California is forging a path for climate disclosure with its series of related legal frameworks requiring covered entities to disclose climate-related information, supporting documentation for certain net zero claims and financial risk frameworks.
In October 2023, California became the first state to enact such broad climate disclosure legislation, with the passage of the:
- Climate-Related Financial Risk Act (SB 261),
- Climate Corporate Data Accountability Act (SB 253), and
- California’s Voluntary Carbon Market Disclosures Act (AB 1305).
Entities covered by these three programs generally include those that do business in the state of California and either (1) make certain climate related claims about the business, its products, etc.; (2) market and/or purchase certain voluntary carbon offsets; and/or (3) meet certain monetary thresholds (for purposes of SB 253 and SB 261).
With compliance deadlines already in place or approaching quickly, implementation has been challenging for industry. The California Air Resources Board (CARB) is responsible for promulgating regulations associated with the three statutory programs, but has yet to do so. AB 1305 has already gone into effect, with its first deadline occurring as of January 1, 2025. SB 253 and SB 261 have deadlines starting in 2026. Like AB 1305, SB 261’s climate-related financial risk disclosure requirement does not depend on CARB completing its rulemaking prior to when the first reports are due on January 1, 2026. However, SB 253 differs from the other two in that no reporting obligations are imposed without CARB’s adoption of implementing regulations. Regulated entities needs to be prepared to comply while remaining flexible given pending publication of regulations in December.
To assist, this three part series provides a high-level guide on the three programs, including the applicability, the program’s coverage, steps for compliance, timing and other miscellaneous information based on current regulatory guidance. Here we focus on disclosure under California’s Climate-Related Financial Risks Act, SB 261, which has an initial compliance deadline of January 1, 2026.
California Section 261; Cal. Health & Safety Code § 38553
(Climate-Related Financial Risk)
- What – SB 261 requires certain covered entities doing business in the state to provide biennial disclosures of climate-related financial risk. Once a covered entity falls within the scope of the program, the entity must generate a climate-related financial risk report. Climate-related financial risk is very broadly defined as including “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand and financial markets and economic health.” § 38533(a)(2).
- Who – A covered entity falls within the scope of the program if it does business in California, and has global revenues exceeding US$500 million. Following its initial public workshop, CARB issued preliminary guidance indicating the agency will adopt the definition of “does business in California” found in the California Revenue and Tax Code section 23101, which encompasses almost any entity that “engag[es] in any transaction for the purpose of financial or pecuniary gain or profit.” However, CARB is considering shifting its definition of revenue to include “the total global amount of money or sales a company receives from its business activities, such as selling products or providing services.” While the climate-related financial risk reports “may be consolidated at the parent company level,” the statute does not require that. It merely provides an option to avoid breaking out subsidiaries separately, if desired by a reporting parent. CARB has published a preliminary list of potentially covered entities that may be subject to SB 261 and SB 253.
- Timing – The first report must be submitted on or before January 1, 2026, and then updated biennially thereafter. § 38533(b)(1)(A).
- How – Covered entities must publicly post their climate risk reports online by January 1, 2026. CARB intends to post a public docket on December 1, 2025, for entities to post the public link to their climate-related financial risk reports. The docket will remain open until July 1, 2026. The disclosures must follow the framework developed by the Task Force on Climate-related Financial Disclosures (TCFD), the International Sustainability Standards Board’s (ISSB) Climate-Related Disclosures Standard or a comparable voluntary reporting framework. CARB has released both a checklist and Q&A document to assist with preparing the required financial risk disclosures.
- Fees – Covered entities must pay annual fees to CARB for program implementation. § 8533(c)(2)(A). Per CARB’s August webinar, CARB currently estimates annual fees will be US$1,403 for SB 261.
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Questions about the Climate Corporate Data Accountability Act (SB 253) requirements? Check out Part 2 of our series here.
