There has been growing pressure—from investors, from the Financial Stability Board (FSB), and from the International Organization of Securities Commissions (IOSCO)—for companies to disclose their greenhouse gas (GHG) emissions. Many stakeholders were awaiting the issuance of standardized climate disclosure rules from the U.S. Securities and Exchange Commission (SEC). In the meantime, California enacted the first corporate climate disclosure laws in the United States in October 2023, consisting of the following three laws (collectively, the California Laws): 1) Climate Corporate Data Accountability Act (SB-253), regarding greenhouse gas emissions; 2) Green-house Gases: Climate-related Financial Risk (SB-261), regarding climate risks; and 3) Voluntary Carbon Market Disclosures Act (AB-1305), regarding the validity of carbon emission credits used as offsets. Provisions of the California Laws, including effective dates are summarized in Exhibit 1.

EXHIBIT 1 Fast Facts and Effective Dates of California Laws

In March 2024, the SEC issued its climate rule, which was subsequently stayed in court and then by the SEC. In 2025, the new SEC Chair has chosen not to defend the rule in court, which will likely result in its termination. The California Laws also face a court challenge but remain in effect as of this writing. Accordingly, if they survive the litigation, they will likely become the de facto standard, and in some cases mandate, for corporate climate disclosures in the United States.

California Sets the Pace In the 1940s and 1950s, California was one of the most polluted states in the country. Smog was first detected in the U.S. in Los Angeles in the summer of 1943. “Visibility was only three blocks,” stated the California Air Resources Board (CARB) on their history page (https://ww2.arb.ca.gov/about/history). It was not until the early 1950s that Arie Haagen-Smit, chemistry professor at the California Institute of Technology, discovered that the “automobile was the main culprit.” His pioneering work “became the foundation upon which today’s air pollution regulations are based,” according to CARB’s history. Consequently, in 1966, California established the nation’s first automobile emissions standards. A year later, Governor Reagan signed a law that ultimately created CARB, the first such agency in the nation. The Environmental Protection Agency (EPA) and the federal Clean Air Act were both signed into law by President Nixon in 1970. This coincided with the establishment of Earth Day that same year. In the 1970s, CARB efforts in air pollution control led to the development of the catalytic converter. In 1990, CARB issued a zero-emission vehicle (ZEV) regulation requiring automobile manufacturers to start producing and selling electric vehicles. This spurred General Motors (GM) to invent the EV1, which was the first mass produced and state-of-the-art electric vehicle in the world, except for rudimentary electric vehicles in Henry Ford’s day. GM “built over 1,000 EV1s before stopping production in 1999,” according to NPR (“This Little Electric Car Made History. 25 Years Ago, GM Stopped Making It,” 2024, https://tinyurl.com/m3493xew); however, GM did not realize the potential of the EV1. Because GM leased all these cars, they were able to demand their return and had them destroyed in 2003. It took a couple of engineers from outside the company to see the huge potential in electric vehicles. They started a company, Tesla, in California the same year the EV1s were destroyed. They copied the EV1’s technology, perfected it, and built the world’s first electric car in California. Currently, California has the most electric cars and charging stations in the nation (Lyle Daly, “The Number of EV Chargers in Each State,” Motley Fool, May 30, 2025, https://tinyurl.com/87v7s58b).

U.N. Climate Summits Lead to Corporate GHG Disclosures The United Nations Framework Convention on Climate Change is an international environmental treaty. It was signed in 1992 at the Earth Summit in Rio de Janeiro, and its main focus was to limit GHG emissions by all member nations. The treaty calls for continuing scientific research on global warming, annual conferences (i.e., the U.N. Climate Summit) to be held around the world, and negotiated agreements that will reduce GHG emissions. The Intergovernmental Panel on Climate Change (IPCC), which is a scientific body selected by all United Nation member states, is an advisor to these annual Climate Summits, which have advanced the science regarding the harmful effects of GHG and guided the search for solutions. The Kyoto Protocol was the first landmark international treaty, signed at the U.N. Climate Summit held in Kyoto, Japan, in 1997. The Kyoto Protocol is known for developing two scientific standards for disclosing GHG emissions: (1) the six most harmful GHGs contributing to global warming, and (2) the standard unit of measurement for disclosing GHG emissions, metric tons of carbon dioxide equivalent. The Kyoto Protocol set the governmental GHG disclosure standard that ensures all countries report their GHG emissions in a consistent manner. It also marked the first time that 35 countries agreed to reduce their GHG emissions. A year later, the Greenhouse Gas Protocol Initiative (GHG Protocol) was established, and it applied the scientific standards of the Kyoto Protocol to corporate GHG disclosures. The GHG Protocol, a non-governmental organization (NGO), was formed as a collaboration between the World Resources Institute (WRI), a U.S. environmental nonprofit, and the World Business Council for Sustainable Development (WBCSB), an NGO whose members include leading international companies. In 2001, the GHG Protocol promulgated the first edition of A Corporate Accounting and Reporting Standard, which covers the accounting and reporting of the six most harmful GHGs and sets the standard unit of measurement as metric tons of carbon dioxide equivalent, both derived from the Kyoto Protocol. Accordingly, the GHG Protocol set the standards to measure and manage corporate GHG emissions. As shown in Exhibit 2, these six GHGs are: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF6) (WRI, WBCSB, “GHG Protocol: Corporate Value Chain (Scope 3) Accounting and Reporting Standard,” p.5, 2011, https://tinyurl.com/mr2vxymm). There are now seven GHGs covered by the GHG Protocol standards, with nitrogen trifluoride (NF3) added by the Doha Amendment to the Kyoto Protocol, agreed to at the U.N. Climate Summit in Doha, Qatar, in 2012 (https://tinyurl.com/2zsas868). The GHG Protocol standards are based upon the scientific work of the U.N. Climate Summits and the IPCC. EXHIBIT 2 Overview of GHG Scopes 1, 2, and 3 The GHG Protocol coined the terms “Scope 1, Scope 2, and Scope 3 emissions.” Some companies have voluntarily been disclosing these for over 20 years. As shown in Exhibit 2, Scope 1 emissions are defined as those GHGs directly emitted by company facilities and vehicles, while Scope 2 emissions are indirect GHGs attributable to “purchased electricity, steam, heat and cooling” (WRI, WBCSB 2011) for the company’s own use. Scope 3 emissions are a company’s indirect emissions attributable to upstream and downstream activities, known as “emissions across the value chain,” (WRI, WBCSB 2011) which are attributable to its suppliers and end users of its products. In 2015, the FSB organized the Task Force for Climate-related Financial Disclosures (TCFD), chaired by former NYC Mayor Michael Bloomberg, which recognized the importance of companies disclosing their GHG emissions and climate risks. In 2017, the TCFD published its voluntary framework, and a growing number of international public companies have been reporting on them. In 2021, at the Climate Summit in Glasgow, the International Financial Reporting Standards (IFRS) Foundation announced the creation of the International Sustainability Standards Board (ISSB) and its merger with the Sustainability Accounting Standards Board (SASB), which established a set of widely used standards and coined the term “sustainability accounting” [For full disclosure, the author is accredited in the Fundamentals of Sustainability Accounting (FSA) by the IFRS Foundation]. In June 2023, the IFRS Foundation issued its inaugural Sustainability Disclosure Standards: IFRS S1, General Requirements for Disclosure of Sustainability-Related Financial Information, and IFRS S2, Climate-related Disclosures. In October 2023, the California Laws became the first corporate GHG disclosure mandate passed in the United States. On March 6, 2024, the SEC issued its Final Rule: The Enhancement and Standardization of Climate-Related Disclosures. But less than two weeks later, on March 15, 2024, the U.S. Court of Appeals for the Fifth Circuit stayed the SEC Climate Rule. On April 4, 2024, the SEC suspended their Climate Rule pending the result of the federal appeals court challenge.

Link Between GHGs and Global Warming Although climate change and global warming have often been used inter-changeably, global warming is perhaps foremost in the public consciousness because it is an easier concept to understand. The Oxford English Dictionary defines global warming as: “a long-term gradual increase in the average temperature of the earth’s atmosphere, waters, and land surfaces, spec. that occurring in the wake of the Industrial Revolution, becoming apparent from the late 20th century onwards, and linked to increased emissions of carbon dioxide and other green-house gases caused by human activity” (https://www.oed.com/dictionary/global-warming_n?tl=true). In the last 100 years, Earth’s population has grown from 2 billion in 1927 to 8.2 billion today (U.N. Population Division). Humans are burning more fossil fuels to support this fourfold increase in population, resulting in billions of tons of GHG emissions. This author wonders: can the planet support this many people? Climate change and environmental, social and governance (ESG) reporting has been a controversial issue. In “Moving Beyond ESG,” Robert G. Eccles, founding chairman of SASB and visiting professor at Oxford University succinctly explains the controversy: “In the United States the term [ESG] has become a punching bag for both sides of the political aisle. For those on the left, ESG doesn’t go far enough in forcing businesses to address major societal challenges, particularly climate change. For those on the right, it represents an insidious attempt to make companies adopt a liberal agenda, thus distorting markets and free competition.” (Harvard Business Review, September/October 2024). Corporate GHG emission disclosures measure how much air pollution a company emits, and thus they are a crucial metric for many investors in evaluating how sustainable, or environmentally responsible, a company is. One of the purposes of GHG disclosures is to set targets for reducing air pollution, which many believe significantly heats up the atmosphere and is a cause of health problems.

SEC Climate Rule Stayed and Will Not Be Defended in Court The SEC Climate Rule faces an uncertain future amid the numerous lawsuits that have been brought to block it. Furthermore, the rule has a very limited scope and weak standards compared to the California Laws. It is worth recalling that, when the SEC issued its proposed Climate Rule in 2022, it received nearly 15,000 comment letters, most of which expressed disagreements with the proposal. As a result, when it was ultimately issued on March 6, 2024, it was significantly watered down from the original proposal. Jones Day, a large international law firm, wrote “U.S. SEC Climate Disclosure Rules Spark Flurry of Litigation,” which summarized the attack on the SEC Climate Rule as follows: Multiple parties filed petitions for review in six different appellate courts: the Second, Fifth, Sixth, Eight, Eleventh, and D.C. Circuits. A total of 25 states filed petitions across four of those circuits. … In addition, the U.S. Chamber of Commerce and two affiliated Texas business groups, two energy companies, and two energy trade associations filed three additional petitions in the Fifth Circuit. Environmental groups also filed suit: the Sierra Club filed in the D.C. Circuit; and the Natural Resources Defense Council filed in the Second Circuit. The latter two petitioners largely support the SEC’s authority to issue the rules but will likely argue the SEC should have gone further (Jones Day, Insights, Sep. 6, 2024, https://tinyurl.com/5n8euf36). In April 2024, the SEC stayed the Climate Rule to avoid regulatory uncertainty. This was closely followed by the Supreme Court’s ruling in Loper Bright v. Raimondo (2024), which overturned the “Chevron doctrine,” which had previously required judges to defer to federal agencies’ interpretations of federal laws that were deemed ambiguous. It is now widely presumed that judges will exercise broader authority to determine that federal agencies have exceeded their authority under a respective law passed by Congress. The SEC Climate Rule is a federal regulation, and under new leadership appointed by a new administration, the SEC faced the decision to rescind the regulation or not to defend it in court. The SEC has decided not to defend it, and so it appears likely that the Climate Rule will be terminated in court.

Sustainability Standards Are Outside FASB’s Mission Some CPAs may question whether FASB should be issuing GHG emission disclosure standards. Although the FASB and the SASB were discussing a merger over a decade ago to establish sustainability standards, the merger never occurred, and such standards were never promulgated. In 2021, the SASB merged with the International Integrated Reporting Council (IIRC) to form the Value Reporting Foundation. Then in 2022, the Value Reporting Foundation merged with the IFRS Foundation to form the ISSB, which is now responsible for publishing updates to the widely used SASB standards as well as the Integrated Reporting Framework and Principles. FASB has made it clear their mission is to only “establish and improve financial accounting and reporting standards …. [and] to address only amounts reported in financial statements,” as stated in their exposure draft “Environmental Credits and Environmental Credit Obligations,” issued in 2024. “Measuring or tracking an entity’s … actual greenhouse gas emissions are beyond the scope of FASB’s mission.” So, since it appears that FASB will not be issuing any sustainability standards, and the SEC’s disclosure efforts have been blocked, it is left to the states—and California has become the first.

A Comparison of the SEC Climate Rule and California Laws The California Laws are much stricter and wider in scope than the SEC Climate Rule. While the SEC Climate Rule would only affect large public entities, the California Laws will apply to both public and private companies with annual revenues over $500 million or $1 billion, as shown in Exhibit 1. Although revenue is not defined in the laws, observers have taken it to mean “total revenue as reported in a company’s financial statements,” according to KPMG (KPMG Hot Topic, Climate in the US: Focus on 2026 Reporting for California Climate Laws, January 2025). The California Laws require disclosure of Scope 1, 2, and 3 emissions. In contrast, the SEC Climate Rule requires Scope 1 and 2 emission disclosures only if they are material and does not require Scope 3 emission disclosures at all. Even though the SEC is not moving forward with the Climate Rule, a comparison of the two is in Exhibit 3 to illustrate their relative differences. EXHIBIT 3 Comparison of California Laws vs. SEC’s Climate Rule Companies that purchase many goods and services from vendors are likely to have significant Scope 3 emissions. For example, according to its 2024 Environmental Sustainability Report, Microsoft emitted a total of 17.162 million metric tons of GHG, measured in CO2 equivalent. Their Scope 3 emissions were 16.624 million metric tons, representing 97% of their total GHG emissions. Micro-soft’s Scope 1 and 2 emissions were only 538,000 metric tons, representing 3% of this larger total, a figure which could be deemed immaterial. Under the SEC Climate Rule, therefore, it might well be that Microsoft would not be required to disclose any GHG emissions because their Scope 1 and 2 GHG emissions would be deemed immaterial, and disclosure of Scope 3 emissions would not be required—even though its own sustainability report indicates it is a very large emitter.

California Laws Use Tax Nexus A curious CFO may be asking how their private company, based in New York or Texas, could be subject to the California Laws. Auditors may ask how California can regulate corporate disclosures for their out-of-state clients. Wouldn’t the SEC have sole authority to set a national mandate on GHG disclosures for public companies? These are obvious questions that companies and CPAs would ask, assuming that only companies organized or located in California were subject to them, and therefore the California Laws would not apply to them. It is worth noting that California used a company’s tax nexus—a novel approach for environmental laws—as the basis for its requirement that out-of-state companies disclose their GHG emissions. Companies have a tax nexus when they are considered to be “doing business in California,” as defined under California tax laws. This applies to out-of-state companies, which might not have a physical presence in the state but meet certain other criteria and therefore must file a state franchise tax return. As illustrated in Exhibit 4, an out-of-state company is deemed to have a tax nexus if it exceeds any one of the following thresholds (or 25% of a company’s respective amounts): 1) California sales exceed $711,538; 2) has California property valued in excess of $71,154; 3) pays California employee compensation exceeding $71,154 or 4) engages in any transaction for the purpose of financial gain within California—this last criteria is vague and is likely to lead many companies to be subject to nexus which otherwise might not. (These thresholds are for 2023 only, and they are subject to change each year.) EXHIBIT 4 Doing Business in California

California Laws Based Upon Existing Standards and Penalties Applicable As shown in Exhibit 5, the California Laws use the GHG Protocol standards and the TCFD framework, which are pioneering corporate climate standards that are also both aligned with the IFRS Sustainability Disclosure Standards. Accordingly, SB-261 permits a “framework relief,” an exemption in reporting if a company is already complying with the IFRS Sustainability Disclosure Standards, because these standards are the successor and equivalent standards to the TCFD framework. Although SB-253 does not have a “framework relief” provision, the law states that CARB may issue one when it writes the final regulations. Because the IFRS Sustainability Disclosure Standards incorporate the GHG Protocol standards, it appears likely CARB will permit their use as a “framework relief” as well. EXHIBIT 5 Targeted Disclosures on California Laws The SEC’s Climate Rule is almost 900 pages long, whereas California’s Laws are less than 10 pages each and based upon existing standards. In the author’s opinion, the SEC tried to “reinvent the wheel” with an overly complicated approach, whereas California relied on the tried and true GHG Protocol, TCFD, and IFRS, and this distinction is significant and impactful. In addition, there are severe penalties for noncompliance with the California Laws. While this will hopefully provide the incentive to comply, even million-dollar penalties may not deter the largest corporations.