Two new groundbreaking California laws will require companies doing business in California, including food and agriculture companies, to report their annual greenhouse gas emissions, climate-related financial risk exposures and climate risk management plans. Notably, the reach of the California laws extends beyond the proposed Securities and Exchange (SEC) climate-related financial risk rule (which also would mandate emissions disclosures and which IATP strongly supported) to include privately held companies, such as Cargill, as well as companies covered by the proposed SEC rule. Corporate climate disclosures, which have been voluntary, inconsistent and not comparable, will for the first time be standardized and comparable.
The laws, to be implemented by California Air Resource Board (CARB) regulations, are additions to California’s “Health and Safety Code.” Emissions levels and progress in reducing emissions are important indicators of the scale of climate-related financial risk that the companies covered by the law must transparently and comprehensively report. The most notorious recent failure to manage corporate climate-related financial risk in California was the 2018 bankruptcy of Pacific Gas and Electric (PG&E) related to wildfires caused in part by PG&E’s failure to invest in infrastructure upgrades to its power stations and energy grid. Among the billions of dollars of wildfire damage from PG&E’s climate risk management failures were nearly 400 buildings plus vineyards in California’s famed wine industry.
On October 7, California Governor Gavin Newsom signed a bill to mandate biennial corporate climate financial risk disclosure reports (SB 261) and a bill to require annual standardized disclosure of greenhouse gas emissions for covered corporations, including their subsidiaries, doing business in California (SB 253). (Insurance companies are exempt but covered by a separate bill.) SB 261 covers businesses with annual revenues of $500 million and that “do business in California.” SB 253 applies to companies, including subsidiaries, with annual revenues of $1 billion and that “do business in California.” “Doing business in California” is defined by three criteria, including the transaction of taxable sales, which in 2022 must have exceeded $690,144. Opponents, including fossil fuel giants, have willfully mischaracterized SB 253 as a “hidden tax on small business.” However, the “and” ensures that your “small business” must have annual revenues of $1 billion or more to be subject to the law.
SB 253 is expected to impact about 5,300 companies. According to CDP (formerly, the Carbon Disclosure Project), about 45% of U.S. and Canadian publicly traded companies with more than $1 billion in revenue already disclose annually and voluntarily their emissions and other climate-related financial risk data through CDP. We discuss SB 253 first and then SB 261 below.
What is in SB 253, California’s GHG emissions disclosure law?
In a signing statement, Governor Newsom said that SB 253 deadlines for emissions disclosure were “likely infeasible” and that emissions reporting protocols, whose use is mandated in the bill, might result in inconsistent reporting among different types of businesses. He asked the legislature to address those problems. SB 253 proponents anticipate that opponents, including fossil fuel companies and the California Chamber of Commerce (CalChamber), will use the signing statement to try to kill the bill in the legislature and/or in the courts. Chamber President Jennifer Barrera said, “We look forward to working with the Governor’s office on SB 253 clean-up legislation that will address some of the major concerns of our members, particularly the impact on small business.”
Unlike the proposed SEC climate financial risk disclosure rule, which also requires both GHG emissions reporting and climate risk disclosure for SEC-registered companies, the California legislation covers privately held companies in addition to publicly traded companies registered with the SEC. Many food processing, food retail chains and agribusiness companies are privately held, such as Cargill. Trade associations are repeating some of the same criticisms about the California legislation that agribusiness expressed about the proposed SEC rule, summarized last year by IATP.
An April 17 agribusiness and commodity group letter to the SEC argued, “the Commission has legal authority to carve the agriculture industry out of Scope 3’s [value chain emissions] obligations and should do so.” (p.5) The letter proposes exemptions for the industry from climate risk reporting, including, “any agricultural entity with less than $100 million in annual revenue cannot be compelled to supply information to a public company that is obligated under Scope 3.” (p. 6) Were the SEC to grant the proposed agribusiness carveout and exemptions, other industries would demand equal treatment, and the rule’s efficacy for informing investors about corporate climate financial risks and plans to manage those risks would collapse. A March 15 letter from IATP and 19 other signatories proposed a clarification to the rule and noted, “A recent study of 100 major food companies found that 51 already disclose Scope 3 emissions from suppliers.”
Agribusiness and other opposition to implementing SB 253
Governor Newsom’s signings begin a process of implementation by the California Air Resources Board (CARB) and attempts to weaken the bills’ implementation. Opponents of the bills, including the California Chamber of Commerce and the Western States Petroleum Association, will challenge the SB 253 Scope 3 reporting mandate, alleging that the requirements will be impossibly burdensome for California small businesses and farmers who are not corporate subsidiaries, but are claimed by opponents to be part of corporate supply chains.
A Chamber-coordinated campaign to “Stop SB 253” claimed that the disclosure requirement would act as a “hidden tax on small businesses.” Even though the bills contain no tax, hidden or otherwise, Stop SB 253 claims the following food and agriculture organization supporters: African American Farmers of California; Agricultural Council of California; Agricultural Energy Consumers Association; American Pistachio Growers; California Apple Commission; California Blueberry Association; California Blueberry Commission; California Cotton Ginners and Growers Association; California Date Commission; California Fresh Fruit Association; California Life Sciences; California Poultry Federation; California Walnut Commission; Far West Equipment Dealers Association; Nisei Farmers League; Olive Growers Council of California; Western Agricultural Processors Association; Western Growers Association; Western Plant Health Association and the Wine Institute.
Some member companies of the Securities and Financial Industry Markets Association, the Western States Petroleum Association and California Life Sciences, to say nothing of Chamber member companies, very likely have annual revenues exceeding $1 billion annually. However, most of the food processing and agriculture companies that are part of the Stop SB 253 campaign do not. Why do so many food and agriculture organizations that have no emissions reporting obligations under SB 253 stand in solidarity with those companies to which the law does apply?
Here is Stop SB 253’s explanation for why small businesses, including farmers and ranchers, should oppose the law:
SB 253 will require thousands of businesses to not only report but verify all emissions in their ENTIRE supply chain, world wide. This requirement would particularly burden small and medium-sized businesses that have partnerships with larger corporations, as they would have to cope with arduous reporting obligations. This extensive increase in reporting demands is likely to drive up costs for smaller businesses that may not have the necessary resources to comply, ultimately leading to the loss of valuable contracts.
The first sentence of this statement is broadly accurate. SB 253 will require an estimated 5,300 companies with more than $1 billion revenues and “doing business California” in the prior year to report annually the company’s emissions according to the methodologies and standards of the Greenhouse Gas Protocol, a protocol developed and already used by companies to voluntarily report emissions estimates, as noted in the law. According to the Protocol’s website, “9 out of 10 Fortune 500 companies reporting to the CDP use GHG Protocol.”
There is nothing in SB 253 that requires small or medium-sized businesses, farmers or ranchers to report emissions. Instead, covered companies are to use the Protocol’s “guidance for scope 3 [value chain] emissions calculations that detail acceptable use of both primary and secondary data sources, including the use of industry average data, proxy data, and other generic data in its scope 3 emissions calculations.” (Sec. 2.c.A.ii) Small and medium-sized business will not be gathering emissions data or reporting emissions publicly to the climate reporting organization that CARB chooses.
Large corporate emissions reports do indeed require verification by auditors, according to the “reasonable assurance” standard by 2030 for scope 1 emissions (direct corporate) and scope 2 emissions (from purchased energy) by 2030. CARB “may establish an assurance requirement for third-party assurance engagements of scope 3 emissions,” (Section 2.c.F.iii) with a compliance date of 2030 for the lowest auditing standard, “limited assurance.” In other words, CARB may decide that large corporate emitters covered by the law need not have their emissions reports audited by an independent third party for accuracy, comprehensiveness and compliance with the reporting format. (Industry lobbyists were further able to persuade legislators to lower the penalty for noncompliance with SB 253 to $500,000, a drop in the bucket for a multi-billion dollars revenue corporation.)
After the broadly accurate first sentence of the Stop SB 253 statement, the remainder is fictitious and fearmongering. Food companies and agribusinesses doing business in California with less than $1 billion in annual revenue already know that the law does not apply to them.
What is in SB 261’s climate-related financial risk law?
SB 261 defines climate-related financial risk to mean “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.” (Section 2.a.2) The format for reporting must follow the internationally recognized Task Force on Climate-Related Financial Disclosures (TFCD) framework, a project of the intergovernmental Financial Stability Board.
According to TFCD’s sixth and final status report, published in September, TCFD disclosure recommendations have been adopted by the International Sustainability Standards Board’s Sustainability Disclosure Standards, cited in SB 261. To evaluate the global status of corporate financial disclosure reporting, TFCD used artificial intelligence (AI) technology to review the disclosure documents of about 3,100 publicly traded companies in fiscal year 2022. (p. 11) The law requires a “non-profit climate reporting organization” contracted by CARB to produce a biennial climate financial risk report, very likely employing AI document analysis technology.
However, the companies to which the law applies can also satisfy its requirements by filing a biennial report that is “Pursuant to a law, regulation, or listing requirement issued by any regulated exchange, national government, or other governmental entity, including a law or regulation issued by the United States government, incorporating disclosure requirements consistent with clause (i) of subparagraph (A) of paragraph (1) [referring to the TFCD reporting protocol], including the International Financial Reporting Standards Sustainability Disclosure Standards, as issued by the International Sustainability Standards Board.” (Section 2.b.4.iii). In sum, SB 261 gives companies with $500 million in annual revenues and doing business in California numerous options for reporting their climate-related financial risk to the State. For example, a covered company could satisfy the law’s requirements by reporting according to the SEC disclosure rule, once that rule is finalized and enters into effect. Alternatively, some SB 261 covered companies could meet their reporting obligations by complying with the European Union’s climate disclosure rules that begin to go into effect in January 2024. The rules are expected to apply to more than 3,000 U.S.-based companies that do a certain amount of business in the EU’s 26 member states.
CalChamber misreads these options to satisfy SB261 disclosure reporting requirements as duplicative: “The CalChamber opposes SB 261 because the reporting requirements established by the bill create significant implementation challenges, will lead to duplicative requirements and do not align with generally accepted international standards.” SB 261 is based on the TFCD recommendations and the ISSB standards, which were finally agreed in June and have a broad base of corporate and government regulator support. There are, no doubt, “significant implementation challenges,” but not because the reporting requirements are duplicative.
Although the text of the law makes clear that parent companies alone are obligated to report, CalChamber argues that “if a retailer has several hundred storefronts in California, SB 261 would require an analysis for each individual storefront.” Parent companies of multi-outlet retailers, including food and agricultural input and machinery dealers, already have consolidated audit trails that allow them to closely monitor multiple performance indicators of every subsidiary. Adding climate risk indicators to those audit trails is very feasible, but the law’s 2026 deadline for the first corporate climate financial risk report may not be feasible for those privately held and publicly traded companies that are not already reporting to the TCFD’s CDP voluntary reporting organization.
For companies that cannot or will not comply, the law offers this alternative: “the covered entity shall provide the recommended disclosures to the best of its ability, provide a detailed explanation for any reporting gaps, and describe steps the covered entity will take to prepare complete disclosures.” (Section 2.b.B) If a company decides that even this alternative is too “burdensome” or revealing, it can pay a mere $50,000 fine, a concession the bill’s authors apparently made to secure the final votes for SB 261’s passage.
However, CalChamber further argues that “SB 261 should be delayed until federal action is taken and reporting entities have a clear sense of their obligations.” The most prominent and imminent federal action that will obligate financial risk disclosures and emissions reporting is the proposed SEC disclosure rule, which currently includes a 2026 compliance deadline for large corporate filers. The U.S. Chamber of Commerce opposed the proposed SEC disclosure rules in a June 16, 2022 letter: The issues identified as in need of correction take about 80 pages to describe and include making reporting of Scope 3 emissions “entirely voluntary.” (p. 4) Because Scope 3 emissions are estimated to be 90% of the average packaged food company’s emissions, to make Scope 3 reporting “entirely voluntary” would result in radically inconsistent and incomplete climate risk indicators that would be of little use to the investors and asset managers that are the target audience for the climate risk reporting generated by the proposed SEC rule.
CalChamber’s request to delay SB 261 “until federal action is taken” is moot regarding California law. However, the U.S. Chamber’s proposals would vitiate the proposed SEC disclosure rule, very much like the agribusiness lobby proposals for agriculture industry carveouts and exemptions would vitiate the rule. Currently, SB 253 and SB 261 comprise a critically important backstop applied to cover companies in the world’s fifth-largest economy (as defined by Gross Domestic Product), if the final SEC disclosure rule is less comprehensive than the proposed rule.
The enormous financial risk from continued climate-related losses for U.S. farmers
As litigation and political opposition from large corporations to climate-related financial disclosure proceeds, the costs of climate change and the opposition to climate-related risk management continue to rise. Just the costs of damage to U.S. agriculture operations in 2022 were estimated to be $21.5 billion by the American Farm Bureau Federation, an opponent of both the California climate accountability legislation and the proposed SEC rule. Only half of those losses were insured, according to the Farm Bureau study, mostly by crop insurance policies whose premium payments are heavily subsidized by U.S. taxpayers. According to an Environmental Working Group report, the payments were heavily concentrated to benefit large farms in 10 states for four crops. Only about one-fifth of U.S. farms benefit from the taxpayer-supported crop insurance program.
Under the Farm Bill, U.S. crop insurance is privately administered, including by many Farm Bureau insurance agencies. A General Accountability Office “Snapshot” of crop insurance payouts to high-income legal entities (e.g., farmland trusts) recommends that by lowering the payout limit, more losses for more farmers could be insured. Additionally, some crop insurance requirements penalize farmers for climate-friendly practices. But climate-related financial solutions likely will get little traction from a bipartisan Congressional majority dedicated to protecting the high-income entities.
The bottom line of climate change
Since the launch of the Task Force on Climate Related Financial Disclosures in 2017, the policy momentum for disclosure has been building. Without consistent, standardized, comparable and transparent disclosures, it is not possible to make investment and policy decisions to reduce the costs and damage from the momentum of climate change itself. GHG emissions are an important indicator of climate financial-related risk exposure and the scale of the risk to be reduced. One study estimates that the industrial sector, including food processing, accounted for 29.6% of all U.S. GHG emissions in 2020. In 2022, the EPA reported that the agriculture sector accounted for 11.4% of U.S. GHGs, continuing a trend of rising emissions. The California climate accountability laws establish a corporate disclosure reporting framework that will help reverse part of the accelerating momentum towards a disastrous climate future.
