As organizations look to meet their sustainability targets, they face a rapidly evolving regulatory landscape. California’s climate disclosure laws could reshape corporate reporting standards, with ripple effects across the United States.

With compliance requirements shifting and coming into effect soon, complying with these rules can be challenging as they place new demands on finance teams. However, these requirements present an opportunity to gather better information, make smarter business decisions, and create value from sustainability. 

A quick recap of the legislation

In October 2023, the California state legislature passed two climate bills into law, introducing new climate-related disclosure requirements for large companies operating in the state. These laws require large companies to assess and publicly report their climate-related financial risks (SB 261) and greenhouse gas emissions (SB 253). Subsequent legislation has been passed that clarifies the first two laws (SB 219).  This legislative effort is the strictest US corporate climate transparency mandate to date and will take effect soon.

In this article, we’ll break down the basics of California’s climate disclosure laws, who they affect, and what companies need to know to prepare.

Which organizations does this legislation affect?

SB 253 applies to U.S.-based entities that conduct business in California and have annual revenue exceeding $1 billion. SB 219 allows subsidiaries to combine their SB 253 reports with their parent companies. 

SB 261 applies to U.S.-based entities that conduct business in California and have over $500 million in annual revenue. Notably, insurance companies are excluded from this law since they already have climate reporting requirements. 

The California Air Resources Board (CARB) has not yet released its regulations for reporting under SB 261 and SB 253 and does not expect to do so until 2026. However, CARB has recommended that companies refer to the definition of “doing business in California” outlined in the California Revenue & Taxation Code Section 23101 to assess if they’re covered under the laws. Companies are defined as “doing business in California” if the company:

• Is organized or has its main office in this state.
• Engages in transactions for financial gain within the state.
• Has California sales exceeding $735,019 (for 2024).
• Owns real or tangible personal property in California exceeding $73,502 (for 2024). 
• Pays employee wages in California exceeding $73,502 (for 2024).

What reporting is required?

1. Greenhouse Gas Emissions Reporting (SB 253)

SB 253 will require affected entities to prepare an annual report disclosing Scope 1 and 2 greenhouse gas emissions and obtain third-party verification of the inventory starting in 2026. Scope 3 emissions disclosures will be required in addition to Scope 1 and 2 beginning in 2027. 

CARB has not yet set a deadline for the 2026 report. However, CARB stated in its July 9th FAQ that it will allow companies to “submit Scope 1 and Scope 2 emissions from the reporting entity’s prior fiscal year that can be determined from information the reporting entity already possesses or is already collecting at the time the [December 2024 Enforcement] Notice was issued.” 

In other words, companies may submit Scope 1 and 2 emissions from their prior fiscal year. This exception only applies if the reporting company already had the data or was collecting it when the December 2024 Enforcement notice was issued.

2. Climate- Related Financial Risk Disclosures (SB 261)

SB 261 requires affected entities to prepare a biennial report disclosing climate-related financial risks, the first of which must be made available no later than January 1, 2026. The report must be aligned with the Task Force on Climate-Related Financial Disclosures’ (TCFD) or an equivalent standard. Data is typically collected on a fiscal year basis and typically takes time to process.  As a result, CARB states that initial climate-related financial risk reports submitted by January 1, 2026, may cover either fiscal years 2023/2024 or FY 2024/2025.¹

SB 261 defines climate-related financial risk as “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.” This law allows but does not require the disclosure of information that falls outside of this definition. 

TCFD guidance states “organizations should determine materiality for climate-related issues consistent with how they determine the materiality of other information included in their financial filings.” Ultimately, the TCFD emphasizes that disclosures should be specific, complete, and provide sufficient information to enable users to understand the impact of climate-related issues on an organization’s business.

Next steps: preparing for approaching deadlines

These climate disclosure laws represent a global shift towards addressing climate change by increasing corporate responsibility and transparency. Organizations that meet reporting criteria must act quickly to prepare for approaching deadlines. Partnering with a sustainability consultancy like Verdis Group can help ensure compliance with these laws while gaining valuable insights into climate-related risks that could impact your business operations and financial performance. 

Verdis Group has the expertise and guidance to collaborate with your organization in assessing risks, calculating scope emissions, and creating a comprehensive report. In short, we can shepherd your team through the process to lighten their workload and ensure that you are compliant. To start your path to a resilient future today, contact info@verdisgroup.com, and learn more about our ESG services.

Resources: 

1. California Air Resources Board: California Corporate Greenhouse Gas Reporting and Climate-Related Financial Risk Disclosure Programs: Frequently Asked Questions Related to Regulatory Development and Initial Reports
2. California Legislative Information: Senate Bill No. 261
3. California Legislative Information: Senate Bill No. 219
4. California Legislative Information: Senate Bill No. 253
5. California Air Resources Board: CARB Virtual Public Workshop on SB 253, SB 261, and SB 219
6. California Air Resources Board: The Climate Corporate Data Accountability Act

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By Megan Belongia and Cheyenne Storms

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