Mandatory Climate Reporting: How to Navigate the New Compliance Era in 2024 and Beyond

Climate change is no longer a distant concern. It is an immediate reality reshaping the corporate landscape, and the term “mandatory climate reporting” has caught the attention of sustainability managers – but what does it mean for you and your business?

Let’s dive into it.

Voluntary vs. Mandatory Climate Disclosure

Understanding the difference between voluntary and mandatory climate disclosure is crucial.

Voluntary disclosure involves companies proactively reporting their environmental impact without legal obligation. Investor demands, corporate social responsibility goals, and increasing awareness of climate risks typically drive these disclosures. This approach allows companies to showcase their sustainability efforts and build stakeholder trust.

In contrast, mandatory climate disclosure is a legal requirement that governmental bodies can enforce. These laws obligate companies to report specific climate-related information systematically.

This shift from voluntary to compulsory reporting ensures transparency, standardization, and accountability, ultimately compelling companies to take concrete actions toward mitigating climate risks.

The Transition from Voluntary to Mandatory Reporting

The shift from voluntary to mandatory climate reporting is a global trend. Over 93% of S&P 500 companies already disclose climate data voluntarily. Investor demand, corporate social responsibility goals, and a growing awareness of climate risks have primarily driven these disclosures.

However, certain voluntary disclosure frameworks are increasingly being adopted by mandatory disclosure regulations.

Voluntary Frameworks Setting the Stage

Frameworks such as the Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP), and IFRS/ISSB (former TCFD) have been instrumental in standardizing climate reporting.

These frameworks have provided companies with the tools to measure, manage, and report their environmental impact. As these voluntary disclosures become more widespread, they set a precedent for mandatory reporting.

The European Union and the United Kingdom

In the EU, the Corporate Sustainability Reporting Directive (CSRD) and Non-Financial Reporting Directive (NFRD) are already in place, requiring detailed sustainability disclosures from large companies.

Similarly, the UK’s Climate-Related Financial Disclosure Regulations mandate that companies with more than 500 employees report on climate-related risks and opportunities. These regulations illustrate the trajectory from voluntary to mandatory reporting, reinforcing the importance of transparency.

California’s Pioneering Climate Disclosure Laws

California has always been a leader when it comes to environmental policy, and its latest move in October 2023 is no exception.

The state has enacted three significant laws that set a high corporate climate transparency standard. These laws reflect California’s commitment to combating climate change and pave the way for nationwide business regulation.

Let’s break them down.

SB 253 (Climate Corporate Data Accountability Act)

The Climate Corporate Data Accountability Act requires U.S. entities with over $1 billion in annual revenues and business operations in California to report their emissions annually.

This is much more than a formality. Starting in 2026, companies must report their Scope 1 (direct emissions from owned or controlled sources) and Scope 2 (indirect emissions from the generation of purchased electricity) emissions to a digital platform run by California and accessible to the general public.

By 2027, the requirement expands to include Scope 3 emissions, which cover all other indirect emissions that occur in a company’s value chain.

These emissions often represent most of a company’s carbon footprint and include everything from business travel to the production of purchased goods and services. The requirement to report these emissions will push companies to assess their entire supply chain and operational processes.

The law mandates these reports be in a format prescribed by the Greenhouse Gas Protocol, a widely recognized international standard. To add a layer of credibility, companies must have their data assured by third parties.

This means businesses can’t just self-report their data—they need independent verification to ensure accuracy. This requirement enhances transparency and reliability, making it harder for companies to underreport or misrepresent their emissions.

SB 261 (Greenhouse Gases, Climate-Related Financial Risk)

Next up is SB 261, which tackles the financial risks associated with climate change.

If your business was formed in the U.S., operates in California, and generates revenue over $500 million annually, you’ll need to get familiar with this one. Starting in 2026, companies must biennially report on their climate-related financial risks. But what does that entail?

The reports need to follow the framework set by the IFRS / International Sustainability Standards Board (former Task Force on Climate-related Financial Disclosures ). This framework focuses on four key areas: governance, strategy, risk management, and metrics and targets.

Essentially, companies need to explain how they identify and manage climate risks, how they impact their business strategy, and what steps they take to mitigate them.

These reports aren’t meant to gather dust in a filing cabinet. They must be submitted to the California Climate-Related Risk Disclosure Advisory Group and made publicly accessible.

This level of transparency allows stakeholders, including investors, customers, and the general public, to understand how companies are addressing climate risks. It also puts pressure on businesses to take meaningful action rather than paying lip service to sustainability.

AB 1305 Voluntary Carbon Market Disclosures

The third law targets the carbon offset market and decarbonization claims made by companies. Carbon offsets are credits that permit companies to emit a certain amount of greenhouse gasses to the atmosphere. However, the market has been plagued by issues of transparency and credibility.

Under the new California law, any entity involved in selling or purchasing carbon offsets within the state of California must annually disclose detailed information about their offset projects on the company’s public website.

This includes data on the project’s location, methodology, and the amount of emissions reduced or removed. Companies must also provide information on third-party validations and other measures used to calculate the amount of emissions reductions.

In addition to information about carbon credit purchases, organizations that make public decarbonization claims (for example, the emissions reductions they’ve made or reached net zero) must annually disclose information about third-party verifications.

They must also include how the emissions claims were accomplished and determined to be accurate and similar matters on their public website.

This requirement ensures solid data-backed claims of carbon neutrality or significant emissions reductions. It also helps prevent greenwashing, a practice in which companies exaggerate or fabricate their environmental efforts.

The Broader Impact

California’s new laws are more than just state regulations; they represent a shift towards greater corporate accountability in the fight against climate change. These laws set a precedent that other states and potentially federal regulators could follow.

They demonstrate that significant progress in climate transparency and accountability is possible and necessary.

For companies doing business in California, these laws mean stepping up their game. They must invest in robust data management systems, engage credible third-party assurers, and integrate climate risk into their overall business strategy.

While this may seem daunting, it also allows businesses to lead in sustainability and build trust with their stakeholders.

Companies that align with these requirements now will be better positioned to navigate the evolving regulatory landscape and thrive in a world that increasingly values sustainability and transparency.

Practical Steps for Compliance

Here are 4 practical steps to ensure compliance:

• Data Management: Begin tracking your emissions data comprehensively. Ensure accuracy by covering Scope 1 (direct emissions) and Scope 2 (indirect emissions from energy use), and prepare for Scope 3 (all other indirect emissions).

• Third-Party Assurance: Engage credible third parties to validate your data. This not only ensures compliance but also enhances the credibility of your reports.

• Integrated Risk Management: Incorporate climate risk into your overall risk management strategy. Recognize that climate risk is not just an environmental issue but a financial one.

• Stay Updated: Keep abreast of regulatory updates at federal and state levels by following SEC and other relevant bodies. The landscape is rapidly evolving, and staying informed is crucial.

The Bigger Picture: Why This Matters

Mandatory climate reporting is more than regulatory compliance; it’s an acknowledgment of the pressing reality of climate change. It compels businesses to make informed decisions that safeguard their financial performance and the planet.

Paul Polman, co-founder of IMAGINE, eloquently captures this:

“We cannot close our eyes to the fact that the well-being of our planet is the well-being of our business.”

Conclusion: A Call to Action

Growing mandatory climate reporting is an opportunity for sustainability leadership.

Companies that proactively embrace these regulations and develop robust sustainability strategies will not only avoid penalties but also gain a competitive edge.

Voluntary disclosures serve as a training ground for what will become mandatory. Following reporting standards, such as those outlined by the Greenhouse Gas Protocol, is crucial in this new era.

At Tellus Markets, we provide compliance-ready GHG reporting in multiple formats and offer assistance with complimentary consultations to ensure your company meets and exceeds regulatory expectations.

Are you ready to navigate this new compliance era?

The world demands real, measurable change. It starts with transparent and accountable reporting. It begins with you. And Tellus is here to help.