California Sets New Climate Disclosure Standard
California’s Air Resources Board (CARB) just approved sweeping new climate disclosure regulations (SB 253/261) that are more stringent than current SEC proposals. The rules mandate detailed Scope 1, 2, and 3 emissions reporting for large companies operating in the state, effectively creating a new national benchmark while federal rules are tied up in court.
The mandate for Scope 3 emissions reporting, which includes all indirect emissions in a company's value chain, presents a significant challenge for manufacturers. For many, these emissions can account for over 70% of their total carbon footprint, embedded deep within complex global supply chains. This requirement will necessitate unprecedented transparency and collaboration with suppliers to gather reliable data. Manufacturing CFOs are now at the forefront of this new compliance landscape, tasked with integrating sustainability into the core financial functions of their companies. This involves establishing robust data collection systems and internal controls to ensure the accuracy and auditability of climate-related disclosures. The shift is also driving a trend towards co-sourcing internal audit functions to bring in specialized ESG expertise that may not exist in-house. The new regulations are forcing a strategic reassessment of supplier relationships, potentially reshaping procurement strategies. Companies may need to revise contracts to mandate emissions reporting and develop supplier scorecards to track environmental performance. In essence, suppliers who are unable or unwilling to provide reliable emissions data may become a liability in this new regulatory environment. Internal audit functions must evolve beyond traditional financial checks to provide assurance over climate-related risks and disclosures. This includes developing new competencies in climate risk assessment, evaluating the governance structures for climate-related data, and ensuring the accuracy and completeness of emissions reporting. Audit committees will need to support and encourage senior management to embed climate change risk into the organization's overall risk management framework. Geopolitical tensions, particularly between the U.S. and China, add another layer of complexity to Scope 3 reporting for manufacturers with global operations. Disruptions and shifts in supply chains due to tariffs and trade policies can complicate the already challenging task of collecting consistent and accurate emissions data from international suppliers. While facing legal challenges, the core components of SB 253 remain in effect, and companies are advised to prepare for compliance. The initial reporting for Scope 1 and 2 emissions is slated for 2026, with Scope 3 reporting to follow in 2027. There is a safe harbor provision for Scope 3 emissions disclosures through 2030, protecting companies from penalties for misstatements made in good faith. For forward-looking companies, these regulations can be a catalyst for competitive advantage. Proactively engaging with suppliers to build a transparent, low-carbon value chain can not only ensure compliance but also enhance brand reputation and appeal to investors and customers who increasingly demand credible climate action. The California rules are part of a broader global trend towards mandatory climate disclosure, with similar regulations emerging in the European Union and other jurisdictions. This global alignment suggests that even for companies not directly impacted by California's laws, developing robust systems for emissions tracking and reporting is becoming a business imperative.
