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 organisations 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, standardise 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 organisations 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 organisation’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 rigourous 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 organisations 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.

Why It Matters

California’s climate disclosure package heralds a new era for corporate sustainability. Thousands of businesses will now have to share their emissions profiles, which will likely lead to significant carbon reductions. The laws ratchet up the pressure on large corporations — the heaviest emitters of greenhouse gases — to decarbonise. Consumers and regulators will be able to readily identify companies that are falling behind and encourage them to take climate action. Moreover, the law will protect investors by exposing entities that are vulnerable to substantial climate-related financial risk. 

In a rapidly changing global landscape, a company’s climate data increasingly affects access to capital. Climate-forward companies stand to benefit from California’s policies. If a business has already been measuring and mitigating its emissions and climate risks, the new reporting framework will allow them to showcase those initiatives. 

Though the bills apply only to entities doing business in California, they reflect a global push for increased transparency in carbon accounting. The state’s laws are part of a wave of climate disclosure laws that include the European Union’s Corporate Sustainability Reporting Directive (CSRD) and pending regulations from the US Securities Exchange Commission (SEC). 

These developments answer a demand from investors to obtain consistent, comparable, reliable information that can help them integrate climate-related financial information into their investment decisions. A growing number of enterprises have made commitments to achieving net zero emissions. Enhanced transparency will enable investors to assess whether companies are greenwashing, or genuinely making progress toward these climate commitments. 

The laws could also help businesses identify value-creation opportunities. Accurate carbon accounting allows companies to gain a deeper understanding of their emissions profiles, as well as quickly identify hotspots such as high-emitting suppliers. In a rapidly changing marketplace, the ability to provide investor-grade climate data can help build trust and secure investments. It can also add a competitive advantage: Consumers are increasingly willing to pay a premium for sustainable brands and change their buying behavior to reduce their carbon footprints.

The new laws make California the first state in the US to require climate transparency at this level — and they will have a ripple effect beyond the state’s borders. California is a major player in global markets and is rapidly moving up the ranks to become the world's fourth-largest economy, overtaking Germany. It has used its market muscle to push for global change before — most notably with its ambitious tailpipe regulations for automakers. 

Enactment of SB 253 and SB 261 represents a pivotal moment for climate action.

How did it happen?

In 2022, a bill similar to the Climate Corporate Data Accountability Act (SB 253) faced a close call in the Assembly, falling short by just one vote, following opposition from powerful interest groups. 

The landscape has shifted since then. Over the past year, the coalition of businesses and advocates supporting the policy ballooned. In 2023, heavy hitters including Microsoft, Apple, Adobe, Patagonia, and IKEA joined forces to endorse SB 253. 

At the same time, the intensity of disasters ravaging California fueled demand for climate action from impatient voters. Against this backdrop, more and more companies began initiating voluntary disclosures, and a growing number of investors began demanding net zero commitments and pushing for increased transparency about climate-related financial risks. 

It's not surprising that Sacramento is leading the charge on corporate climate accountability. In the last decade, California has been hit hard by wildfires, floods, and other climate-related disasters. Without prompt measures to reduce greenhouse gas emissions, the state’s finances, economy, and environment are at grave risk. 

SB 253 and SB 261 set a new standard for corporate transparency, and could ignite similar efforts across the country.

A Comparison to the SEC’s Proposed Climate Disclosure Rules

While California’s SB 253 shares common ground with the SEC’s climate proposal, it extends beyond the federal rule on two critical fronts: the type of emissions reported, and the type of company required to report them. 

The SEC proposal would require all public companies to disclose scope 1 (direct emissions from their owned operations) and scope 2 (indirect emissions from purchasing electricity, steam, heating, and cooling) emissions. Businesses would only report on scope 3 emissions if they have set scope 3 reduction targets or if scope 3 emissions are deemed material. Moreover, smaller companies would not have to report their scope 3 emissions.

California goes further. Its new policy calls for disclosure of all three types of emissions for any US company operating in the state with annual revenue over $1B USD. This is significant, as scope 3 emissions often make up the lion’s share of corporate carbon inventory. 

The other notable difference between the regulations is the type of company involved. While the proposed SEC rule applies only to publicly traded companies, California’s policy targets both public and private entities. This could help drive decarbonisation of the private market and would enable investors to initiate climate action across multi-asset portfolios.

Prepare for GHG Emissions Reporting Under California's New Regulations

The world is rapidly shifting to a low-carbon economy, and California’s climate accountability laws will further speed that transition. 

Businesses can respond by creating an action plan for climate disclosure now. If you’re a large company operating in California, you will need to begin gathering emissions data in 2025 in order to meet reporting requirements in 2026. 

You must now handle your climate data with the same level of care as your financial data, which means you need rigourous internal processes and controls. Persefoni’s carbon accounting platform ensures that your emissions calculations are traceable, transparent, and reliable. We help you efficiently build auditable, investor-grade reports, so you can confidently disclose under California’s new policy — while preparing for future federal and global mandates. 

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Learn more about how Persefoni can help you get ready for reporting under California’s Climate Accountability Package.

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Frequently Asked Questions (FAQs)

Who does CA SB 253 affect?

The law applies to public and private businesses with more than $1B USD in revenue and doing business in California.

What does "doing business" in California mean?

As the law is currently written, this is not yet clear. The definition likely will be spelled out through rules that implement the law. However, for now, some people are looking to the State of California Franchise Tax Board, which defines “doing business in California” as meeting any of the following criteria:

• Engaging in any transaction for the purpose of financial gain within California
• Are organised or commercially domiciled in California
• Your California sales, property, or payroll exceed the following amounts:

• $690,144 in CA sales exceed (either the threshold amount or 25% of total sales) for 2022
• $69,015 in CA real and tangible personal property exceed (either the threshold amount or 25% of total property)
• $69,015 in CA payroll compensation exceeds (either the threshold amount or 25% of total payroll)

To be clear, SB 253 does not explicitly state that this is the definition — the final criteria may include revenue from financial reporting, taxes, or some other source. The California Air Resources Board (CARB) is charged with clarifying this and other details of the law. Based on existing standards, however, it is likely that the bar for “doing business in California” could be quite low. 

It’s not uncommon to pass a law before this level of detail is settled. When the General Data Protection Regulation in Europe was developed, the threshold for which companies would have to be in compliance was developed after the regulation was approved.

When will companies need to start reporting emissions under SB 253?

By 2026, companies will need to adhere to Greenhouse Gas Protocol (GHGP) standards for measuring and reporting scope 1 and 2 emissions based on the prior fiscal year’s data. They will also need to obtain limited third-party assurance for scope 1 and 2 emissions. By 2027, companies will need to adhere to the GHGP standards for measuring and reporting scope 3 emissions based on the prior fiscal year’s data. By 2030, companies will need to obtain reasonable, third-party assurance for their scope 1 and 2 emissions reporting, as well as limited third-party assurance for their scope 3 emissions reporting.

How will the CA SB 253 impact smaller companies?

Companies under $1B USD in revenue will not be directly subject to California SB 253. However, we expect that the inclusion of scope 3 in the law will lead to increased pressure throughout value chains for scope 1 and 2 emissions disclosures, as these help larger companies report on scope 3. Many large companies already report their scope 3 emissions, with minimal reported burden on small businesses. 

What should my company do now to prepare for SB 253?

The bottom line is that companies need to focus on controls and transparency. As we move from a voluntary reporting landscape to a regulated one, emissions data will be treated in a similar manner to financial data — it will need to undergo intense financial and legal internal review, as well as third-party assurance. In this atmosphere, companies need to be confident in their data and they must be able to show their work. Technology that automates carbon accounting is crucial to ensuring that data is transparent, traceable, and reliable.

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