Navigating the burdensome and nuanced compliance of greenhouse gas (GHG) reporting obligations will become an increasingly challenging task for domestic and international fleet operators as they work within complex value chains and labor markets.
As fleets grapple with meeting the requirements of the California Air Resources Board (CARB) Advanced Clean Fleet (ACF) regulation, they are responding with uncertainty and caution about the latest batch of state climate regulations that will impact the transportation industry. As early as 2025, companies must begin preparations to face a series of increasingly complex reporting requirements, including several focused specifically on GHG. While these new regulations are complicated in their own regard, additional challenges confront fleet operators — lack of funding to support compliance, uncertainty around implementation timelines, and poor understanding of how the bills will actually be implemented leave confusion on how and when entities should prepare their compliance plans.
California is not alone — GHG and climate reporting regimes are rolling out at the federal level in the U.S.; binding climate regulations took effect in the European Union (EU) and the United Kingdom (UK); and, most recently, Japan released proposed sustainability reporting standards.
New Climate Regulations Require Extensive Planning, Reporting, and Data Collection
California’s recent slate of climate regulations, Senate Bill (SB) 253, SB 261, and Assembly Bill (AB) 1305, are designed to drive corporate accountability and create enhanced transparency around climate disclosures and business practices. Focused on GHG emissions and climate and financial risk, these regulations are underpinned by various reporting frameworks that require extensive planning and data collection, partnerships and reporting procedures, and the establishment of forward-looking strategies and risk mitigation goals.
The carrots are clear — complying organizations can mitigate harmful climate impacts, increase their competitiveness in the sustainability-driven market where investors are requiring enhanced visibility into climate risk, and become better stewards of the planet. However, so too are the sticks — there are financial penalties associated with non-compliance and reporting false data, as well as filing fees, in addition to the added expense of additional human capital required to monitor and report these efforts.
SB 253, relevant to businesses that operate in California and that have annual revenues in excess of one billion dollars, includes reporting requirements on Scope 1, 2, and 3 emissions. While all these emissions contribute climate change, Scope 3 emissions are the most difficult to measure as the sources are outside of a reporting entity’s control. Even still, in conformance with the Greenhouse Gas Protocol Standards and Guidance, reporting entities must measure and report accurate and comprehensive data, subject to a third-party verification audit, to determine a company’s direct and indirect GHG emissions and to effectively identify sources of the emissions in order to develop a means to reduce the same. SB 253 requires annual reporting.
SB 261
SB 261 relates to the disclosure of climate-related financial risk. It impacts a larger market segment than SB 253 because it requires business entities with total annual revenues in excess of $500,000,000 and that do business in California to report. SB 261 relies on the Task Force on Climate-related Financial Disclosures (TCFD) reporting framework, which is meant to assist companies in disclosing both climate-related risk and forward-looking opportunities for reducing such risk. This is especially important as extreme weather conditions brought on by climate change are projected to persist, resulting in financial risk to companies and the global economy. It is critical that organizations report on risks and proactively report on opportunities to reduce them. The near-term reporting requirements may be challenging for organizations. However, in the long run, this reporting mechanism is designed to improve climate reporting and help companies create strategies to sustain sound business operations amidst climate change and thus reduce climate and financial risk. SB 261 reporting is biennial.
AB 1305
AB 1305 requires a business entity that is marketing or selling voluntary carbon offsets, purchasing or using carbon offsets, or making claims regarding achieving “net zero emissions,” “carbon neutral,” or other similar claims within the state of California to disclose certain required information on the business entity’s website and to update the information at least once per year. This requirement is meant to drive accountability and prevent greenwashing in the carbon market. Compliance with AB 1305 is required in 2025.
Federal / International Climate Regulation Landscape
At the federal level, the U.S. Securities and Exchange Commission (SEC) ruled on the long-awaited Climate-Related Disclosures for Investors, and while this ruling represents the significance of reporting on GHG, it is a watered-down version of what was originally proposed. The final rule deleted Scope 3 emissions reporting requirements and did not enhance the definition of materiality, as is notable in the EU disclosure requirements. Additionally, the SEC ruling is currently on hold pending the outcome of multiple legal challenges. Thus, it remains to be seen if certain companies will be required to begin reporting in 2026, with additional companies phased in over the upcoming years, as written in the ruling.
Conversely, across the pond and following the UK’s 2022 Climate Related Disclosure Regulations, the EU’s climate ruling is currently in effect and companies that meet certain criteria are required to record this year’s data for reports that will be published in 2025. The EU’s climate ruling takes a stronger stance than the SEC in that it contains a more wholistic approach to material issues, referred to as double-materiality. Double-materiality assesses both a company’s social and environmental impact, as well as how social and environmental matters create organizational financial risks and opportunities. The double-materiality lens provides a comprehensive view into environmental, social, and business risks which paints a more robust landscape for accurate climate compliance reporting.
Climate change is an interconnected issue that impacts markets and complex value chains across the globe. As time progresses, additional countries will also stand-up climate reporting requirements, as seen in Japan, because financial investors will demand it.
Compliance Planning is the Right Solution, even in a Complex and Uncertain Future
While monitoring the status of ongoing legislation, complying entities can take these additional proactive steps to better position themselves: develop forward-looking strategies and risk mitigation goals, build data collection protocols, and establish partnerships and reporting procedures.
Forward-Looking Strategies and Risk Mitigation Goals
Companies must take a wholistic approach to future business operations and establish forward looking-strategies and risk mitigation goals. Climate regulations, while administratively burdensome, create value via enhancements to market competitiveness and improvements in corporate culture. Part visioning exercise, part risk mitigation strategy, and part storytelling, this effort gives complying entities the opportunity to establish, revise, or update environmental, social, and governance (ESG) goals to ensure they are robust enough to meet the nuanced climate compliance reporting requirements.
Data Collection Protocols
Data is the foundation of any sustainability program, and the quality of data informs vision, strategy, and implementation metrics. When embarking upon this process, a key first step is understanding data collection and its numerous challenges. Often when working within complex value chains, data is stored in numerous departments and stored within multiple software platforms that do not communicate with one another. This leads to data gaps and data integrity challenges. A clear line of sight into the organization’s current operating state will help establish realistic future goals. It bears mentioning that reporting entities will likely be required to compile data far more inclusive than just GHG emissions, a complex endeavor in and of itself. Reporting entities will also need to compile data relating to climate and financial risk in their respective value chains and the opportunities to reduce said risk. All of these reporting requirements will require comprehensive data collection and analytical protocols that are subject to third-party verification.
Partnerships and Reporting Procedures
The value of internal partnerships cannot be overstated. Now is the ideal time to look within your organizational structure and determine what departments should be included in the climate compliance conversation because each department will need to coordinate and drive reporting procedures within their respective verticals. This takes time to plan and implement. It is also important to establish a central point of contact who will oversee these efforts. Lastly, now is also the ideal time to establish reporting processes and map out key milestone targets because 2026 reporting will be based off prior fiscal year information.
Charting a Path to a More Sustainable Future
While regulatory requirements impose obstacles that companies need to address, they also drive the climate agenda forward and can improve business operations. From a current and future business state perspective, this is not an “either/or” scenario, it is a “both/and” scenario. Whether at the state, federal, or global level, all stakeholders must embrace these robust climate polices and compliance undertakings, as agencies and fleets alike need to collaborate amidst complex markets and value chains to create a more sustainable future for our planet. This is an ongoing dialogue that must include all parties to benefit our communities, our economy, and our environment.
Compliance360 proactively tracks transportation policy trends at the local, state and federal level. Our 360-degree process ensures our team understands your priorities and continually monitors the evolving regulatory landscape to provide you with expert insights into the regulations that impact your business and the tools to help you prepare. Our regulatory compliance experts can help your organization navigate climate-related compliance requirements and implement your climate-related reporting targets. Learn more by visiting our Policy & Regulatory Support page here.
Gain insight into the regulations, rules, and policies transforming the clean commercial transportation at this year’s ACT Expo in Las Vegas, May 20-23, 2024. Sessions will highlight the current state of clean transportation regulations and how entities are staying compliant and aware of these regulations today. Industry and policy experts will also discuss some of the most ground-breaking regulations ever adopted at the local, state, and federal levels, with a specific focus on the commercial transportation sector.
