Businesses Must Determine Before 2025 If They Fall Under California Climate Reporting Law

In 2023, California approved the Climate Accountability Package, a pair of bills aimed at creating climate reporting requirements. Reporting is set to begin in 2026 for data collected during 2025. Companies need to determine now if they are required to report and establish the processes to collect the data. However, delays in drafting the standards and ambiguous language are making it difficult for businesses to determine if they qualify.

The Rise of Climate Reporting

California’s climate reporting regulation is part of a global movement to require companies to disclose their greenhouse gas emissions, climate policies, and to evaluate climate risks. Driven by the net zero 2050 goal of the Paris Agreement, jurisdictions around the world are looking to reduce GHG emissions.

The European Union has been leading the way with the Corporate Sustainability Reporting Directive. Initially adopted in 2022, the CSRD requires climate and environmental, social, and governance reporting by most companies that operate within the EU. Reporting for large companies began in 2024. Reporting for non-EU companies and small and medium-sized enterprises has been delayed to 2026.

In the U.S., the Securities and Exchange Commission adopted a Climate-Risk Disclosure Rule in early 2024, only to delay implementation while it faced legal challenges. California and other states are moving forward with their own reporting requirements.

California’s Climate Accountability Package established the broad parameters for the reporting standards. 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. In September, the Legislature extended the deadline by six months to July 1.

The original legislation states that CARB shall develop and adopt regulations requiring for the reporting entity’s prior fiscal year.” Meaning, while the reporting does not take place until 2026, the data is from 2025. Businesses must determine before January 1, 2025 if they qualify as a reporting entity so they can begin collecting the required information.

Reporting requirements are divided into two categories, based on the total annual revenue of the company. Unlike the SEC, the California reporting requirements apply to both publicly traded and privately held companies. Only U.S. companies will have to report.

Reporting Entities

The highest level of reporting is required of large companies. Senate Bill 253 required companies who 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.

Generally, Scope 1 GHG emissions are those that come directly from the company. Scope 2 are indirect GHG emissions from the company’s power source. Scope 3 are GHG emissions from the value chain, both from suppliers and consumers.

Scope 3 has been highly debated as it is considered by the business community as being overly burdensome. When the SEC implemented their rule, they chose to not require Scope 3. The EU requires it.

Covered Entities

Senate Bill 261 required companies who do business in California and an excess of $500 million in revenue, defined as “covered entities”, to submit a biennial climate-related financial risk report.

Climate risk is defined as “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.”

This is a much lower requirement as it does not include any level of GHG emission reporting.

What Classifies As “Doing Business in California”?

In the development and interpretation of law, words matter. Codes, ordinances, laws, and regulations typically begin with a list of definitions of key terms. Frequently, those definitions are prefaced with the phrase “for purposes of this section.” This allows lawmakers to define a term for limited use in that section of the law preventing new legislation from negatively impacting established law. Definitions bring clarity, allowing those subjected to the law, regulators, attorneys, and judges to know the exact intent of the lawmakers.

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.”

While the dollar amount thresholds are clear, there is a question as to what classifies as “doing business” in California. The definition varies by section of the state code and by state agency. The Climate Accountability Package amended the state’s Health and Safety Code, that does not have a definition of doing business.

Presumably, CARB will provide a clear definition when they release the standards in July. However, companies will need to determine by January 1 if they need to collect data. In the interim, there are two key definitions that help provide some guidance.

California Corporations Code

Section 191 (a) of the California Corporations Code gives a definition of “entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce.” However, that definition is for the phrase “transact intrastate business” and is only for “the purposes of Chapter 21”, requiring registration with the Secretary of State.

Notably, “a foreign corporation shall not be considered to be transacting intrastate business merely because its subsidiary transacts intrastate business.” This leaves raises a question as to if a subsidiary can trigger reporting by the parent company. The 2024 amendment clarified that a subsidiary does not have to file separate from the parent company, but did not address this question.

California Revenue and Taxation Code

Article 1, Section 23101(a) of the California Revenue and Taxation Code gives a 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 $711,538 or 25% of the company’s total sales;
4. The company has real property or tangible personal property in California exceeds the lower of $71,154 or 25% of the company’s total; or
5. The company has payroll compensation in California exceeds the lower of $71,154 or 25% of the company’s total payroll.

The Struggle For Businesses

While there will likely be a delay in implementing California’s climate reporting requirements, companies have to decided soon how to respond. The choice comes with a hefty price tag. The SEC estimated compliance with their rule would cost a company approximately $1 million the first year. There is no reason to think California’s will be any different. As a result, companies are faced with a difficult decision – move forward with costly programs or hope for a delay.

There are a lot of unanswered questions while CARB drafts the climate reporting standards. However, given the current timeline, companies need to act now to evaluate if they meet the minimums and get their process in place by January 1.