In October 2023, the state of California passed two climate-related bills into law: the Climate Corporate Data Accountability Act (CCDAA, SB 253) and the Climate-Related Financial Risk Act (CRFRA, SB 261). Together, these new legislative actions impose much more significant climate disclosure obligations on companies doing business in California, starting as early as 2026. While SB 253 mandates the disclosure of GHG emissions aligned with the GHG Protocol, SB 261 focuses on climate-related financial risks.
What does SB 261 require?
The bill requires companies that fall within its scope to prepare a climate-related financial risk report once every two years.
Crucially, it calls for the report to be created in alignment with the recommendations set forth by the Task Force for Climate-Related Financial Disclosures (TCFD), published in 2017. The TCFD recommendations are the foremost standard for climate-related financial disclosures and have been utilized and recognized by frameworks and governments around the world. They are structured around four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management, and metrics and targets around climate-related risks and opportunities.
In short, under SB 261, the climate-related financial risk report should:
- disclose the company’s climate-related financial risk, in alignment with the TCFD’s recommendations
- disclose measures adopted to reduce and adapt to that risk
- explain any reporting gaps and describe plans to address them
- be publicly available on the company’s website
SB 261 also requires the state board to issue administrative penalties to companies that fail to make their disclosures publicly available or that publish insufficient data.
Lastly, reporting companies are required to pay an annual fee to cover the state board’s implementation of the bill.
What companies fall within the bill’s scope?
Mandatory reporters include any U.S. corporation or business entity that does business in California and whose total annual revenues exceed US$500 million. For subsidiaries, reports may be consolidated at the parent company level. Several thousand companies are expected to fall within the bill’s scope.
SB 261 specifically excludes entities that are in the business of insurance (or are subject to regulation by the Department of Insurance).
What is SB 261’s timeline for implementation?
Reports are due to be publicly available by January 1, 2026. Following this, updated reports should be published biennially.
Latest updates to SB 261
Fewer than four months after it was passed, the California Climate Accountability Package has faced legal challenges. In January 2024, a number of groups—the U.S. Chamber of Commerce, the California Chamber of Commerce, the American Farm Bureau Federation, business federations from L.A. County and Central Valley, and the Western Growers Association—filed a lawsuit against the California Air Resources Board in federal court, seeking to block and overturn both SB 253 and SB 261. The lawsuit alleges that the bills violate the First Amendment, are unconstitutional, attempt to extend the state’s reach beyond its legal jurisdiction, and force companies to incur unreasonable costs to comply.
With California now seeking to have the lawsuit dismissed, one of the bills’ primary sponsors, Senator Scott Wiener, responded in a press release, calling the challenge “climate denial” and an attempt to “block basic transparency for the public.” The case is set to be considered in June 2024.
Despite legal challenges to the bill, companies should still take steps to meet the requirements laid down in SB 261 and SB 253. Other climate-related legislation—both in the U.S. and abroad—are set to come into effect over the next several years. This, in addition to a growing number of investors asking for and incorporating ESG information into their decision-making, should be an indication to companies around the world that climate disclosures—in some capacity—are here to stay.
ADEC ESG supports global companies as they work towards their sustainability goals and rise to meet ever-growing ESG reporting requirements. From frameworks like CDP and EcoVadis to regulatory mandates like the CSRD, the SEC’s climate rule, and SB 253 and SB 261, our experts provide our clients with an integrated perspective informed by in-depth ESG reporting and disclosure experience. Talk to our team today to find out how we can help you meet your ESG goals.
