How Will California’s Sustainability Disclosure Laws Influence The SEC Plans: FEI Weekly Podcast

by FEI Weekly Podcast

Persefoni's Kristina Wyatt discusses how California's new carbon disclosure laws could reshape coming federal rules.

In this episode of the podcast, we speak with Kristina Wyatt, Deputy General Counsel and Chief Sustainability Officer for Carbon and Climate Reporting Platform for Persefoni, about the new Califronia sustainbility reporting rules and how they could enhance or conflict with the SEC proposals
An edited transcript of the discussion is below.
Chris Westfall: I know there's a lot of conversations going on in the corporate finance and accounting, and where the regulators are going, and what investors are expecting as far as new rules around disclosure around sustainability, but I want to always like to start these conversations by level setting and going, maybe you could describe a little bit of your background. You have both a legal and regulatory background, but maybe you could describe a little bit on how you got to Persefoni today.

Wyatt: My background is as a securities lawyer, as a transactional lawyer, I spent many years at Latham & Watkins, the second-largest law firm in the world, doing transactional work. And, at some point, I started to work in sustainability, went back to school, got an MBA in sustainability, and pivoted my focus to sustainability in a fashion that included both the firm's internal sustainability program, it's pro bono program, and the commercial practice, and really helping to build an ESG practice there. And along the way, I came to know Allison Herren Lee, who became the acting chair of the SEC when President Biden was elected. And she asked me to come over to the SEC to work on climate and ESG disclosure issues. And, of course, I very happily agreed to do that.

I took a one-year assignment at the SEC and worked on the climate proposal that is currently pending. And, during that time, I came to appreciate the emerging role and the importance of technology in helping companies to be able to measure and manage their greenhouse gas emissions. And this is so critical to companies being able to address these large swaths of data that they're going to be reporting, but also to enhancing the reliability of that data for investor purposes.
So, when I left the SEC, I went to Persefoni, which is where I am now, and we're a carbon accounting software company. We help companies to measure and manage their greenhouse gas emissions. So, that's where I am now, and I am Deputy General Counsel and Chief Sustainability Officer, so I do wear both of those hats.

Westfall: Great. I want to start off with something that's on the top of all our members' minds, especially those that are in public companies, and they're waiting on the SEC's proposal on climate disclosure. And what are your thoughts about that? But also, I understand that California just passed some new rules around climate emissions. Maybe we'll start off with, could you give us some broad ideas or concepts that are in the California law, and what they mean for ESG?

Wyatt: There are actually three laws that passed and that Governor Newsom signed, I guess, bills that Governor Newsom signed into law that relate to climate disclosures. And this all happened last month in October of 2023. The first one is California SB 253, and that's a bill that would require companies that are U.S.-based entities, that do business in California and have a billion dollars in revenue, to report their Scopes 1, 2, and 3 greenhouse gas emissions, and to get assurance over those disclosures.
The second one is SB 261, and this one, for people who are somewhat familiar with the broader climate reporting landscape around the world, looks quite a bit like the Task Force on Climate-Related Financial Disclosure, so the TCFD, it asks companies to disclose their climate-related risks and how they're addressing those risks, which is really what the TCFD was designed to do.
And then the third bill, AB 1305, regulates businesses that market or sell voluntary carbon offsets in California, as well as any entities that purchase or use voluntary carbon offsets that are sold within the state. And so that's a bill that will require companies to provide information to their stakeholders about their use of carbon offsets, the source of the offsets, et cetera.

Westfall: Was there anything in the bills that have been implemented, or are being implemented now, that was sort of a surprise to you? Or was the industry expecting a lot of what came out of the California laws?

Wyatt: I think a lot of people were a little bit surprised, just by the fact of the bills and that they passed. I think so much of the focus has been on the SEC, and perhaps on the rest of the world, the CSRD. So I think that there was perhaps a bit of surprise just at the fact that California jumped ahead and adopted these regulations.
I think so much focus has been on the SEC and the climate disclosure proposals that are pending there, as well as the CSRD out of Europe and its implementing regulations, and the ISSB, the International Sustainability Standards Board and the standards that it's been developing. And I just think that a lot of people didn't have their eye on California quite as much as other jurisdictions, and so, that seems to be the sentiment that I've heard, is just a bit of surprise that California has taken this leadership role.

Westfall: And just from my own experience, I know there was one thing that a lot of public companies and corporates are fond of is surprises, but given that it is what it is, maybe, thinking about it, California is the largest economy of any U.S. state, and really is one of the largest economies in the world. Given that they've adopted and are inputting these new rules, what's the knock-on effect for companies that aren't necessarily located in California, just around these requirements?

Wyatt: I think the new laws will have broad effect. And just thinking about their coverage, they're not limited to companies based in California. So they apply to U.S. entities that are doing business in California. So, the coverage is quite broad. The estimates that I've seen with regard to the number of companies that will be subject to SB 253, the first of those bills, the one that would require companies to disclose their Scopes 1, 2, and 3 emissions, is that there will be some 5,400 companies that are subject to that law. So it has quite a broad impact.
I think that the laws will, to some extent, help solidify the direction of travel that we're seeing regulators and standard setters around the world taking in their climate disclosure requirements, as well as the direction of travel that we're seeing companies taking in their voluntary disclosures. And the reason that I say that is that, when you look at SB 253 and SB 261, they really do track, with the disclosure requirements, that underpin, the SEC proposal, and the CSRD in Europe, and the ISSB standards, meaning that they follow the Greenhouse Gas Protocol, which is the framework for thinking about how you measure your greenhouse gas emissions that define Scopes 1, 2, and 3 emissions, and then the TCFD, the Task Force on Climate-Related Financial Disclosures, which I mentioned earlier.

Westfall: And that's what I want to get to a little bit too, is reconciling what California has done with what, I guess, the rest of the market is considering that the SEC might do. And that's been going on for a while. So, obviously, our members concern about [inaudible 00:11:41] new disclosure measures. And given that California has already adopted new climate disclosure rules before federal rules can set off alarm bells. How do you, I guess, counsel companies about their worry over the overlapping rules confusion? Or do you think that's not on the table at this point?

Wyatt: No, we hear a lot about concern that companies that are subject to regulation in different jurisdictions might have different reporting obligations. And I think that once the SEC rule comes out and we start to have greater clarity as to what the overall landscape looks like, that will help to alleviate some of those concerns.
One of the things that I think is quite helpful is this harmonization that we're seeing in the broad reporting landscape. And to step back for a second, where we've come from is really a fragmented world of what used to be called sort of the alphabet soup of ESG reporting standards. And now, there's quite significant harmonization around the Greenhouse Gas Protocols, which defines how you measure your greenhouse gas emissions and the Task Force on Climate-Related Financial Disclosures, the TCFD, which helps companies to build frameworks to think about how climate risk manifests as financial risk and how they think about their governance, and their strategy, and their risk management, and the metrics that they set to address that climate-related financial risk. And the harmonization that we're seeing is quite helpful, I think.
So all of these different reporting requirements that are coming down the path, including the CSRD out of Europe, and the ISSB standards, the SEC proposal of California, they all do go back to those core frameworks, the Greenhouse Gas Protocol and the TCFD, which is I think quite helpful.
Now, there are differences certainly in scope of coverage and what the specific reporting requirements will be, and that's where I think people are concerned about just figuring out what they're going to have to do in different jurisdictions. And I think that once we have the final rules from the SEC, that will help quite a bit. But for now, having that common direction of travel, I think, is quite useful, and we certainly advise companies to look to the Greenhouse Gas Protocol and the TCFD as those anchor frameworks that all of these different reporting requirements are going to be looking to.

Westfall: And it's good to have that sort of harmonization. But I wanted to ask you, is there any aspect of reporting requirements between California and what's expected from the U.S.? I mean, I guess the various reporting requirements, whatever jurisdiction they're in, that you think will require the most work in harmonizing going forward? I know there's been a lot of work done on carbon reporting requirements, but is there something within the disclosures you think really should be a focus in the near future?

Wyatt: I think it's helpful for companies to really focus on the different sustainability disclosure requirements that are coming down the pike. And when you think about climate, it's rather easier to focus on the harmonization, because that's an area where we really do have a pretty clear direction of travel, and that's partly simply because the ISSB, the International Sustainability Standards Board, and the SEC started with climate, and so we have greater guidance there.
And that's where we can look to the Greenhouse Gas Protocol and the TCFD to help guide how we think about disclosures and how we think about readiness. There are other reporting standards that are emerging, certainly out of Europe and the ISSB, that relate to other sustainability issues, and those relate to other environmental issues, nature, human capital, supply chain, human rights, deforestation, water use, a whole array of different topics. And so, I think that those still really need to emerge. We have some guidance from Europe in the CSRD and the ESRS, the European Sustainability Reporting Standards, that implement the CSRD, that start to give a sense for how those other topics will be regulated. But I think there's still more to come in that realm.

Westfall: I wanted to ask you, obviously, sustainability is a topic not only in corporate finance, but in the political sphere as well, and that has knock-on effects within capital markets. How do you counsel the people you speak with about dealing with the sort of clamor and, I guess, political angst around sustainability and how it's being discussed in the market, to what actually needs to be done? I mean, how do you, I guess, turn down the rhetoric and focus on the task at hand when it comes to sustainability?

Wyatt: These are hard issues, for sure. I'm not going to try to minimize the impact of the anti-ESG rhetoric, but what I tell people when they ask for my opinion on this is to really try to focus on the financial impacts of the climate risks and opportunities that they face. And so, if you can anchor your analysis and your planning back to the financial risks and the financial opportunities, then you're sort of meeting those challengers at the point where it's sort of incontrovertible. We're not tree huggers. Some of us really care about the environment, others really don't care about the environment and just are concerned about the bottom line. But that point where climate manifests as financial risk and opportunity is a point of intersection where everybody ought to be able to agree that these are issues that we need to be addressing and we need to be addressing in a serious way that helps to protect our financial institutions, helps to protect investors in the U.S. and global capital markets, and ultimately, can help to bolster the financial stability of the global markets.

Westfall: Those are important points. I just always try to understand, given the changes in the political landscape, the impact on the market. There's another aspect to this, and that's something that actually Persefoni and our researcher foundation worked on, which is a new paper that we're going to be issuing, talking about the talent issues that repairs are dealing with when it comes to reporting sustainability measures. There's a wider accounting talent issue going on, but having the skills needed to report sustainability is a particular need right now. What do you see are the biggest challenges when it comes to filling the ESG talent gap?

Wyatt: I think that the biggest challenges have to do with just the fact that so much of this is new and emerging. And so, I think we're all learning, and the world is changing. And so, there are specific skills and knowledge that people are going to need to be able to address the challenges that ESG issues present, and those are going to evolve. So, people will learn the things that they need to learn in order to address these issues.
But, in the short term, that there is this talent gap, we have challenges that we need to address, and we don't necessarily have people who have been working in this space for years and years, because these are emerging issues. So, more than specific skills, I think that what we're seeing is that there's a need for leaders and those in the trenches to cultivate certain characteristics to be able to address the changes that we're seeing. And these characteristics include an ability to operate in a world that has some inherent uncertainty, and an ability to embrace change, an innovative mindset, an ability to distill the really vast array of issues that are out there and focus on what's really meaningful for your company, as always, sort of a learning mindset, and, I think, importantly, also, an ability to find opportunities in the change that we're facing. So it's not all about additional costs and compliance burdens, but how do we find opportunities that we can capitalize on?