Even before the SEC’s climate disclosure rule was essentially disavowed by the agency under the new Trump Administration, California’s corporate climate accountability requirements were the most robust in the nation. But as compliance deadlines near, the state regulator in charge of administering the rule has pulled back slightly. Clarity AI’s Tom Willman considers the pros and cons of California’s attempt at giving companies a bit of grace.
For years, California has positioned itself as a trailblazer in US corporate climate accountability, setting a gold standard for emissions reporting in the United States. The Climate Corporate Data Accountability Act (CCDAA), passed in 2023, is a landmark law requiring companies operating in the state to disclose their greenhouse gas (GHG) emissions — an ambitious step toward corporate transparency.
Under the CCDAA, businesses operating in California with annual revenues exceeding $1 billion must start reporting their Scope 1 and Scope 2 emissions in 2026. The law also sets the stage for Scope 3 emissions reporting, which includes supply chain and indirect emissions, though its timeline remains uncertain due to complexity and measurement challenges.
California’s move to enforce climate disclosure at the state level was seen as a bold and necessary step, particularly as federal climate regulations remain uncertain. However, recent developments indicate a more flexible approach to enforcement than initially expected. The California Air Resources Board (CARB), responsible for overseeing compliance, announced in December that while the reporting deadlines for 2026 remain unchanged, it will adopt a more flexible approach by not penalizing companies for incomplete reporting the first year, as long as they demonstrate good-faith efforts to comply.
This grace period, though practical, has sparked debate. Some see it as a reasonable adjustment that acknowledges the real challenges businesses face in implementing new systems. Others worry it could become a loophole that slows momentum, allowing firms to delay full transparency without consequence.
A shift in federal and political winds
California’s decision to soften its initial enforcement stance cannot be seen in isolation: It comes against the backdrop of mounting political resistance to climate disclosure at the federal level.
The SEC had finalized nationwide climate disclosure rules requiring public companies to report their climate-related financial risks and emissions data. But these efforts have faced legal and political pushback. In February, the SEC signaled that it may significantly weaken its climate disclosure rule, reportedly dropping key elements under pressure from business interests and lawmakers opposed to ESG mandates and moved to stop defending the rule in court. The chances of the requirements surviving in any capacity seem slim.
This move leaves state-level policies like California’s as the primary forces driving corporate climate transparency in the absence of strong federal oversight.
This federal retreat highlights the deepening divide in US climate policy. While Republican-led states are actively rolling back ESG requirements, California continues to forge ahead with progressive regulations. For businesses, this creates a fractured regulatory landscape — multinational and national companies must navigate conflicting requirements, balancing state-level compliance with federal uncertainty and political resistance.
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Read moreDetailsThe risks and rewards of CARB’s flexibility
The flexibility announced by CARB has both advantages and potential pitfalls. On one hand, the decision acknowledges the complexity of emissions reporting and allows companies to gradually adapt to the new requirements. Emissions reporting is technically challenging, requiring firms to build internal systems, ensure data accuracy and coordinate across supply chains.
One of the most difficult aspects is reporting Scope 3 emissions, which account for indirect emissions throughout a company’s supply chain. According to a recent Clarity AI research, while nearly 80% of companies in the MSCI ACWI Index — an index representing 85% of the world’s listed market capitalization — have disclosed their Scope 1 and 2 emissions, only 60% report any Scope 3 emissions. Imposing strict enforcement from Day One could lead to rushed, unreliable data — ultimately undermining the quality and credibility of disclosures.
By offering a grace period for enforcement, CARB ensures that businesses can phase in accurate reporting while still moving toward full transparency. This proportionate approach allows companies to avoid immediate penalties while demonstrating their commitment to compliance.
However, there is a significant downside. If companies interpret this leniency as an opportunity to delay compliance, it could lead to material non-reporting, weakening the impact of the law and denying investors critical information that could help them fully take climate risks into account. While CARB has stated that firms must show good-faith efforts, the absence of strict enforcement in 2026 could reduce urgency, leading some businesses to push back their transparency efforts.
Despite these concerns, there is reason to believe that most companies will still comply with the reporting requirements. Many large corporations already disclose their emissions voluntarily as part of their ESG commitments, and the trend toward increased transparency is unlikely to be reversed. Additionally, investor pressure is mounting for companies to provide clear climate-related data, regardless of regulatory mandates. Institutional investors and asset managers continue to prioritize sustainability metrics, recognizing that climate risks translate directly into financial risks.
California’s climate roadmap: A model or a missed opportunity?
CARB’s decision reflects a broader balancing act — one between ambition and pragmatism. While California remains committed to climate transparency, it recognizes the operational challenges businesses face and is adjusting its enforcement accordingly. The key question now is whether companies will use this time to build robust reporting systems — or see it as an opportunity to postpone compliance.
Despite the short-term flexibility, California remains at the forefront of US climate policy. In the long run, corporate climate disclosures are here to stay, regardless of temporary delays or political pushback. Encouragingly, many large corporations are already stepping up, disclosing their emissions voluntarily as part of broader ESG commitments.
This trend toward transparency is unlikely to slow. Investors, consumers and global regulators will continue to demand transparency, and businesses that fail to adapt risk falling behind in a rapidly changing economic and regulatory landscape. While the federal government retreats, California pushes forward, offering a blueprint for other states looking to enforce corporate accountability.
Tom Willman is regulatory lead of Clarity AI, a sustainability technology platform. A member of the Future of Sustainable Data Alliance (FoSDA), Willman is also a former economist at the UK’s Financial Conduct Authority (FCA). 
