California forges ahead with first of its kind climate and environment reporting requirements for U.S. based private companies

California's environmental initiatives have set a new precedent for corporate sustainability reporting.

Sustainability Reporting on America's Doorstep

In recent days, the state of California finalized requirements for U.S. based public and private companies doing business in California and meeting defined revenue thresholds to provide mandatory reporting on climate risks and greenhouse gas emissions. While much of the global marketplace has had similar requirements in place for some time, the new regulations are first-of-their kind for private entities in the U.S.

While many entities had hoped for compliance date relief in the latest legislative session, that relief was largely absent from the final provisions of the new laws. The reporting requirements demand a rapid timeline for implementation with in-scope companies required to report on both topics beginning with 2025 information or risk incurring substantial fines for non-compliance.

Understanding the Rules

California's Climate Corporate Data Accountability Act applies to businesses with annual revenues exceeding $1 billion that do business in the state and first requires reporting of scope 1 and scope 2 greenhouse gas emissions in accordance with the Greenhouse Gas Protocol (GHG Protocol) in 2026 on fiscal year 2025 information. Scope 3 emissions reporting is deferred for at least one year. Assurance requirements will be phased in beginning with a review requirement on 2026 reported information.

The state's climate-related financial risk law applies to businesses with annual revenues exceeding $500 million that do business in California and also first requires reporting of climate-related financial risks and the measures a company has adopted to reduce and adapt to such risks beginning in 2026. Entities subject to the law will provide reporting based on the recommendations on the Task Force on Climate Related Financial Disclosures (TCFD).

Navigating the Regulatory Landscape

While California is the first U.S. jurisdiction to mandate climate risk and greenhouse gas emissions reporting for private companies, it is unlikely to be the last. Recent years have seen similar efforts by legislatures in various states, including Indiana and New York. The topics of climate change and greenhouse gas emissions are particularly fraught in the U.S. with political tension and disagreement in approach. Recent actions by the SEC to require reporting by public companies have been snarled with legal challenges, and California's recently adopted regulations have also already been challenged in the courts.

Nevertheless, companies would be wise to not only keep an eye on developments but to also meaningfully prepare for what is becoming a more and more inevitable shift toward required reporting. Environmental reporting requirements have taken hold across the globe, and with entities required to not only report their own direct emissions and impacts, but also the risks and emissions that exist within their value chains, U.S. based companies doing business internationally or with international entities will find it increasingly difficult to avoid managing this topic.

What may start as mandatory reporting may also quickly evolve into a business mandate to manage business relationships and win and manage contracts given the broad reach of sustainability reporting requirements. In addition, companies are expected to increasingly find preparedness for reporting and managing of risk in this area as a driver of value in M&A transactions.

The California laws go beyond disclosure to other companies with which a reporting entity does business, as both laws require public disclosure of reported information. Such disclosure is expected to further increase pressure for companies to manage risks associated with greenhouse gases and the climate at large while also providing opportunities for enhancing brand reputation associated with corporate responsibility.

Readiness

A major criticism of the California sustainability regulations is that they require swift implementation while guidance provided within the laws is vague and not fully developed. While California's reporting requirements no doubt pose significant initial challenges for private companies related both to the lack of technical guidance and fast-approaching deadlines, companies have an opportunity to learn and evolve their systems now, while it is still an early stage effort for many U.S. private companies. Those who invest in learning and begin to manage information now will be best suited to tell their stories, understand their own data, and meet inevitably increasing demands for transparency in the marketplace.