California Bills Mandate Scope 3 Accounting

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by KnowESG
KnowESG_California Bills Mandate Scope 3 Accounting
Image courtesy of Sumday

California has taken a significant stride toward tackling its greenhouse gas emissions through the contemplation of enforcing mandatory Scope 3 accounting.

Comprising the California Climate Accountability Package are three distinct yet interconnected bills, all geared toward enhancing corporate transparency and standardising carbon emissions disclosures.

  • SB 252 - The Fossil Fuel Divestment Act

  • SB 253 - The Climate Corporate Data Accountability Act

  • SB 261 - The Climate-Related Financial Risk Act

Should these bills gain approval, especially SB 253, they would necessitate businesses to meticulously account for and divulge their indirect emissions, commonly known as Scope 3 emissions, stemming from their value chain activities.

It is well established that, for most enterprises, approximately 90% of emissions are generated from their supply chain. The proposed legislation is aimed at ushering in greater transparency within supply chains, prodding companies to shoulder responsibility for their complete carbon footprint.

Who would be subject to these regulations?

In the event these bills become law, all businesses operating within California would be mandated to measure, disclose, and mitigate their Scope 3 emissions. SB 253 would require both publicly traded and privately held companies with global revenues exceeding $1 billion to disclose emissions spanning Scope 1 to 3.

As for SB 261, it would mandate companies with global revenues exceeding $500 million to reveal their climate-related financial risks, aligning with the principles of the Task Force on Climate-related Financial Disclosures (TCFD).

This could potentially exert a significant influence on various industries and supply chains, compelling companies to assess and ameliorate their environmental impact beyond their immediate operations.

Larger entities will undoubtedly need to commence dialogues with their suppliers to gather the requisite data, mirroring recent developments witnessed globally, with companies like Coles, Tesco, Meta, Amazon, Fonterra, and others setting examples in this regard.

Will it be cost-effective to comply with these reporting requirements?

We believe it will be. Advocates of mandatory Scope 3 accounting contend that it will stimulate innovation, promote sustainable practices, and fortify California's ambitious climate objectives. However, detractors voice apprehensions regarding the potential complexities and expenses associated with implementing such obligations, especially for smaller enterprises.

As companies increasingly incorporate carbon accounting into their financial reporting, we are confident that affordability and accessibility to support services will improve, with advisors progressively offering these services to their small business clients, thereby integrating carbon accounting into standard business practices.

While these bills have already cleared the Senate, it is essential to note that they have not yet received Governor Newsom's signature, although he has signalled his intention to do so. If endorsed, California would pioneer Scope 3 accounting mandates in the United States, possibly setting a precedent for other states and jurisdictions.

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Source: Sumday

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