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Companies need to integrate climate reporting across functions to comply with California’s new law

Henry Engler  Thomson Reuters Regulatory Intelligence

· 5 minute read

Henry Engler  Thomson Reuters Regulatory Intelligence

· 5 minute read

California has become the only U.S. state to enact a first-of-its-kind mandatory climate emissions disclosure rule, compelling companies to integrate company-wide disclosure and reporting

California’s new climate disclosure laws, coming into force in 2026, have put companies in the state under pressure to ensure they have clear accountability roles for climate reporting and create cross-functional teams within their finance, legal, and other units. Perhaps the greatest challenge will come in meeting Scope 3 reporting requirements, experts said.

The Climate Corporate Data Accountability Act (SB 253), signed into law by Governor Gavin Newsom earlier this month, is the first-of-its-kind mandatory climate emissions disclosure rule in the United States. A second bill, SB 261, requires disclosure of climate-related financial risks, in accordance with recommendations from the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures.

California — the world’s fifth largest economy by GDP and home to corporate giants such as Apple, Google, and Microsoft — has long been at the forefront of progressive U.S. policies, especially on environmental issues. The state’s new climate disclosure rules come as the Securities and Exchange Commission (SEC) is still preparing the final version of its own climate disclosure rule. While there are certain similarities between the SEC proposal and California’s laws, there are also important differences.

California disclosure rules closer to EU regulations

The California Climate Accountability Act goes further than the SEC’s proposed climate rule, as it applies to both public and private companies that do business in the state and meet certain annual revenue thresholds. The SEC’s proposed climate rule targets only public companies that report to the SEC, including U.S. public companies and foreign private issuers.

“In this respect, the California rules more closely approximate the European Union’s Corporate Sustainability Reporting Directive (CSRD), which applies to non-E.U. entities that meet certain presence and size thresholds,” the law firm Cooley wrote in a note to clients.

One important difference, however, is that compared with the California bills, the European CSRD has a lower revenue threshold. The California bills are focused on companies that make more than $1 billion in annual revenue per calendar year.

Large E.U. companies, including subsidiaries of non-E.U. companies, listed or not, must report in 2026 on 2025 data, if they satisfy at least two of the following criteria: i) a balance sheet total exceeding 20 million euros; ii) a net turnover (annual sales minus value-added tax) of 40 million euros; iii) or an average of more than 250 employees over the financial year.

“For those companies subject to both the CSRD and the California rules, reporting obligations should generally be complementary,” Cooley reported.

Scope 3 emissions seen as major challenge

The California disclosure regulations and CSRD both require companies to report on their Scope 3 emissions (those of third parties along their supply or value chains). While the SEC included Scope 3 in its initial proposal, it is unclear whether the final rule will include such emissions, which have become highly politicized in the U.S. Congress and among industry groups. Indeed, House Democrats and Republicans continue to pull the SEC in opposing directions on climate risk, with Democrats urging the regulator to preserve strong Scope 3 emission disclosures in its upcoming rules and Republicans threatening a subpoena over the agency’s coordination with E.U. regulators on climate directives.

In California, while large companies such as Google and Apple are well-advanced in identifying Scope 3 emissions, smaller companies are likely to struggle, experts said. “For better or worse, it’s a regulatory burden for a lot of companies,” says Bill Tarantino, a partner at Morrison Foerster in San Francisco.

Tarantino added that companies “that don’t have emissions directly but engage in a lot of activity that produce (Scope 3) emissions” will be most affected. These include professional services firms and financial companies — banks and broker-dealers, for example — which have customers engaged in activities that produce carbon emissions.

Climate reporting should be embedded across organizations

To comply with California’s new laws, experts said companies which fall within the $1 billion revenue threshold should be actively establishing cross-functional teams to manage the climate reporting process.

“Companies should start by assigning internal responsibility for climate reporting, which often includes setting up a cross-functional committee of management team members from operations, legal, and finance,” Cooley wrote in their client note. “Companies also should begin building an internal system for climate reporting and related data governance and disclosure controls.”

Additionally, identifying appropriate outside advisers will also be an important early task, particularly finding the right emissions accounting firm for a given business and industry to gather emissions data and prepare audit-ready greenhouse gas emissions (GHG) disclosures. The new California legislation requires companies to hire third parties to audit their disclosures.

“Climate reporting can be time-consuming and logistically challenging, especially given the need to gather full value-chain GHG emissions data,” Cooley said.

It is critical for companies to first understand their carbon footprint — including their own emissions profile and that of their full supply chain — before embarking on climate-related financial risk reporting.

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