California’s ESG Regulations: What They Are & How To Comply

California’s environmental, social, and governance (ESG) regulations are no longer on the horizon — they’re here. The state continues to lead in passing ambitious climate policies, and this time, the impact is being felt far beyond the Golden State’s borders.

While the reporting regulations apply specifically to companies that do business or operate in California, they signal a strong trend that other states are following. New York has advanced similar legislation with bills S897A and S5437 moving through the legislative process. Illinois and Washington are also preparing comparable laws, creating a nationwide shift toward mandatory ESG disclosure.

For the past decade, global momentum has been building around corporate ESG prioritization. The 2015 Paris Climate Agreement intensified urgency around avoiding catastrophic climate impacts, and environmental groups, regulators, investors, and consumers continue pressing companies to contribute meaningfully to climate action. California’s regulations represent a significant milestone in making corporate climate accountability mandatory in the U.S.

With various reporting requirements now active and others beginning in 2025, companies must act quickly to centralize operational data, build necessary technology infrastructure, and establish robust internal controls. These systems must be in place to avoid substantial penalties, fines, and reputational damage.

What are California’s ESG regulations?

Three ESG bills were passed and signed into law in October 2023, with amendments signed in September 2024 that pushed the California Air Resources Board (CARB) deadline for developing Scope 1, 2, and 3 emissions reporting regulations to July 1, 2025. The amended law also allows greenhouse gas (GHG) emissions reporting to be consolidated at the parent company level instead of requiring separate reports from each subsidiary.

Here’s a comprehensive breakdown of each bill, including its purpose and impact:

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 categories. Scope 1 refers to direct emissions from company operations, while Scope 2 includes indirect emissions from energy purchases like electricity. These scopes require annual reporting starting in 2026. Scope 3 covers indirect emissions from supply chain operations, transportation, and employee travel, with reporting beginning in 2027.

Purpose of this bill: SB-253 aims to create transparency around corporate carbon footprints and enable stakeholders to make informed decisions about climate risks and corporate environmental performance. By requiring comprehensive emissions disclosure, the bill pushes companies to better understand and reduce their climate impact.

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 climate-related financial risk reports to CARB starting January 1, 2026, and every two years thereafter. These reports must detail how climate change could impact the company’s business model and financial plans, plus strategies for addressing these risks. Reports must be publicly available on company websites.

Purpose of this bill: This climate disclosure law recognizes that climate change poses material financial risks to businesses. By requiring disclosure of climate-related financial risks, SB-261 helps investors, stakeholders, and companies better understand and prepare for climate impacts on business operations and financial performance.

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 “zero-emissions” or “reduced emissions” claims.

What the law means: Assembly Bill 1305 requires companies to disclose specific carbon offset project details, accountability measures, and calculation methods for verifying accuracy. For emissions claims, companies must disclose how they determined claim accuracy and provide measurements of completion or progress toward goals.

Purpose of this bill: AB-1305 addresses concerns about “greenwashing” (making misleading environmental claims) and ensures transparency in voluntary carbon markets. By requiring detailed disclosure of carbon offset projects and emissions reduction claims, the bill helps maintain integrity in corporate sustainability communications.

California ESG Regulations Summary

What industries are most impacted by these regulations?

Several industries face heightened scrutiny under these ESG reporting requirements due to their significant environmental footprints and operational complexity.

Manufacturing and heavy industry

Companies in automotive, aerospace, chemicals, and steel production typically have substantial Scope 1 and 2 emissions, making GHG reporting particularly challenging. These industries often have complex supply chains that complicate Scope 3 emissions tracking.

Technology and data centers

While tech companies may have lower direct emissions, their rapid growth and energy-intensive data centers create significant Scope 3 emissions. Companies like Microsoft, Google, and Amazon face particular challenges in balancing expansion with emissions reduction goals. Microsoft utilizes digital twin technology to visualize and optimize its supply chain, and as detailed in Forbes, is leveraging Coupa’s design tools as part of its ambitious goal to become carbon negative by 2030.

Retail and consumer goods

Large retailers with extensive supply chains face complex Scope 3 emissions tracking requirements. Companies like Walmart, Target, and consumer goods manufacturers must account for emissions throughout their global supplier networks.

Financial services

Banks, insurance companies, and investment firms must consider climate-related financial risks in their portfolios and operations. To comply with SB-261 requirements, these organizations need robust risk assessment frameworks. From an AI-native platform, Bank of Montreal uses predictive monitoring tools and community-powered data to manage supplier and third-party risk across multiple business units easily.

Energy and utilities

Traditional energy companies face scrutiny across all emissions scopes, while renewable energy companies must ensure accurate reporting of their environmental benefits and any carbon offset claims. Schneider Electric gained control over its procurement, finance, and supply chain operations across 200 global entities by integrating processes onto one total spend management platform.

Why do California’s ESG regulations matter to finance, procurement, and supply chain departments?

California’s ESG regulations are part of a larger global effort to hold corporations accountable for their environmental and social impacts. Investors are closely monitoring these compliance efforts, and companies that fail to adapt to corporate sustainability requirements risk diminishing public confidence, losing market value, and limiting funding opportunities for long-term growth.

The immediate consequences for non-compliance include substantial financial penalties, making cross-departmental coordination essential for meeting these reporting requirements.

Finance: Navigating compliance costs and financial risk

Finance teams now play a central role in assessing and reporting climate-related financial risks under SB-261. This involves:

• Risk assessment: Analyzing potential climate change effects on operations, revenue streams, and long-term financial health
• Cross-functional collaboration: Working closely with procurement and supply chain departments to understand operational and financial risks
• Budget planning: Allocating resources for new reporting systems, data collection processes, external audits, and sustainability initiatives
• Skills development: Building capabilities to quantify climate-related financial risks for regulatory reporting, assess the financial impact of ESG non-compliance penalties, and evaluate how climate factors affect investment portfolios and business valuation

The urgency of these sustainable investment requirements places increasing pressure on finance leaders, who remain at the forefront of ensuring organizational compliance.

Procurement: Finding ways to source more sustainably

Procurement teams must fundamentally reassess sourcing strategies to align with ESG disclosure requirements:

• Supplier selection: Implementing sustainability criteria in bidding events, including emissions reduction standards, eco-friendly materials, and water conservation practices
• Contract integration: Embedding sustainability requirements into supplier agreements from the outset
• Risk monitoring: Conducting routine supplier audits to ensure compliance and identify climate-related risks that could impact operations
• Alternative sourcing: Developing backup supplier relationships to manage climate-related supply chain disruptions

For example, organizations receiving alerts about increased flooding affecting rubber suppliers in South India may need to quickly identify alternative suppliers or document the risk in their climate-related financial reports.

Supply Chain: Enabling sustainable and resilient supply chains

Supply chain departments face complex challenges in meeting these reporting requirements:

• Scope 3 tracking: Collaborating with procurement teams to monitor emissions from transportation, logistics, and suppliers across global networks
• Data collection: Implementing AI-driven tools to collect, process, and analyze emissions data from multiple sources
• Scenario planning: Using modeling technology and digital twins to test climate-related scenarios and adjust logistics, distribution centers, and shipping routes
• Resilience building: Developing strategies to combat climate disruptions like floods, droughts, and extreme weather events

Tracking Scope 3 emissions across global supply chains is complex, requiring sophisticated technology solutions and close departmental coordination.

What cross-functional teams should be involved in ESG compliance planning?

More than 50% of companies say they’re building cross-functional ESG teams to reduce risk and build long-term growth, according to Deloitte’s 2024 Sustainability Action Report. Successful ESG compliance requires coordination across multiple departments beyond the traditional finance, procurement, and supply chain teams:

• Legal and compliance: Ensuring accurate interpretation of regulatory requirements and managing compliance risks across jurisdictions
• IT and data management: Building technology infrastructure to collect, store, and analyze ESG data from multiple sources and systems
• Risk management: Identifying, assessing, and mitigating climate-related risks that could impact business operations and financial performance
• Sustainability and environmental affairs: Providing subject matter expertise on emissions calculations, carbon accounting, and sustainability best practices
• Investor relations and communications: Managing stakeholder communications about ESG performance and ensuring consistent messaging across all disclosure channels
• Operations and manufacturing: Implementing emissions reduction strategies and providing accurate operational data for reporting requirements

Creating dedicated ESG committees or task forces with representatives from these departments ensures comprehensive compliance planning and execution.

What should your organization be doing now to comply with California’s ESG regulations?

These laws are designed to accelerate sustainability initiatives that reduce greenhouse gas emissions and promote transparency in corporate social responsibility projects. Companies lacking visibility and control across their supply chains, supplier networks, and spending activities will find it nearly impossible to meet disclosure requirements.

Many organizations still struggle with disjointed systems and manual processes that create data silos and prevent cross-departmental collaboration. To address these challenges, companies should focus on centralizing operations and data on a unified platform to improve visibility and control over ESG-related activities.

Essential preparation steps include:

Step 1: Unify supplier and spend data

Centralizing supplier and spending data helps companies gain control and visibility over sustainability efforts. With full traceability and auditability of spending and supplier activities, leaders can easily conduct audits and produce required compliance reports. This approach also makes it easier to implement compliance standards and proactively monitor supplier risks throughout the source-to-pay process.

Step 2: Onboard and monitor suppliers

To mitigate risk from the start, include sustainability criteria in sourcing events and contracts. By unifying processes on one platform, companies can better track supplier performance and identify risks before they impact business operations. Look for supplier performance tools that can automatically analyze third-party data across different risk domains to flag high-risk activities.

Step 3: Gain supply chain visibility

From raw materials to final products, companies need to trace each step and account for emissions throughout their supply chains. Supply chain design tools can support visibility and control over entire networks, helping manage energy consumption, reduce waste, and optimize resource use.

Preparing data structures and process workflows now is essential, even if regulations face further delays.

How frequently should data be reviewed to ensure ongoing ESG compliance?

ESG compliance requires continuous monitoring rather than periodic check-ins. Organizations should establish regular review cycles that align with reporting requirements and business operations:

Monthly reviews: Monitor key performance indicators for emissions reduction progress, supplier sustainability metrics, and energy consumption trends. This frequency allows for quick identification of issues and course corrections.

Quarterly assessments: Conduct comprehensive reviews of Scope 1, 2, and 3 emissions data, supplier risk assessments, and climate-related financial risk factors. Quarterly reviews should include cross-functional team meetings to ensure alignment across departments.

Annual audits: Perform thorough audits of all ESG data, reporting processes, and compliance controls. Annual reviews should include third-party verification where required and a comprehensive assessment of climate-related risks and opportunities.

Real-time monitoring: Implement automated systems that provide continuous monitoring of critical ESG metrics, supplier risks, and operational changes that could impact compliance. Real-time alerts enable proactive risk management and immediate response to emerging issues.

Regulatory updates: Review regulatory changes and guidance from CARB and other relevant agencies regularly. As reporting requirements evolve, organizations must adapt their data collection and reporting processes accordingly.

How the Coupa AI-native Total Spend Management platform can help

California’s ESG regulations require comprehensive data management and cross-functional coordination that many organizations struggle to achieve with traditional systems. Coupa’s platform addresses these challenges by providing integrated solutions for ESG compliance and sustainability management.

Microsoft provides an excellent example of how companies can successfully navigate these requirements. The company is on an ambitious mission to be carbon-negative by 2030 while simultaneously opening hundreds of new data centers nationwide — a logistically energy-intensive process since IT hardware requires special packaging and handling.

To balance the competing goals of fostering growth and reducing carbon emissions, Microsoft uses Coupa Supply Chain Design & Planning to test various supply chain scenarios for future inventory positioning, freight consolidation opportunities, and optimized distribution center locations.

By analyzing trade-offs between service reliability, cost, and emissions, Microsoft makes data-driven decisions that support overall business objectives. This approach has enabled Microsoft to slash North American trucking emissions by 60% without compromising delivery speed, and the company is now replicating this success in Europe and other global regions.

Companies of all sizes trust Coupa to drive more sustainable practices. With Coupa’s AI-native Total Spend Management platform, organizations can:

Automate routine operational tasks: Centralize invoice matching, requisition approvals, and other repeatable processes to free staff for complex compliance requirements and strategic sustainability initiatives.

Embed compliance standards: Integrate internal compliance standards directly into workflows for specific regulations like HIPAA, SOX, and California’s ESG requirements to ensure consistent and automatic adherence to legal obligations.

Source with sustainability criteria: Use customizable bidding templates that promote ESG initiatives and incorporate sustainable criteria such as eco-friendly packaging, emissions standards, and social responsibility metrics.

Mitigate supplier risks: Automatically vet and monitor suppliers using AI-driven insights into third- and fourth-tier supplier risks, cross-community data, and user-submitted feedback. Receive real-time alerts about changes to supplier risk status for proactive risk management.

Optimize sustainable supply chains: With end-to-end visibility into operations, make informed supply chain decisions. Test various scenarios using powerful AI tools to balance cost, carbon impact, and service levels while achieving ESG goals.

While uncertainties remain about how California’s regulations will be implemented, these laws clearly signal that mandatory ESG reporting will become mainstream across the nation. Companies should prepare a robust data infrastructure to enable finance, procurement, and supply chain leaders to gain greater visibility, accelerate sustainable decisions, and effectively mitigate risks.

As a company headquartered in California, Coupa is also focused on meeting these new regulations as part of our overall path to net-zero emissions by 2041. Our comprehensive climate strategy ensures we serve as a sustainable supplier for global customers while helping organizations develop their own sustainability programs. Our 2024 ESG Report details how we have significantly reduced emissions and integrated a climate strategy into our business operations.