How California’s Climate Disclosure Requirements Are Affecting Construction Supply Chains

Sustainability-related risks and opportunities are becoming increasingly central to the financial position of companies in the construction industry. As a result, companies are facing growing expectations from customers, supply chain partners, and regulators to evaluate risks beyond traditional financial metrics and incorporate sustainability considerations into broader risk management and disclosure processes. 

California’s recent Climate Disclosure Laws are one example. These laws, first passed in 2023, require companies doing business in California in excess of $500 million per year to qualitatively assess and publicly disclose climate-related financial risks. Those earning an excess of $1 billion per year are required to disclose quantitative information related to greenhouse gas emissions, with reporting beginning in 2027 for fiscal year 2026 data.   

Even companies that are not directly subject to California’s reporting requirements may feel the effects of these laws. As reporting organizations collect information from suppliers and subcontractors, businesses throughout the value chain may face requests for emissions and climate-related risk data, making it increasingly important to understand and assess sustainability-related risks and opportunities. 

How do these laws impact construction companies? General contractors that meet the threshold for reporting are required to calculate and report out their emissions from a variety of sources. These include direct sources that are controlled or owned by the organization (“Scope 1 emissions”); indirect sources from the purchase of electricity, steam, heat, or cooling as a result of the company’s energy usage (“Scope 2 emissions”); and indirect sources from the company’s upstream and downstream value chain (“Scope 3 emissions”).  

Work performed by subcontractors falls under the general contractor’s upstream value chain. If the subcontractor contributes materially to the overall scope of the organization, the general contractor may request subcontractors provide information related to their own emissions and activity. 

These requests may consist of information related to fuel and energy consumption, equipment usage (whether owned or leased), material purchases, transportation, employee travel, waste treatment and disposal, transportation of employees, and other emissions-related activities.  

Beginning in 2030, companies will be required to obtain independent limited assurance over their emissions disclosures. As a result, suppliers and subcontractors may be asked to provide documented, verifiable support for emissions-related information rather than estimates alone. 

Being able to track, calculate, and report emissions-related information under a consistent, repeatable methodology is key to being able to fulfill these information requests to allow reporting companies to appropriately follow statutory requirements.  

Further, taking steps to understand a company’s existing processes related to the assessment of climate-related risks can better position them to be able to mitigate those risks, identify inefficiencies, and have a more complete understanding of the business environment in which they operate.  To learn more about performing a climate-related financial risk assessment of your business, contact us. 

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