Understanding California’s Senate Bills 253 and 261. Do you need to report? The answer might surprise you.
California continues to lead the charge in climate legislation with the recent enactment of Senate Bills (SB) 253 and 261. These laws, which are part of the Climate Accountability Package, impose significant new climate-related disclosure requirements on companies doing business in California.
But many companies not based in California are surprised to learn that they are included as a reporting entity because of the broad definition of doing business in California.
For the purposes of these bills, doing business in California generally means engaging in any transaction or activity within the state that generates income. This includes, but is not limited to:
- Having a physical presence, such as an office or store
- Employing workers in California
- Selling goods or services to customers in California
- Holding property in the state
This is the broadest definition of coverage for inclusion in a state policy to date and one that companies will need to stay vigilant about to avoid penalties for noncompliance. A key element of a successful Environmental Justice plan includes effective risk communication.[1]
Overview of SB 253 and SB 261—What are they?
SB 253: Climate Corporate Data Accountability Act (CCDAA)
SB 253 mandates that companies doing business in California and earning over $1 billion in annual revenue must disclose their greenhouse gas (GHG) emissions across scopes 1, 2, and 3 in accordance with the Greenhouse Gas Protocol. Key features of the bill that companies need to be aware of include:
- Companies must calculate and disclose their direct (scope 1), indirect (scope 2) supply chain (scope 3) emissions.
- Scope 1 and 2 emissions reporting will start with disclosure of 2025 emissions. Reporting will be due early in 2026. The California Air Resources Board (CARB) will publish the exact submission deadline soon.
- The first scope 3 reporting year will cover 2026 emissions.
- Scope 1 and 2 emissions require third-party assurance.
- Reporting entities will be required to submit emissions data through a digital platform developed by CARB. This platform will be publicly accessible and searchable.
- Penalties for non-compliance or misstatements are up to $500,000.
SB 261: Climate-Related Financial Risk Act (CRFRA)
SB 261 requires companies to report on climate-related financial risks, their risk assessment process, and their strategies for mitigation. This biennial reporting requirement aims to ensure that businesses are adequately preparing for and addressing the financial implications of climate change. Key features of the bill that companies need to be aware of include:
- Companies doing business in California and earning over $500 million in annual revenue must assess and disclose climate-related risks in accordance with the Task Force on Climate-Related Financial Disclosures (TCFD) framework.
- Risks to be assessed include physical risks (e.g., floods, hurricanes) and transition risks (e.g. policy risk, energy and resource costs, changes in consumer behaviors).
- A scenario analysis approach referencing at least two credible climate scenarios (such as those developed by the International Energy Agency or the Intergovernmental Panel on Climate Change) should be used to assess future uncertainty.
- Measuring corporate emissions (scope 1, scope 2, and, if significant, scope 3) emissions is part of the climate risk assessment process and establishes a link between SB 261 and SB 253.
- Reporting is first due on January 1, 2026, and on a two-year cycle thereafter.
- The penalty for non-compliance is currently set at $50,000.
Two key areas of caution!
After companies have confirmed the applicability of these regulations to their business, they should keep two important aspects in mind:
- If this will be your first time measuring scope 3 emissions, do not wait! Some companies note that the reporting period for scope 3 under SB 253 (covering 2026) is one year later than for scopes 1 and 2. However, this can be misleading; since SB 261 requires a scope 3 measurement if emissions are significant (which is the case for most companies), a calculation would be required for 2025 data. Furthermore, first-year scope 3 emissions can be especially challenging from a data collection and management perspective, and data quality is often lacking. Starting now will enable you to work through data challenges and prepare for a quality submission.
- The scenario analysis portion of climate risk assessment can be complicated and time consuming due in large part to the financial modeling of climate risk impacts. This often catches companies off guard, causing a last-minute scramble and resource crunch. Companies should be aware of this complication and budget time and/or support accordingly.
What should companies do now to prepare?
- Establish a Compliance Team: Form a dedicated team to oversee compliance with SB 253 and SB 261. This team typically includes leadership representation from sustainability, finance, legal, and operations departments.
- Develop Reporting Processes: Implement processes for collecting, verifying, and reporting emissions-data and climate-related financial risks. This will mean establishing a system for relevant data management as well as periodic legislative reviews to stay on top of the upcoming updates to the reporting process, ensuring alignment with the GHG Protocol and TCFD framework.
- Engage Third-Party Verifiers: You will need accredited third-party verifiers to ensure the accuracy and reliability of emissions reports. It is good practice to engage with them to gain early visibility on any assurance related risks.
- Leverage Technology: Consider using digital tools or platforms to streamline data collection and reporting.
- Stay Informed: Systematic scanning of policy updates will be important during the run-up to the first reporting period to ensure you can account for any changes. You might consider engaging with industry groups and consult with sustainability experts to ensure ongoing compliance.
In Summary
California’s SB 253 and SB 261 represent significant advancements in climate-related disclosure requirements, setting a new standard for corporate transparency and accountability. By understanding the scope and requirements of these regulations, businesses can take proactive steps to ensure compliance, mitigate risks, and contribute to a more sustainable future.
If you have any questions or need further assistance in navigating these regulations, please do not hesitate to reach out to our team. We are here to support you! Give us a call. Consider it Done!
[1] The specific legal definition can be found in the California Revenue and Taxation Code, which outlines various criteria for what constitutes doing business in the state. California’s Air and Resource Board (CARB) will provide further guidance in the near future, but the definition is expected to be similar.
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