The California Air Resources Board (CARB), the primary regulatory body tasked with architecting and enforcing the state’s pioneering corporate climate transparency laws, has unveiled a revised proposal for Scope 3 emissions reporting. In a move that balances rigorous environmental oversight with the practical realities of corporate data management, the regulator announced it would initially limit mandatory Scope 3 disclosures to five key value chain categories. This decision follows an extensive period of consultation during which numerous multinational corporations expressed significant concerns regarding the administrative costs, technical complexity, and lack of standardized data availability inherent in full value chain reporting.
The updated framework was introduced during a public workshop aimed at refining the implementation of Senate Bill 253 (SB 253), also known as the Climate Corporate Data Accountability Act. Beyond the Scope 3 revisions, CARB provided critical updates on third-party assurance requirements and the inclusion of the insurance sector, signaling a maturing regulatory environment that aims to harmonize California’s mandates with global sustainability standards. As California represents the world’s fifth-largest economy, these regulations are expected to set a de facto national standard for climate disclosure in the United States, particularly as federal efforts face ongoing legal and political hurdles.
The Evolution of SB 253 and the Scope 3 Compromise
The Climate Corporate Data Accountability Act, signed into law by Governor Gavin Newsom in October 2023, applies to all United States-based partnerships, corporations, limited liability companies, and other business entities with total annual revenues exceeding $1 billion that "do business" in California. The law mandates the disclosure of greenhouse gas (GHG) emissions across three scopes: Scope 1 (direct emissions from owned or controlled sources), Scope 2 (indirect emissions from the generation of purchased energy), and Scope 3 (all other indirect emissions that occur in the value chain, including both upstream and downstream activities).
While Scope 1 and 2 emissions are generally considered manageable for corporate accounting, Scope 3 has long been the "final frontier" of climate reporting. For many companies, especially those in retail, manufacturing, and technology, Scope 3 emissions can account for more than 90% of their total carbon footprint. However, calculating these emissions requires gathering data from thousands of suppliers and predicting consumer behavior, leading to concerns about "double counting" and data unreliability.
Initially, CARB explored a "Broad Applicability" model that would have required companies to report on all 15 categories defined by the Greenhouse Gas Protocol Corporate Value Chain Standard. However, after synthesizing feedback from stakeholders, the regulator pivoted to a "Category Phase-In" approach. Under the new proposal, mandatory reporting beginning in 2027 will be restricted to the following five categories:
- Purchased Goods and Services: Emissions from the production of all products and services purchased or acquired by the reporting company.
- Fuel and Energy Related Activities: Emissions related to the production of fuels and energy purchased and consumed by the reporting company that are not already included in Scope 1 or Scope 2.
- Waste Generated During Operations: Emissions from the third-party disposal and treatment of waste that is generated by the reporting company’s owned or controlled operations.
- Business Travel: Emissions from the transportation of employees for business-related activities in vehicles owned or operated by third parties.
- Employee Commuting: Emissions from the transportation of employees between their homes and their worksites.
CARB officials noted that these five categories were selected because they are among the most frequently reported by companies currently engaging in voluntary disclosures. Furthermore, these categories benefit from more mature quantification methodologies and established data sources compared to more abstract categories like "franchises" or "investments." Companies will still be permitted—and encouraged—to report on the remaining ten categories voluntarily as they develop more robust internal tracking systems.
Strengthening Data Integrity through Assurance Standards
A cornerstone of the new CARB proposal is the requirement for third-party verification, known as "assurance." To ensure that the reported data is accurate and not merely a "greenwashing" exercise, SB 253 requires companies to have their emissions disclosures audited by independent, qualified providers.
During the recent workshop, CARB clarified the timeline and standards for this process. Starting in 2027, companies must obtain "limited assurance" for their Scope 1 and Scope 2 emissions reports. Limited assurance is a standard of review that provides a moderate level of confidence, where the auditor states that they are not aware of any material modifications that should be made to the report. This is a common starting point for sustainability reporting before moving toward "reasonable assurance," which is the higher level of scrutiny applied to traditional financial audits.
CARB has identified five internationally recognized standards that auditors must follow to satisfy the regulation:
- AA1000AS v3: The AccountAbility Principles and Assurance Standard.
- AICPA AT-C Section 210: The standard used by the American Institute of Certified Public Accountants.
- ISO 14064-3:2019: The International Organization for Standardization’s framework for GHG statement validation and verification.
- ISAE 3410 & 3000: International Standards on Assurance Engagements, specifically for GHG statements.
- ISSA 5000: The upcoming International Standard on Sustainability Assurance 5000, which will be the mandatory standard for engagements beginning after December 15, 2026.
By aligning with these global frameworks, CARB aims to reduce the compliance burden for multinational firms that may already be preparing similar reports for the European Union’s Corporate Sustainability Reporting Directive (CSRD) or the International Sustainability Standards Board (ISSB) frameworks.
Inclusion of the Insurance Sector
One of the more technical updates provided by CARB involves the treatment of insurance companies. Under the original text of SB 253, there was a provision intended to prevent duplicative reporting for insurers who already submit climate-related data to the California Department of Insurance (CDI).
However, after a thorough review, CARB determined that the current CDI reporting requirements are insufficient to meet the rigorous standards set by SB 253. Specifically, the CDI disclosures do not currently mandate Scope 3 reporting or require the same level of third-party assurance. Consequently, CARB has proposed that insurance companies must comply with SB 253 requirements starting in 2027.
Insurers will have two pathways for compliance: they can either produce a single comprehensive report that satisfies both CDI and CARB standards, or they can submit a supplemental report to CARB that fills the gaps in their CDI filing. This inclusion is significant, as the insurance industry faces unique climate risks both in their underwriting portfolios and their massive investment holdings, often referred to as "financed emissions."
Timeline and Implementation Deadlines
The implementation of California’s climate reporting suite has been a moving target, as regulators work to finalize the "rulemaking" process. CARB recently announced a shift in the deadline for the very first round of reports. While the initial expectation was an August deadline, the first mandatory disclosures for Scope 1 and Scope 2 emissions are now slated for November 10, 2026 (based on 2025 data).
The chronological roadmap for compliance currently looks as follows:
- 2025: Companies begin tracking Scope 1 and Scope 2 emissions data.
- November 2026: First reports for Scope 1 and Scope 2 emissions are due to the state.
- 2027: Scope 3 reporting begins (initially limited to the 5 proposed categories).
- 2027: Mandatory limited assurance for Scope 1 and Scope 2 reports goes into effect.
- 2027: Insurance companies begin full compliance with SB 253 standards.
- 2030: Transition from limited assurance to reasonable assurance (as per the original legislative intent of SB 253, though specific CARB rules on this transition are still being refined).
Stakeholder Reactions and Market Analysis
The reaction to CARB’s proposed narrowing of Scope 3 has been mixed. Industry groups, such as the California Chamber of Commerce, have generally welcomed the move as a pragmatic step toward feasibility. Business advocates have long argued that a "big bang" approach to Scope 3 would lead to inaccurate data and excessive legal liability for companies relying on third-party information they cannot control.
Conversely, environmental advocacy groups and some institutional investors have expressed concern that by omitting categories like "Use of Sold Products" (Category 11) and "Investments" (Category 15), the regulator is missing the most significant sources of emissions for the fossil fuel and financial sectors. However, many climate tech experts argue that the five selected categories represent a solid foundation. By standardizing the "easy" categories first, the state builds the infrastructure necessary for more complex disclosures later this decade.
From a market perspective, the CARB proposal reinforces the trend of "regulatory gravity." Even if the U.S. Securities and Exchange Commission (SEC) continues to face delays with its own climate disclosure rule—which notably omitted Scope 3 in its final version—California’s law ensures that any large company doing business in the Golden State must prepare for Scope 3 anyway. This effectively bypasses federal gridlock, forcing the majority of the Fortune 500 to adopt sophisticated carbon accounting practices.
Broader Implications for Global Corporate Strategy
CARB’s proposal represents a significant milestone in the global shift toward mandatory ESG (Environmental, Social, and Governance) transparency. By providing a clear list of categories and accepted assurance standards, California is providing a template for other U.S. states. Oregon and New York are already considering similar "copycat" legislation, which would further solidify these requirements.
For corporations, the message from CARB is clear: climate reporting is no longer a voluntary marketing exercise but a core financial and compliance function. The focus on assurance standards highlights that "the era of estimation is ending and the era of auditing is beginning." Companies will need to invest heavily in "carbon ERP" (Enterprise Resource Planning) systems to track emissions with the same rigor they apply to their balance sheets.
CARB has scheduled a series of "listening sessions" throughout August and September to gather further stakeholder input before finalizing these rules. As the comment period opens, the business community and environmentalists alike will be watching closely to see if this "5-category compromise" becomes the final law of the land in America’s most influential state economy.
