How new sustainability and ESG legislation could impact your organization

by Darin Styles, CPA, CFE

In the U.S., environmental, social and governance (ESG) has been a buzzword for the last several years, at least within the private sector. Now, thanks to the trickle-down effect of new sustainability legislation in California and Europe, public and private organizations across the country may need to take a closer look at their sustainability and ESG metrics and initiatives.

For U.S.-based organizations, the regulations that will primarily impact you are the ones from California. Here’s what you should know about California’s recent legislation and how it could impact your organization.

What happened in California?

On October 7, 2023, California Governor Gavin Newsom signed two state senate bills (SB 253 and 261) and one state assembly bill (AB 1305) into law. These laws are meant to increase the transparency of how large organizations disclose their environmental impacts, particularly those related to greenhouse gas emissions. Together, they represent the first non-industry-specific U.S. regulations related to sustainability and ESG.

• SB 253, known as the Climate Corporate Data Accountability Act, imposes climate-related disclosure requirements for companies with more than $1 billion in annual revenue that do business in California.
• SB 261, Greenhouse Gases: Climate-Related Financial Risk, requires public and private businesses with annual revenues over $500 million that do business in California to prepare and publicly publish (on their website) a biennial climate-related financial risk report.
• AB 1305, Voluntary Carbon Market Disclosures, lays out requirements for both U.S. and international entities that do business in California and make certain claims about their climate-related emissions.
  Although the reports imposed by SB 253 and SB 261 will not be required until 2026, the effective date of AB 1305 is currently January 1, 2024. In the meantime, California lawmakers are working to clarify certain aspects of these laws and prepare agencies for their adoption. Businesses, of course, should be paying attention to these developments and taking steps to prepare as soon as possible.

How California’s new laws could impact you

Although the laws’ definition of “doing business in California” has yet to be flushed out, it will likely be broad. This means if your organization has significant sales in California or works with entities doing business in California, it could be subject to these new reporting requirements.

What should you do now?

At the moment, we recommend staying abreast of developments related to the new California laws and keeping your eye out for others. Currently, there is similar legislation pending in Illinois and New York as well as regulations from the SEC that should be issued this year.

Organizational leaders should also be aware of the inaugural global sustainability standards from the International Sustainability Standards Board (ISSB) that were issued in 2023. These are meant to help improve investors’ trust and confidence in organizations’ sustainability-related disclosures and may apply to those that do business overseas.

The most important thing you can do, however, is to begin assessing how sustainability and ESG regulations could impact your organization and what improvements you need to make.

As I mentioned, lawmakers are still sorting out the details of certain aspects of the laws, and it’s possible legal challenges could alter the scope and requirements of each.

Plan ahead with help from a forward-thinking team

At Abdo, our experts are keeping up with the latest changes and are happy to answer any questions you have. We can work with you to gauge how your organization could be affected and if there are any immediate actions you should take.

If you’d like to determine how these sustainability and ESG developments could impact your organization, contact us today.