California’s new environmental, social, and governance (ESG) regulations should come as no surprise to anyone — the state is a long-time leader in passing ambitious climate policies. But this time around, its impact will likely be felt beyond the Golden State’s borders.
While the reporting regulations only apply to companies that do business or operate in California, it’s a strong sign that other states will follow suit with similar laws. In particular, New York is likely next. The state already has two bills (S897A and S5437) in the process of passage. If those become laws, the impact will be widespread, as many international companies operate out of the state. Illinois and Washington are also preparing similar legislation.
For the past decade, a global movement has been pushing companies to prioritize ESG. The 2015 Paris Climate Agreement heightened a sense of urgency to avoid the most catastrophic impacts of human-caused climate change, and environmental groups, regulators, investors, and consumers have been pressing companies to do their part in combating climate change ever since. California’s new regulations are a big first step in making it happen in the U.S.
With the regulations coming into effect as early as 2025, companies should prepare now by centralizing operational data, building the technology infrastructure necessary to monitor their efforts, and setting up strong internal controls to reach their ESG goals. Getting these areas in place quickly will be vital to avoid hefty penalties, fines, and reputational risk.
What are California’s new ESG regulations?
Three ESG bills were passed and signed into law in October 2023. Amendments to two of the bills were signed into law in September 2024, pushing the deadline for the California Air Resources Board (CARB) to develop and adopt regulations regarding the reporting specifics of Scope 1, 2, and 3 emissions to July 1, 2025. The amended law also allows greenhouse gas (GHG) emission reporting to be consolidated with the parent company instead of the original plan of requiring each subsidiary company to produce its own report.
Here’s a breakdown of each bill and the organizations that will be subject to them.
SB-253: Climate Corporate Data Accountability Act
Who is impacted: All private and public companies that do business or operate in California with revenues over $1 billion.
What the law means: Senate Bill 253 requires companies to publicly disclose their GHG emissions across Scope 1, 2, and 3.
Scope 1 refers to the direct emissions from a company’s operations, and Scope 2 includes indirect emissions from energy purchases, such as electricity. These scopes require an annual report starting in 2026. Scope 3 refers to indirect emissions, like supply chain operations, transportation costs, or employee company travel. Reporting for Scope 3 will begin in 2027.
Keep in mind that there are still uncertainties around reporting criteria. CARB has until July 2025 to finalize the details.
SB-261: Climate-Related Financial Risk
Who is impacted: All private and public companies that do business or operate in California with revenues over $500 million.
What the law means: Senate Bill 261 requires companies to submit a climate-related financial risk report to CARB on January 1, 2026, and every two years afterward. This report must include how climate change could impact the company’s model and financial plan and the strategies it plans to implement to combat these risks. The report must also be made publicly available on the company’s website.
AB-1305: Voluntary Carbon Market Disclosures
Who is impacted: U.S. and international companies operating or doing business in California that market, sell, or use voluntary carbon offsets (VCOs) or make certain “zero-emission” or “reduced emission” claims.
What the law means: Assembly Bill 1305 requires companies to disclose on their websites specific carbon offset project details for VCOs, their accountability measures, and the calculation methods for verifying the accuracy of those measures.
For emission claims, companies need to disclose how they determined those claims to be accurate and provide measurements of their completion or progress toward achieving that goal.
Why do California’s ESG regulations matter to finance, procurement, and supply chain departments?
California’s new ESG regulations are part of a larger global effort to hold corporations accountable for their environmental and social impacts. Investors are also taking note of these efforts. If companies don’t adjust and adapt to the shift toward better corporate sustainability, they may diminish public confidence, lose market value, and impact funding opportunities to drive long-term business growth.
The more immediate consequences for not complying with the regulations include:
- Administrative penalties set by the state board (SB-253)
- Up to a $50,000 administrative penalty per year (SB-261)
- Up to a $500,000 civil penalty per year (AB-1305)
Finance, procurement, and supply chain departments will play a critical role in helping their companies achieve compliance and avoid these penalties. Here are some of the ways each department may be impacted and the strategies they may adopt to prepare for the new laws.
Finance: Navigating compliance costs and financial risk
Under SB-261, finance teams will need to assess and report on climate-related financial risks that could impact the organization’s financial performance. This includes analyzing the potential effects of climate change on the company’s operations, revenue streams, and long-term financial health. Finance will need to work closely with procurement and supply chain departments to understand the logistical and financial risks across operations. The urgency of these regulations puts increasing pressure on finance leaders, who remain at the forefront of ensuring compliance across their organizations.
However, quantifying and reporting climate-related risks is still an evolving area. Teams will need to develop new skills and frameworks to model potential climate impacts. To meet the challenge, finance departments need to budget accordingly to include new reporting systems, data collection processes, external audits, and other sustainability initiatives.
Procurement: Finding ways to source more sustainably
Procurement will need to reassess their sourcing strategies to prioritize sustainable suppliers that align with the organization’s ESG goals. This may involve setting new criteria during supplier selection or bidding events, including reduced emissions, eco-friendly materials, or water conservation practices.
Routine auditing of suppliers will also be paramount to ensure there are no violations of any compliance laws or near-term climate risks that may impact the organization’s operations. For example, if an organization gets an alert from their supplier risk monitoring system that there’s increased flooding for their rubber supplier in South India, they may choose to seek an alternative supplier or make note of the risk in their climate-related financial report for SB-261.
Supply chain: Enabling sustainable and resilient supply chains
Under SB-253, supply chain departments will need to work with procurement teams to track Scope 3 emissions from transportation, logistics, and suppliers. With many players across global supply chains, tracking Scope 3 emissions can be challenging. However, there are AI-driven tools that can help collect, process, and analyze this data.
For SB-261, supply chain teams will need to work with finance to analyze how potential climate disruptions — like floods, droughts, and extreme weather events — will impact operations and develop strategies to combat them. Modeling technology that includes a digital twin of a company’s supply chain gives teams the power to test different climate-related scenarios and adjust logistics, distribution centers, and shipping routes to combat these threats and find more sustainable transportation and network solutions.
What’s the estimated timeline of California’s ESG regulations?
- January 1, 2024: AB-1305 went into effect.
- January 1, 2025: AB-1305 disclosure deadline. Companies should prepare for additional upcoming disclosures.
- July 1, 2025: The specific deadline for reporting Scope 1 and 2 emissions under SB-253 will be determined by the California Air Resources Board (CARB) through regulations expected to be finalized.
- January 1, 2026: SB-253 and SB-261 go into effect. For SB-253, reporting on Scope 1 and Scope 2 emissions will begin. For SB-261, the first climate-related financial risk report must be filed, with the next report required in two years. This report will be due biennially (every two years).
- January 1, 2027: Under SB-253, reporting of Scope 3 emissions will begin.
California Governor Gavin Newsom proposed pushing back the Scope 1 and 2 disclosure deadlines to 2028, and the Scope 3 disclosure deadline to 2029, but those changes were not included in the amendments signed into law in September 2024. With legal challenges and uncertainties around reporting criteria, implementation may still be delayed.
What should you be doing now to prepare your organization?
These laws are designed to accelerate sustainability initiatives that curb greenhouse emissions and promote transparency of corporate social responsibility projects. If companies don’t have visibility and control across their supply chain, supplier network, and spending activity, they will find it nearly impossible to meet the disclosure requirements in California. Many still struggle with disjointed systems and highly manual processes that silo data and prevent cross-department collaboration.
It’s important to centralize operations and data on one platform to improve visibility and control over ESG-related activities. Companies should seek to:
- Unify supplier and spend data to ease reporting, compliance, and risk management: Centralizing supplier and spending data helps companies gain control and visibility of sustainability efforts. With full traceability and audibility of spending and supplier activities, leaders can easily conduct audits and produce the reports necessary for compliance. It’s also easier to implement compliance standards and proactively monitor supplier risks across the entire procure-to-pay process.
- Onboard and monitor sustainable suppliers: Include sustainability criteria in sourcing events and contracts, so that you’re mitigating risk from the start. By unifying processes in one place, companies can better track the performance of their suppliers and identify risks before they impact the business and its bottom line. Look for supplier performance tools that can automate and analyze third-party data across different risk domains to flag high-risk activities from suppliers.
- Gain full visibility into the supply chain: From raw materials to the final product, companies need to trace each step in the supply chain and account for omissions. Supply chain and design tools can support visibility and control over the entire supply chain network, helping to manage energy consumption, reduce waste, and optimize resource use.
Now is the time to prepare your data structure and process workflows, even if the regulations are further delayed.
Get your teams and data ready with Coupa’s AI Total Spend Management platform
Microsoft is on an ambitious mission to be carbon-negative by 2030. The company hopes to reach that goal while opening hundreds of new data centers nationwide, a logistically energy-intensive process since IT hardware is often heavy and requires special packaging. To balance the conflicting goals of fostering growth and reducing carbon emissions, Microsoft uses Coupa Supply Chain Design & Planning. The team tests various supply chain scenarios for future inventory positioning, freight consolidation opportunities, and optimized distribution center locations. By seeing tradeoffs between service reliability, cost, and emissions, Microsoft makes data-driven decisions that support its overall business goals. So far, Coupa’s solution empowered Microsoft to slash North American trucking emissions by 60% without compromising speedy deliveries. The same approach is being replicated in Europe and other world regions.
Companies of all sizes trust Coupa to help them drive more sustainable practices. With Coupa’s #1 AI Total Spend Management platform, you can:
- Automate and centralize routine tasks, like invoice matching and requisition approvals, to free your staff to focus on complex compliance requirements.
- Embed internal compliance standards into workflows regarding specific regulations applicable to your organization, such as HIPAA or SOX, to meet legal obligations.
- Source smarter with customizable bidding templates to promote ESG initiatives and incorporate more sustainable criteria, like eco-friendly packaging or emission standards.
- Mitigate risks by vetting and monitoring suppliers automatically with AI-driven insights into third- and fourth-tier supplier risks, cross-community data, and user-submitted feedback. Receive real-time alerts of changes to supplier risk status to get proactive about risk management.
- Make sustainable supply chain decisions with end-to-end visibility into your supply chain operations. Test various scenarios with powerful AI tools to balance cost, carbon, and service to optimize your supply chain network while achieving ESG goals.
While there are still uncertainties on how California’s new regulations will be implemented, it’s a sure sign that these types of laws will become mainstream across the nation. To meet the challenge, companies should prepare a robust data infrastructure that enables finance, procurement, and supply chain leaders to gain greater visibility, accelerate sustainable decisions, and mitigate risk.
As a company headquartered in California, we’re also focused on meeting these new regulations as part of our overall path to net-zero emissions by 2041. Our robust climate strategy ensures we serve as a sustainable supplier for our global customers while also helping organizations develop their own sustainability programs. Read our 2024 ESG Report to learn how we’re reducing emissions significantly and integrating climate strategy into our overall business operations.
