New California Climate Disclosure Laws: Why They Matter To You

New California Climate Disclosure Laws:  Why They Matter To You

While the U.S. awaits federal action on the climate disclosure rules proposed by the country’s Securities and Exchange Commission (SEC), the State of California has already acted. On October 7, 2023, Gov. Gavin Newsom signed into law two regulations anticipated to have a wide-ranging impact on many organizations’ climate change and reporting disclosures. 

Although these new laws apply specifically to companies that do business in California, they reflect part of a broader global movement toward more robust and consistent emissions reporting. This includes both the pending SEC rules in the U.S. and the Corporate Sustainability Reporting Directive (CSRD), which went into effect in the EU at the start of 2023. The directive is clear. It’s critical for companies across all sectors and regions to collate their carbon emissions data, understand their impact, report out their data and show continual improvement starting now. 

What is the climate disclosure rule in California?

The Climate Corporate Data Accountability Act (SB 253) requires companies to publicly disclose their scope 1 and scope 2 greenhouse gas (GHG) emissions beginning in 2026 and their scope 3 GHG emissions beginning in 2027. The law applies to companies with $1 billion or more in total revenue (not limited to California). Although the start dates are subject to change per Gov. Newsom.

The Climate-Related Financial Risk Act (SB 261) requires companies to report on the financial risk aligned with the Taskforce for Climate-Related Financial Disclosures (TCFD). The taskforce provides information to investors about companies’ climate change mitigation strategies. SB 261 applies to companies with $500 million or more in total revenue (not limited to California).

Additionally, under both laws, companies must:
•    Disclose whether they have budgeted or increased compliance and insurance costs on a biennial basis
•    Quantify potential opportunities and strategic priorities on a biennial basis
•    Make climate reporting data publicly available on their company’s website

Companies that fail to comply or provide adequate disclosures may face penalties of up to $500,000 (SB 253) or $50,000 (SB 261).

Why companies outside of California will feel the impact?

The new laws raise the bar on corporate action and accountability to address the global climate crisis, and their impact will be felt far outside of California. That’s because many companies’ supply chains extend beyond state borders, and the requirement to report out on scope 3 GHG emissions covers every part of a business’ value chain. As a quick refresher:

Scope 1 encompasses direct emissions from sources your business owns or controls.  This can include:

• Fuels from your owned vehicles and equipment
• Natural gas you use
• Process emissions

Scope 2 includes indirect emissions from energy you purchase (assuming your organization doesn’t own the energy-generating equipment). Examples:

• Purchased electricity
• Purchased heating / cooling
• Purchased steam

Scope 3 includes all GHG emissions caused indirectly throughout your company’s supply chain related to your business activities. This can include:

• Purchased goods and services (including fuel)
• Upstream and downstream transportation
• Product lifecycle use
• Travel
• Contracted solid waste
• Employee commuting

Four key steps to ensure compliance

Whether or not you’re subject to the new California laws, your business might be part of a supply chain where reporting is required. And even if reporting isn’t mandated in your company’s jurisdiction right now, companies of all types will face continued pressure to disclose and manage their carbon emissions.

The best way to prepare your business is to approach climate reporting not as a risk and compliance issue, but as an opportunity. Four best practices:

1. Understand how your business is impacted. Familiarize yourself with the new laws and their contents. If your company will experience a direct or indirect impact, establish your methodology and compliance plan, and identify gaps that will need actioning.
2. Establish your emissions inventory. Create a comprehensive footprint addressing your scope 1, 2 and 3 emissions. If you aren’t required to disclose your emissions right now, the demand for data throughout the supply chain will only grow, so you should still build your inventory. Remember, your scope 1 and 2 emissions might be part of another organization’s scope 3 reporting. Therefore, it’s crucial to understand the concepts around carbon allocation and the information you’ll need to meet your customers’ reporting requirements.
3. Identify and map your climate risk. Establish internal teams to understand the physical and transactional risks of GHG disclosures. Develop plans on how to both disclose and address those risks via the TCFD network.
4. Be proactive. Don’t wait until disclosure laws are finalized in your region. Instead, establish the processes and systems to track your emissions transparently and accurately now. Then, develop an action plan to mitigate risk and reduce your carbon footprint.

How World Kinect can meet your climate disclosure challenges

The sustainability experts at World Kinect Energy Services can help you at every stage of your carbon reporting process, from implementation through results.

Our sustainability experts can help you understand and identify your company’s climate risk and build an actionable decarbonization plan. Additionally, our carbon reporting experts can map your carbon emissions across all three scopes and help you develop a compliant emissions inventory.

Once your plan is established, you can deploy our cloud-based emissions management platform to support your ongoing accounting and disclosure needs. We can also provide you with educational workshops and other support so you can ensure accurate, compliant reporting.
 

• Managing spend in volatile markets

The afternoon began with a focus on the challenge of managing electricity, gas and fuel spend through uncertain times. Nicole Leonard, Director - Energy Transition, S&P Global Commodity Insights, started by showcasing the latest power, gas and fuel market trends, highlighting the volatility and insecurity in today’s energy markets. Nicole explained how, in the past two years, global energy markets have become vulnerable and reactive to fears of supply insecurity, as well as demand destruction and recession worry. Volatility has seemingly been the only thing we can rely on, as a world without Russian gas makes ensuring supply difficult. 

• Price Risk Management

Marcel Boonaert, Global Director Portfolio Manager at World Kinect, followed with an overview of utilising price risk management strategies to combat the volatile market. With price deviation skyrocketing—leaving it difficult to pay a reliable amount for energy—businesses must look at the ways to mitigate against price risk, using a method that aligns with their business goals. He compared the absolute price deviation on energy to spending £70 on a pint of beer depending on the time you purchase it—a great way to convey the severity of the situation.

Boonaert advised that the best way to utilise price risk management is to pick a strategy and stick with it, without letting ego or emotion get in the way. The more you can back-test your methods, the better they’ll be—while hindsight is a beautiful thing, it’s not a reliable method for hedging your bets.
 

• On-site solar

Hanna Ahlqvist, World Kinect’s Renewable Energy Solutions Associate, gave us a look at the ways on-site solar can help businesses hedge against extreme power prices. She discussed at how the upfront one-time investment in solar panels is becoming a very rational business decision, especially when faced with the high UK market costs currently. Hanna outlined the World Kinect services to assess and develop solar panel set-ups for businesses and advised that self-generation has the most credible additionality claims, lowest reputational risk and the highest cost-saving potential of the renewable energy options available to businesses.

• Journey to net zero

Following a brief intermission, David Carroll, Net Zero Specialist with World Kinect, reopened the session with a high-level macro view of Net Zero. He walked us through why it is increasingly important for organisations in the face of continually tightening regulation since the Paris Agreement, as well as discussing increased consumer and end-user demand for carbon reduction throughout supply chains.

Carroll explained the necessity for all business to have a robust plan to achieve net zero that starts with reducing energy consumption, includes switching to renewable fuels and energy, and utilises carbon offsets to combat residual emissions, as application of alternative forms of energy may not yet be viable.

His overview of the decarbonization journey set up the remaining sessions that included an exploration into the Energy Transition, showcasing short- and medium-term directions for fuel users.
 

• Renewable liquid fuels

Matthew Whitton, Vice President of Supply Land & Aviation Europe with World Fuel Services, then took to the stage to present the directions of supply and demand for the still niche but rapidly growing avenue of renewable liquid fuels.

Whitton shared some of World Fuel’s experiences in helping develop the Sustainable Aviation Fuel market globally, before focusing on Renewable Diesel (otherwise known as HVO) and the directions the Renewable Diesel market is expected to take over the next few years.
 

• Carbon offsets 

Andrea Cortes, Senior Carbon Originator at World Kinect, explained how carbon offsets can be used efficiently alongside a wider carbon reduction plan to play a key role in achieving net zero today. With many hurdles in the way before renewable alternatives to liquid fuels can become commercially viable and available at the scale required, carbon offsetting becomes the obvious bridging mechanism – but one that must be approached with diligence and care to avoid misuse, and ensure transparency and integrity in any decarbonisation claims.

• Hydrogen - the fuel of the future? 

Richard Scott, Vice President of Global Market Development at World Kinect, wrapped up the day with an address on the role hydrogen may have to play in the future energy ecosystem, and the role that World Kinect is playing in helping bring that solution to the fore.

Within the transportation industry, passenger cars and smaller commercial vehicles are moving to electric, while for larger trucks, HGVs and off-road mobile machinery, hydrogen fuel technology may be the most efficient option. Scott also detailed additional use cases across agricultural, industrial marine, and specialist applications.