California Provides Update On Climate Change Reporting, Opens Public Comment

Sacramento California outside the capital building

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In 2023, California passed legislation requiring large companies to file climate change disclosures beginning in 2026 for FY 2025. A year later, Governor Gavin Newsom signed legislation that delayed the releasing of the implementation guidelines for climate reporting until July 1, 2025. However, ambiguities in the law and the complexities of implementing a program made that date unobtainable. A virtual workshop held on August 21 provided more clarity on which companies will be required to report.

In September 2023, California approved the Climate Accountability Package, a pair of bills aimed at creating sustainability reporting requirements. Senate Bill 253 required companies that do business in California and have an excess of $1 billion in revenue, defined as “reporting entities”, to submit an annual report for Scope 1 and Scope 2 starting in 2026. Scope 3 reporting will begin in 2027.

Senate Bill 261 required companies that do business in California and have an excess of $500 million in revenue, defined as “covered entities”, to submit a biennial climate-related financial risk report. The report is based on the work of the Task Force on Climate-Related Financial Disclosures, established by the Financial Stability Board.

The responsibility of drafting specific regulations and implementing the reporting standards was delegated to the California Air Resources Board. CARB was initially given until January 1, 2025 to draft the rules and processes. However, the process of drafting such complex regulations required more time. As a result, the Legislature gave CARB an additional six months to complete the drafting in Senate Bill 219. These three bills have been nicknamed “the 200s” by regulators.

On May 29, CARB held a virtual workshop to update stakeholders on the progress of the rulemaking. A second workshop was held on August 21. That workshop brought more clarity as to who will have to report and the timeline for the final adoption.

Who has to report?

Initial solicitation for comments opened in December 2024 and closed in March. CARB received 261 responses during that period. The themes of those responses focused on who qualifies as a “reporting entity” in SB 253 or “covered entity” in SB 261. How those phrases are defined will determine how much a company has to report, or if they are exempt. The lack of clarity in the law requires the regulator to develop clearer definitions. Those points of concern have continued to be the focus of CARB’s actions, and were addressed again in the August meeting.

Legislative definitions

“Reporting entity means a partnership, corporation, limited liability company, or other business entity formed under the laws of this state, the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the
United States with total annual revenues in excess of one billion dollars ($1,000,000,000) and that does business in California. Applicability shall be determined based on the reporting entity’s revenue for the prior fiscal year.”

“Covered entity means a corporation, partnership, limited liability company, or other business entity formed under the laws of the state, the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of
the United States with total annual revenues in excess of five hundred million United States dollars ($500,000,000) and that does business in California. Applicability shall be determined based on the business entity’s revenue for the prior fiscal year. ‘Covered entity’ does not include a business entity that is subject to regulation by the Department of Insurance in this state, or that is in the business of insurance in any other state.”

Following the May workshop, CARB solicited additional feedback on three clarifing definitions: “total annual revenues”, “doing business in California”, and a subsidiary.

Defining Total Annual Revenue

The distinction in reporting requirements under SB 253 ad SB 261 are based on “total annual revenue.” The initial staff concept defined revenue as: “For the purposes of determining whether an entity meets the annual revenue threshold in SB 253 and SB 261, ‘total annual revenue’ would be defined as gross receipts as set forth in California Revenue and Taxation Code § 25120(f)(2).”

That section defines gross receipts as “the gross amounts realized (the sum of money and the fair market value of other property or services received) on the sale or exchange of property, the performance of services, or the use of property or capital (including rents, royalties, interest, and dividends) in a transaction that produces business income, in which the income, gain, or loss is recognized (or would be recognized if the transaction were in the United States) under the Internal Revenue Code , as applicable for purposes of this part. Amounts realized on the sale or exchange of property shall not be reduced by the cost of goods sold or the basis of property sold.” The definition includes a list of exemptions.

However, companies objected to the gross receipts definition, arguing that it was too broad and cumbersome. Companies also expressed concerns over confidentiality limitations. As a result, CARB has proposed a new definition.

“Revenue is the total global amount of money or sales a company receives from its business activities, such as selling products or providing services.” It does not allow for the deduction of operating costs or business expenses.

Defining “Doing Business in California”

In the Climate Accountability Package, the phrases “covered entity” and “reporting entity” are both defined in their respective sections. The only notable distinction between the definitions is the annual revenue threshold. Both include the phrase “that does business in California.” However, that phrases is not defined and was quickly identified as an issue.

Initial proposals pointed to Article 1, Section 23101(a) of the California Revenue and Taxation Code definition of “doing business.” The California Franchise Tax Board interprets the definition to mean meeting one of five conditions. The board updates the dollar thresholds annually. A company is considered doing business in California if

1. The company is “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit”;
2. The company is “organized or commercially domiciled” in the state;
3. The company has annual sales in California exceed the lower of or 25% of the company’s total sales;
4. The company has real property or tangible personal property in California exceeds the lower of $73,502 or 25% of the company’s total; or
5. The company has payroll compensation in California exceeds the lower of $73,502 or 25% of the company’s total payroll.

The May workshop included an initial staff concept. They propose using the tax board’s definition, but with one change. Companies would need to meet requirement 1 AND any of requirements 2 – 5. However, CARB is looking at alternative definitions, including using existing databases to determine who may qualify. One consideration is the California Secretary of State Business Entity database.

Parent and Subsidiary

At the May workshop, CARB proposed to use the existing definition found in the Cap-and-Trade regulation to define a subsidiary. “Subsidiary is a business in which another company (the parent or holding company) owns more than 50% of its voting stock. A subsidiary has a different legal business name than its parent company. This corporate relationship implies that the parent company has a controlling interest and can influence the subsidiary’s operations, management, and financial decisions, even though the subsidiary operates as a separate legal entity.” It appears CARB is moving forward with that definition.

Exemptions

CARB is proposing three categories that will be considered exempt from the regulations:

1. Non-profits
2. A company whose only business in California is the presence of teleworking
   employees
3. CA Independent System Operator (CAISO) or a business entity whose only
   activity within California consists of wholesale electricity transactions that
   occur in interstate commerce.

Under the current proposed definitions, 4,160 companies will be required to report under SB 261 and 2,596 will be required to report under SB 253. That is only .8% of the 816,845 companies that operate in California. However, it does catch 76.6% of the 8,817 U.S. companies with global annual sales of over $500 million.

Timeline for adopting the final rule

Public comment on the proposals is open until September 11. On October 14, the CARB will publish a notice of proposed rulemaking. From October 17 – November 30, the 45-day APA required comment period will be open. CARB will hold a public board hearing on December 11 & 12 to make the final vote. If they stick to the schedule, the definitions of the final rule will go into effect for FY 2026. However, expect further delays for climate change reporting as companies continue to express concerns over the requirements.