In the past few days, California Governor Gavin Newsom signed three bills that will require companies and investors to provide new disclosure.
Climate Disclosure
On October 7, 2023, Governor Newsom signed Senate Bill 253, titled the Climate Corporate Data Accountability Act (SB 253), and Senate Bill 261, titled Greenhouse gases: climate-related financial risk (SB 261).
SB 253 will require companies that do business in California and have annual revenue over $1 billion to annually disclose, via reports provided to California’s State Air Resources Board, their Scope 1 and Scope 2 emissions beginning in 2026. Such reporting entities will need to annually disclose their Scope 3 emissions beginning in 2027.
SB 261 will require companies that do business in California and have annual revenue over $500 million to biennially disclose, via climate risk reports provided to California’s State Air Resources Board, climate-related financial risk and measures taken to reduce and adapt to such climate-related financial risk beginning in 2026.
For additional details about SB 253 and SB 261, see our previous Client Alert.
Diversity Disclosure
On October 8, 2023, Governor Newsom signed Senate Bill 54, titled Venture capital companies: reporting (SB 54). SB 54 will require “covered entities” to annually report certain diversity information beginning on March 1, 2025, by submitting a report to California’s Civil Rights Department.
A “covered entity” is a venture capital company (VC) that is both: a) either i) a VC that primarily engages in the business of investing in, or providing financing to, start-up, early-stage, or emerging growth companies, or ii) a VC that manages assets on behalf of third-party investors, including, but not limited to, investments made on behalf of a state or local retirement or pension system; and b) either i) a VC headquartered in California, ii) a VC that has a significant presence or operational office in California, iii) a VC that makes venture capital investments in businesses that are located in, or have significant operations in, California, or iv) a VC that solicits or receives investments from a person who is a resident of California.
A covered entity will need to report five categories of information to California’s Civil Rights Department related to “diverse founding team members.”
A “founding team member” is someone who either: a) i) owned initial shares or similar ownership interests of the business, ii) contributed to the concept of, research for, development of, or work performed by the business before initial shares were issued, and iii) was not a passive investor in the business; or b) has been designated as the chief executive officer, president, chief financial offer, or manager of a business, or who has been designated with a role with a similar level of authority as any of those positions. A “diverse founding team member” is a founding team member who self-identifies as a woman, nonbinary, Black, African American, Hispanic, Latino-Latina, Asian, Pacific Islander, Native American, Native Hawaiian, Alaskan Native, disabled, veteran or disabled veteran, lesbian, gay, bisexual, transgender, or queer. A company that was “primarily founded by diverse founding team members” is a company for which more than one-half of the founding team members are diverse founding team members.
A covered entity will first need to report the following aggregated information about the founding teams of all the businesses in which such covered entity made a venture capital investment in the prior calendar year: i) gender identity; ii) race; iii) ethnicity; iv) disability status; v) identification as LGBTQ+; vi) veteran or disabled veteran status; vii) California residency; and viii) declinations to provide any of the foregoing information. Second, a covered entity will need to report the number of venture capital investments made during the prior calendar year with businesses founded primarily by diverse founding team members, as a percentage of the total number of venture capital investments the covered entity made, in the aggregate and broken down by categories (i)-(vi), above. Third, a covered entity will need to report the total amount of venture capital investments made during the prior calendar year with businesses founded primarily by diverse founding team members, as a percentage of the total number of venture capital investments the covered entity made, in the aggregate and broken down by categories (i)-(vi), above. Fourth, a covered entity will need to report the total amount of money in venture capital investments the covered entity invested in each business during the prior calendar year. Fifth, a covered entity will need to report the principal place of business of each company in which the covered entity made a venture capital investment during the prior calendar year.
SB 54 outlines further details of the process by which covered entities are supposed to collect and report the required information, and the law requires California’s Civil Rights Department to make the reports that is receives from VCs readily accessible, easily searchable, and easily downloadable on the Civil Rights Department’s website. The Civil Rights Department may also publish aggregated information on its website, and it is authorized the use the information that it receives in furtherance of enforcing California’s civil rights laws.
If a covered entity fails to submit the information required by SB 54, the Civil Rights Department is will issue a notice, after which such covered entity has 60 days to file such information with the Civil Right Department. Failure to comply could result in injunctive relief against the covered entity, penalties, and attorney’s fees.
What to Do Now?
While we expect that SB 54, SB 253, and SB 261 will be subject to litigation, they may require new disclosure from many companies and investors. Companies and investors can prepare for these requirements in advance by assessing and developing internal capabilities, processes, and governance to support consistent and reliable disclosure.
We expect that companies and investors of all sizes and across all industries will have questions as they begin to familiarize themselves with their obligations pursuant to SB 54, SB 253, and SB 261, and other regulations such as the U.S. Securities and Exchange Commission’s proposed climate disclosure rules, the Corporate Sustainability Reporting Directive, and related rules and regulations. For more information on the these topics or any related matter, please contact any member of the firm’s sustainability and ESG advisory or public company representation practices.
