In this episode of Sustainable Intelligence, Teresa Yu, ESG Metrics & Regulations Lead at Novata, explores California’s climate regulations. Teresa provides an overview of California’s Climate Accountability Package, including SB 253 and SB 261, the implications of these new regulations for businesses, and tips for compliance. She emphasizes the importance of starting preparations immediately to meet the upcoming regulatory deadlines and leverage potential business opportunities.
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Sustainable Intelligence is an interview series from Novata that explores ESG and sustainability in the private markets. From carbon accounting to using data to create value, the series dives into the challenges and opportunities facing private market investors and company leaders as their integrate ESG across the business and respond to regulatory requirements. Each episode centers authentic dialogue, highlighting experts at the forefront of advancing ESG data collection and driving meaningful progress in the sustainability landscape. Listen to more episodes.
Conversation with Teresa Yu (Transcript)
Ella Williamson: Welcome to Sustainable Intelligence, where we discuss all things ESG and sustainability for the private markets, brought to you by Novata. I’m Ella Williamson, and I’m thrilled to be your host. Joining us today is Teresa Yu, Novata’s ESG Metrics and Regulations lead. In her previous work in electrification policy in California, she saw firsthand the positive change when regulations and private markets collaborate.
She therefore could not be better placed to talk about today’s topic on California’s Climate Regulations, who are they going to impact, and how businesses should prepare. Teresa, I’d love for you to start by giving us an overview of what California’s new climate regulations are all about.
Teresa Yu: I’d love to. This issue is near and dear to me, as California is my own home state. In the last year, California has introduced two climate disclosure bills, dubbed as California’s Climate Accountability Package. The first bill is Senate Bill 253, called the Climate Corporate Data Accountability Act, which requires reporting entities to annually report their direct and indirect emissions from their operations and energy use, or their scope one and scope two emissions.
Starting in 2027, entities will then need to report on their indirect upstream and downstream supply chain emissions, better known as Scope 3 emissions. In addition to reporting on their entire scope inventory, organizations will be required to obtain an assurance engagement from an independent and experienced third party to verify their reports.
This is a first of its kind as ESG regulations go. We haven’t seen anything like this, except the proposed rule, though, that is only applicable to public companies. The California Climate Accountability Package goes one step and beyond and requires public and private companies to disclose their entire carbon inventory. The second regulation is California’s SB 261, or colloquially, the Climate Related Financial Risk Act. SB 261 requires covered entities to prepare a public climate related financial risk report on the entities climate related financial risks and the measures adopted to reduce and adapt to their risks. In addition, after the first year of reporting, entities will then be required to publish an updated report every other year.
Ella: Thank you so much for that in-depth description of all of those regulations. It’s great to see that California is really leading the way in these new climate disclosure bills. Teresa, could I ask you to tell me who will be impacted by these regulations?
Teresa: Absolutely! It’s actually projected that more than 10,000 companies are expected to be impacted. For SB 253, that’s requiring companies to disclose their entire carbon inventory. The thresholds for reporting entities are companies that “do business” in California with revenues upwards of a billion dollars. This is projected to cover at least 5,300 public and private entities. Though the regulation does not specifically spell out what they mean by doing business, the California Franchise Tax Board has several thresholds, three of them which include: if an entity engages in any transaction for the purpose of financial gain within California; are organized or commercially domiciled in California; or whether your California sales property and payroll exceeds specific thresholds based on this information. Until California releases more information on the specificity of eligibility requirements, it’s safe to assume that regulations will follow similar thresholds. On the other hand, SB 261, the regulation concerning Climate Related Financial Risks, is broader in scope and applies to any US company that generates an annual revenue of 500 million or more by doing business in California. This is a significantly lower threshold compared to SB 253, which kicks in at revenues upwards of a billion. Both revenues will apply to private and public companies and are expected to cover at least 10,000 companies.
Ella: Great. So the impact is pretty far reaching for both of these regulations. Now, from your perspective, how ready do you believe companies are for these changes and what steps should they be taking to get prepared?
Teresa: Great question. If companies have been taking stock and are measuring your greenhouse gas emissions in any capacity, I’d pat yourself on the back. If you have an idea about your known unknowns, I’d say you’re in a pretty good place. If you have no idea how climate change will affect your company, like not even a ballpark magnitude, I’d suggest getting started right away.
There are a lot of experts that are working to help companies identify their climate related risk and help capture their carbon inventory. The California Air Resource Board will oversee the implementation of the bill, and they will establish specific guidelines by January 2025. However, unless timelines are delayed, regulated companies must start disclosing their Scope 1 and 2 emissions and climate risk report in 2026 and their Scope 3 emissions in 2027. At this time, this gives companies a little over a year to prepare for the upcoming regulations. The first step to get prepared would be to identify information gaps in your organization around greenhouse gas emissions. Begin familiarizing yourself with the basics of carbon accounting and identify emission hotspots in your organization. Another first step, or maybe 0.5 step, would be to gather buy-in. Educate internal stakeholders on the business case for measuring carbon emissions. Beyond cost savings in the long term, many companies find business opportunities when they are conducting their carbon inventory analysis for the first time.
Ella: I love the 0.5 step there. So wherever your company is on your journey, it’s crucial to start assessing climate impact today. Now, if you were advising a company, what’s the first thing you’d tell them to do to tackle these new regulations?
Teresa: Regardless of how prepared your company is, I’d tackle these new regulations as I would any complex cross-departmental project. The first thing I’d suggest is to identify who or which departments will be responsible for what at your organization. Will climate regulations be part of a dedicated ESG team’s responsibilities? Or will you be collecting the data needed piecemeal from various parts of your organization? If you have the in-house expertise to identify what data is needed and where to collect it within your company, great. If not, I suggest for a company to seek external help, whether through an external carbon expert or consultant. At Novata, on our Metrics and Regulations team, we like to frame compliance to regulations not as the end goal, like, great, we complied to this regulation. Long-term emission reduction and value creation is the end goal. Compliance is merely a byproduct.
Ella: I’ve never heard compliance reframed like that, and I completely agree with that. As every step you take towards that ultimate goal of reducing long term emissions and creating that extra value for your business.
Teresa, thank you so much for all your insights today. It was absolutely fantastic having you on. Until next time, let’s keep building sustainable intelligence together. Find out more at novata.com.
