Last week, the California Legislature passed two bills as part of the state’s landmark “Climate Accountability Package.”  If signed by Governor Newsom as anticipated, the two laws—Senate Bill 253 (SB 253) and Senate Bill 261 (SB 261)—will usher in significant climate-related disclosure requirements for thousands of U.S. public and private companies that do business in California.

SB 253 and SB 261 mark the most extensive emissions- and climate-disclosure laws enacted in the United States to date.  SB 253 requires companies with greater than $1 billion in annual revenues to file annual reports publicly disclosing their direct, indirect, and supply chain greenhouse gas (GHG) emissions, verified by an independent and experienced third-party provider.  SB 261 requires companies with $500 million in annual revenues to prepare biennial reports disclosing climate-related financial risk and measures they have adopted to reduce and adapt to that risk, with the first report due by January 1, 2026.

This post focuses on SB 261’s climate-related financial risk disclosure requirements. You can find our post on SB 253’s GHG emissions reporting requirements here.

I. Summary of Key Provisions of SB 261

SB 261, authored by Senator Henry Stern (D­-Ventura and Los Angeles County), is also known as the Climate-Related Financial Risk Act.  The law states that the impacts of climate change, such as wildfires, sea level rise, extreme weather events, and extreme droughts, are affecting California’s communities and economy, and that the “[f]ailure of economic actors to adequately plan for and adapt to climate-related risks to their businesses and to the economy will result in significant harm” to the state, particularly to financially vulnerable residents and communities.

“Covered entities” include entities that, in the prior fiscal year, had total annual revenues larger than $500 million and do business in the state.  Starting on January 2026, and biennially thereafter, covered entities are required to prepare a climate-related financial risk report that discloses (1) their climate-related financial risk in accordance with the recommended framework of the Task Force on Climate-Related Financial Disclosures (TFCD) and (2) measures they have taken to reduce and adapt to the climate-related financial risk disclosed in the report.  Reports that contain a description of an entity’s GHG emissions or voluntary mitigation of those emissions must be verified by an independent third-party.

Covered entities must make their biennial reports publicly available on their websites.  The bill also requires that the California Air Resources Board (CARB) contract with a non-profit climate reporting organization to prepare a biennial public report on the climate-related financial risk disclosures made during that period and identify any inadequate or insufficient reports.  Covered entities that the state board finds to be in violation of SB 261 will be subject to administrative penalties of up to $50,000 in a reporting year.

During an appearance at Climate Week NYC, Governor Newsom told the audience emphatically, “of course I will sign those bills.”  But he also mentioned the need for some “cleanup in language.”  We understand that he may be seeking some technical corrections to enhance the discretion and flexibility for CARB to implement the new law.

II. SB 261 in Broader Context

In a year in which the United States has already experienced 23 separate billion-dollar disasters, including the deadly wildfires in Maui and Hurricane Idalia’s recent landfall in western Florida, SB 261 signals increasing recognition of the importance of understanding climate-related risk and accelerating effective mitigation.  In Executive Order 14030, “Executive Order on Climate-Related Financial Risk” (May 26, 2021), President Biden directed his Administration to develop a climate-related financial risk strategy that would “advance consistent, clear, intelligible, comparable, and accurate disclosure” of climate-related financial risk.  And in its 2023 Climate Change Synthesis Report, the Intergovernmental Panel on Climate Change stresses the importance of action as “climatic and non-climatic” risks become increasingly severe, complex, and difficult to manage.

If signed by Governor Newsom, SB 261 will be the first mandatory climate-related risk disclosure law to go into effect in the United States.  Although there have been two major federal proposals—the Securities and Exchange Commission’s (SEC) proposed climate disclosure rule and a federal proposal to require major government suppliers and contractors to disclose emissions—neither has been finalized.  The California framework would join the European Union Corporate Sustainability Reporting Directive (CSRD), which requires companies to report on material sustainability impacts.  You can find our previous post on these CSRD reporting requirements here.

We highlight five key points below.

1. Public and private companies are covered.  Like its companion bill SB 253, SB 261 applies to corporations, partnerships, and limited liability companies. Insurance companies are exempt from the law, as the California Insurance Commissioner adopted the National Association of Insurance Commissioners climate-related risk reporting standards in April 2022, which align with the TFCD­.  In contrast, the proposed SEC rule would apply only to publicly listed or traded companies.
2. The law will affect thousands of companies.  California law broadly defines “doing business” in the state, with the floor set at $500 million in annual revenues.  The Assembly and Senate Floor Analyses estimate that more than 10,000 companies exceed this threshold.  However, CARB may need to clarify whether the $500 million total annual revenue test is applied (i) on a gross rather than net basis, (ii) with respect to world-wide income, not income generated in California, and (iii) on a consolidated basis for all affiliates of a reporting entity. CARB may also need to clarify whether the California reporting entity reports only for its activities and not those of its world-wide affiliates.
3. Climate-related financial risk is defined broadly.  The bill defines climate-related financial risk to mean “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks…”  The bill provides that such risks include, but are 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 definition is similar, but not identical, to the definition of “climate-related risk” in the SEC’s March 2022 proposed rule.
4. The law anticipates future legislative and regulatory action.  SB 261 anticipates future federal and international requirements.  Covered entities are deemed to satisfy the bill’s disclosure requirements if they prepare a publicly accessible biennial report that includes climate-related financial risk disclosure information in compliance with “a law, regulation, or listing requirement issued by an regulated exchange, national government, or other governmental entity” whose disclosure requirements are consistent with those in SB 261, including the International Financial Reporting Standards Sustainability Disclosure Standards issued by the International Sustainability Standards Board.  This may be an effort to avoid potentially duplicative reporting, including in anticipation of a final SEC rule.
5. Transparency is a central theme of the law.  The bill’s public reporting requirements are designed to not only ensure accountability but also to address potential concerns about unavailable, incomplete, or misleading information regarding climate-related risks by private corporations and entities.  The Senate Floor Analysis emphasizes the importance of transparency, noting that information on climate-related risk “is important to provide more transparency to policy makers, investors, and shareholders” and in turn improve “decision making on where to invest private and public dollars.”

Conclusion

The passage of SB 253 and SB 261 is the latest example of California’s first-mover effect with regard to climate action and disclosure.  While these bills are significant and mark a turning point in private sector reporting and compliance, they should not come as a surprise to businesses operating in the U.S., as they arrive after years of increased scrutiny and deliberate action to improve and standardize voluntary reporting frameworks at the federal, state, and international levels.

Covington’s Climate Mitigation and Carbon Management industry group has extensive experience and capabilities advising on climate and GHG reporting and disclosure frameworks, and is ready to assist entities in navigating this complex and evolving landscape.