The Californian Bills for Mandatory Scope 3 Accounting

The Key Takeaways

• California isn’t just dreaming, it’s doing - Governor Gavin Newsom has officially signed SB 253 and SB 261 into law, reinforcing California’s ambition to implement climate disclosure.
• Three bills are on the table to make carbon disclosures mandatory for large private and public companies doing business in the state from 2026.
• They’ll need data from their supply chain - get ready for the trickle down to SMBs. 

The Summary

California has taken a significant step towards addressing its greenhouse gas emissions by considering the implementation of mandatory Scope 3 accounting. 

The California Climate Accountability Package consists of three separate but correlated bills, with the purpose of helping to improve corporate transparency and standardise disclosures on carbon emissions.

• SB 252 - Fossil Fuel Divestment Act
• SB 253 - Climate Corporate Data Accountability Act
• SB 261 - Climate-Related Financial Risk Act

SB 253 and SB 261 have passed into law as of October 2023. SB 253 - Climate Corporate Data Accountability Act requires businesses to account for and report their indirect emissions (or Scope 3 emissions), which result from activities within their value chain. Sumday subscribers can visit the Sumday Academy’s Introduction to Carbon Accounting course for more information on Scope 3 emissions.

We know that for most companies, around 90% of emissions can come from their supply chain. These bills aim to bring greater transparency to supply chains and encourage companies to take responsibility for their entire carbon footprint.

Who will it apply to?

Businesses operating in California will be required to measure, report, and reduce their Scope 3 emissions. SB 253 mandates both public and private companies with global revenues >$1b to disclose their Scope 1 - 3 emissions.

SB 261 mandates those with global revenues >$500m to disclose their climate-related financial risk (built upon TCFD). This could have far-reaching implications for various industries and supply chains, prompting companies to assess and mitigate their environmental impact beyond their immediate operations. Larger organisations will no doubt need to start engaging with their suppliers for data too, examples of this have already been seen across the globe recently (Coles, Tesco, Meta, Amazon, Fonterra and more).

Is it going to be affordable to report? We think so.

Advocates of mandatory Scope 3 accounting argue that it will drive innovation, encourage sustainable practices, and support California's ambitious climate goals. However, critics express concerns about the potential challenges and costs associated with implementing such a requirement, particularly for smaller businesses. As companies make carbon an extension of financial accounting and reporting with tools like Sumday, we’re confident affordability and access to support will be improved as advisors start providing these services for their small business clients - carbon accounting is becoming part of business as usual for all of us.

California has become a pioneer in the United States in mandating Scope 3 accounting. This is huge news and a great step forward that will hopefully encourage other countries and states to follow the lead.