California SB 253 and SB 261: What Businesses Need to Know

Where California goes, the world follows. The state is home to one of the world’s largest economies, and it has a history of driving national and global change. Two new climate laws follow this trend: In 2023, the state passed The Climate Corporate Data Accountability Act (SB 253) and The Climate-Related Financial Risk Act (SB 261), in light of a growing recognition of the urgency to address the physical, human, and financial risks associated with climate change.

Thousands of organizations that do business in California will now have to provide assurance-ready carbon emissions data — including reporting on scope 3 emissions from up and down their value chains. 

Businesses are already implementing changes to meet the demands of emerging regulations: A recent survey showed that a significant majority of corporate leaders say they are prepared for climate disclosure rules — and more than half said they see climate change as a risk to their business. California’s new laws cement the shift from voluntary climate reporting to mandatory reporting, further raising the bar for corporate climate action. Corporate leaders who develop strong climate reporting capabilities with audit-ready carbon accounting will be best positioned to meet these California requirements -- as well as similar regulations emerging around the globe.

What Happened: California’s Climate Accountability Package

In October 2023, California Governor Gavin Newsom signed SB 253 and SB 261 into law. The bills were first introduced in January 2023 by a group of lawmakers seeking to enhance transparency, standardize disclosures, and provide stakeholders and consumers with transparent and credible climate information. The Climate Corporate Data Accountability Act (SB 253) passed the state Assembly in September in a 49-20 vote. 

While they’re similar to proposed federal climate disclosure regulations put forward by the SEC, California’s laws differ on several fronts.

Here’s what you need to know about the two policies:

SB 253: The Climate Corporate Data Accountability Act

Passage of the Climate Corporate Data Accountability Act represents a crucial milestone in the establishment of mandatory emissions reporting regulations. The law requires large public and private US-based organizations that do business in California to disclose their greenhouse gas emissions in accordance with the GHG Protocol. The policy applies to US-based partnerships, corporations, limited liability companies, and other entities with operations in California and annual gross revenue of more than $1B USD — an estimated 5,400 companies. 

Under the law, impacted companies will need to report their full carbon inventories, including scope 3 emissions. This is pivotal, as scope 3 emissions often account for more than 90% of an organization’s climate impact and are notoriously difficult to measure. 

The Climate Corporate Data Accountability Act stipulates that companies will have to submit emissions calculations to a digital reporting platform, and they must make disclosures easily comprehensible to residents, investors, and other stakeholders. Notably, they will also be required to hire independent auditors to verify their reported emissions — making rigorous data collection absolutely critical. 

The California Air Resources Board will oversee reporting and ensure verification of data by a registry or third-party auditor with expertise in carbon accounting. Companies that fail to comply with the new regulations could be subject to civil penalties from the state’s attorney general. 

Enterprises will need to report on their 2025 direct emissions starting in 2026 and their 2026 indirect scope 3 emissions starting in 2027.

SB 261: The Climate-Related Financial Risk Act

The Climate-Related Financial Risk Act requires large businesses to prepare and submit a biannual climate-related financial risk report, publicly disclosing their climate-related financial risks and the measures they’re taking to mitigate these risks.

The bill applies to any US corporation or business entity with annual revenue over $500M USD doing business in California — a lower threshold than SB 253. Affected organizations will need to provide a climate-related financial risk report detailing the physical and transition threats they face as a result of climate change, as well as the measures they’re taking to mitigate and adapt to those risks. 

Submissions will be reviewed by the Climate-Related Risk Disclosure Advisory Group, which will identify inadequate reports, as well as propose additional policy changes and best practices for disclosure.

According to its sponsors, SB 261 is modeled after existing climate disclosure rules used by the state’s teachers’ retirement fund (CALSTRS) and hundreds of major financial institutions. It aims to safeguard consumers and investors from losses resulting from climate-related disruptions to supply chains, workforces, and infrastructure, which are increasing due to the effects of climate change.

The bill also addresses the financial risks businesses could face if they are unprepared for the transition toward a low-carbon economy. For instance, automobile manufacturers who fail to prepare for the shift towards electric vehicles will likely experience a decline in market share, resulting in revenue losses.

Now that Governor Newsom has signed SB 261 into law, the initial round of climate risk disclosure reports will be due by January 1, 2026.