How Integrated Risk Management Helps Businesses Comply with California's New Climate Laws
California is setting a new regulatory precedent with the passage of Senate Bill 253 (SB 253) and Senate Bill 261 (SB 261), collectively aimed at enforcing climate-related disclosures among large companies. These pioneering laws pave the way for a national wave of similar regulations, including pending rules from the Securities and Exchange Commission (SEC). In the midst of this regulatory shift, Integrated Risk Management (IRM) emerges as a crucial methodology for comprehensively managing the complexities of climate-related disclosure.
“The convergence of state and federal laws around climate disclosure mandates that companies adopt a more sophisticated and integrated approach to risk management. IRM frameworks can be instrumental in adapting to this rapidly evolving regulatory landscape.”
What Companies are Impacted?
SB 253 - Climate Corporate Accountability Act: This law applies to U.S. business entities with global annual revenues exceeding $1 billion operating in California. It mandates reporting of Scope 1 and Scope 2 greenhouse gas emissions.
SB 261 - Climate-Related Financial Risk Act: Targets entities with global annual revenues over $500 million doing business in California. This law requires companies to disclose their climate-related financial risks biennially.
What is the Timeline for Compliance?
SB 253 - Climate Corporate Accountability Act:
Scope 1 and 2 emissions reporting starts in 2026
Scope 3 emissions reporting starts in 2027
SB 261 - Climate-Related Financial Risk Act:
First biennial climate-related financial risk report is due by January 1, 2026
What Type of Assurance is Required?
SB 253 - Climate Corporate Accountability Act:
Limited assurance level for scope 1 and 2 emissions starting 2026
Reasonable assurance level for scope 1 and 2 emissions by 2030
SB 261 - Climate-Related Financial Risk Act:
No specific assurance levels indicated yet, but the California Air Resources Board (CARB) may establish requirements.
What are the Potential Penalties?
SB 253: Administrative penalties up to $500,000 for non-compliance.
SB 261: Penalties not exceeding $50,000 for failing to complete a report.
How Can Integrated Risk Management (IRM) Help?
Risk Identification: IRM aids in the identification of the various types of risks associated with greenhouse gas emissions and climate-related financial risks.
Compliance Monitoring: IRM enables organizations to monitor compliance requirements across different jurisdictions, streamlining the reporting process.
Stakeholder Communication: IRM solutions offer robust capabilities for communicating risks and compliance metrics to stakeholders.
Strategic Alignment: IRM ensures that climate-related risk management is aligned with the organization’s strategic objectives.
Data Integration: IRM tools can integrate emissions data, allowing for more accurate reporting and assurance procedures.
How Do These Laws Interact with Pending SEC Regulations?
The SEC is expected to finalize its own set of rules around climate-related disclosures by October 2023. California's SB 253 and SB 261 could potentially serve as a catalyst for federal regulation, pushing towards a more standardized approach to climate disclosure.
Conclusion
Companies are advised to proactively adopt IRM strategies for effective compliance as climate-related regulations continue to evolve. Such approaches not only mitigate risks but also enhance organizational resilience and stakeholder relations. In the continuously evolving regulatory landscape, adopting Integrated Risk Management frameworks is not just recommended, but increasingly essential
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