requirements that come into play under different laws. Finally, and maybe most important, boards need to think about what different stakeholders are expecting, as Ricardo indicated a moment ago, and how they want the company’s story to be told. Climate and ESG disclosures get a fair amount of attention, and so, at least at a high level, they need to be part of the discussion about how the company presents itself to the world, rather than just being viewed as a compliance exercise.

Alyse Mauro Mason: Michael, from your perspective, how should companies be thinking about partnering with outside counsel?

Michael Littenberg: I’m going to be biased on this one, of course, but it’s always better to involve knowledgeable counsel of your choosing earlier rather than later. That ultimately tends to be a lot cheaper than a mad scramble later down the road, especially with AB 1305. As we’ve noted a bunch of times already, there are a lot of aspects of that statute and compliance that are unclear. Counsel can help navigate those. Counsel also can help navigate evolving AB 1305 market practice, which is still pretty opaque. And since AB 1305 is for the most part a light lift, I don’t think those counsel fees should be significant for most companies.

With respect to 253 in 261, among other things, counsel that practices in this area can help companies think holistically about their compliance requirements across all the climate-disclosure regulations they’re subject to. That’s going to be invaluable for companies’ project planning. Then, when the time comes, counsel can also be involved — and should be involved — with reviewing draft disclosures companies plan on making.

Alyse Mauro Mason: There is such incredible collaboration that happens through sustainability. With what you’re seeing in the market right now, how are law firms and consulting firms working together on compliance, climate-related programs or sustainability programs at large?

Michael Littenberg: It differs by law firm, but because we do so much in this area, we’re frequently partnering with consulting firms around climate-disclosure compliance, and it’s something I typically recommend. A lot of companies don’t have the internal expertise to assess climate risk in alignment with the TCFD framework recommendation. That’s an area where they often need consultant help. And we’re partnering with a lot of consulting firms since we often retain the consultants directly for privileged purposes.

Companies often also need help with greenhouse-gas-emissions tracking and, even before that, selecting cost-effective, fit-for-purpose software solutions. Companies also, in many cases, will need help with audit readiness. That’s going to include help building out requisite controls and testing those controls. And of course, even before undertaking all this work, you and your team are providing invaluable help with project planning to make the compliance process more efficient and effective for companies. In summary, many companies have significant needs for expert consulting advice, so we’re frequently working with and partnering with consultants in this area.

Alyse Mauro Mason: Thank you so much, Michael. We feel the same about Ropes & Gray and your team.

Ricardo, what comes next? Once an organisation understands the requirements and how to report on them, who can they consider collaborating with? Thinking about that internal perspective, data is a big piece of the puzzle. Data enables most of the conversation we’ve had today. Could you share more past the materiality and more on the power of the data behind a climate program?

Ricardo Buitron: To segue off of everything we talked about, once that gap assessment or that materiality assessment has been completed, that’s where the rubber meets the road in terms of operationalising something. To be able to start pulling together the data, you need to get into the data-gathering aspect, and that’s where business units need to take that assessed materiality in the gap and apply it to their operations and begin identifying the metrics that should be captured so you can then provide the inputs into that material risk or those material elements.

In some cases, this will be easy because you need to capture Scope 1 and Scope 2. That’s going to be very much defined per the regulations. But in other cases, it will be hard and will be very specific to the type of operations you have or the type of portfolio and then, ultimately, the type of risk that would be associated with your operations and your portfolio. Potentially, it’s not an easy task, and that could potentially get very broad. Determining and focusing in on scope is going to be extremely relevant.

Once that process or step has been gone through, ultimately, you need to tweak the processes at the end user level that will allow the capture for needed data elements so that information gets accurately reported to leadership. The good news is that most organisations, to a large degree, already have the data architecture in place that needs to be able to support this from a data perspective. The reporting procedures will need to be updated and enhanced to allow for this. IT general controls will need to be put in place to make sure there’s good governance around the new data that’s being collected.

And there’ll be additional work for every organisation to figure out how they’ll be able to achieve compliance with the new reporting requirements, regardless of where they come from. This will take input from the operations team, legal, compliance, internal audit, your assurance provider, and corporate communications and what have you. It’s a lot of input into this process as we start the journey and ultimately continue on with the journey even after we’re achieved compliance.

Alyse Mauro Mason: We’ve talked about the impact of compliance. We’ve talked about how to operationalise it. We’ve talked about some of the overlapping disclosure requirements, and here are a couple of the things I heard throughout our conversation today: Collaborate with your peers in industry groups. Board oversight is essential. Working with outside counsel is an absolute must. Working with your legal team should be a requirement. Thorough scoping. You cannot plan without knowing what applies to you. Look at what you are doing and identify gaps, and then identify gaps in overlapping disclosure requirements.

Marc, to close out our conversation today, what are three key takeaways you want our audience members to remember from our conversation?

Marc Rotter: First, there’s a lot coming online in the near term. It’s important to start planning holistically, thinking about the organisation globally and what you’ll be subject to globally and how you’re going to develop an enterprise wide process to meet those obligations in a consistent, reliable and accurate way.

The second point I’d highlight is that companies are going to need to start making more mandatory disclosures on climate issues. When doing that, it’s important to think about how it fits with your other stakeholder communications and your overall strategy. Again, as we talked about earlier, companies are better served thinking about it in that broader sense than just thinking about it as a narrow compliance exercise.

Finally, the last point I focus on, which follows from the first two, is that it’s important to start thinking about data gathering and controls to make sure that companies are well-positioned to accurately produce the necessary information in a way that’s efficient and repeatable and accurate and reliable.

Alyse Mauro Mason: One of the things that was said earlier was about the acronym soup. Now, we’ve got number soup as well — we’ve got a bunch of new numbers and regulations. The data is a big part of that, which adds more numbers, but that is the fun of sustainability. There is a wonderful glossary we can share that can help navigate some of the acronyms and some of the numbers we’ve talked about today.

Michael, is there anything else you have to add to what Marc just shared?

Michael Littenberg: Marc did a great job with the important takeaways. I’ll add a couple of other high-level takeaways. As we’ve been discussing today, climate-disclosure requirements are increasing. They’re going to impact a lot of companies. There’s going to be more regulation on the way, so companies need to pay attention to climate regulation — disclosure regulation in particular. To borrow a saying from Leon Trotsky, you may not be interested in climate-disclosure regulation, but it’s interested in you.

The second takeaway is, we’re at the very early stages of mandatory climate disclosure. The good news is, we now have a lot more visibility on the requirements, especially with the SEC rule being finalised, than we had even just a few weeks ago. But there are, of course, still a lot of open questions with respect to timing with disclosure across a number of different jurisdictions. To borrow another quote, this one from Winston Churchill, this is not the end. It’s not even the beginning of the end, but maybe it’s the end of the beginning. Therefore — and this is one’s me, not Churchill — it’s important that you know to manage for the road ahead. Companies are going to be very well served by a thoughtful climate-disclosure compliance strategy with the right legal and consulting advisers helping them.

Alyse Mauro Mason: Thank you.

Thank you for being loyal listeners. We hope you enjoyed our conversation today about the California climate laws and other regulatory considerations, what they are, how they impact your organisation and the practical application. If you have any questions, please reach out to us at Protiviti and our friends at Ropes & Gray. Until next time, take good care.