California’s Climate Risk Disclosure Law (SB 261) Is Just Around the Corner. Is Your Company Compliance Ready? 

As 2024 comes to a close, companies across the U.S. who conduct business in California are gearing up for the climate-related financial risk disclosures required under Senate Bill 261 (SB 261), passed in 2023 and reinforced with the amendments provided in SB 219.  

This landmark legislation positions California as a leader in addressing the economic implications of climate change by mandating qualifying companies to publicly report their exposure to climate-related financial risks and the strategies they employ to mitigate them. With the new year on the horizon, understanding who must comply, when to act, and what data to collect is critical for ensuring compliance and aligning with California’s push for transparency and accountability in the face of environmental challenges. 

Who Must Comply?  

SB 261 applies to public and private companies, including financial institutions, that conduct business in California1 with gross revenues over $500 million in the preceding fiscal year. The law’s reach is expansive, covering not just companies directly involved in environmental sectors, but those across industries like banking and real estate, which might face significant financial risks from climate change. While insurance companies are considered to be exempt from SB 261, the National Association of Insurance Commissioners adopted a standard for insurance companies to also report their climate-related risks in alignment with the Task Force on Climate-Related Financial Disclosures (TCFD). For covered subsidiaries, if the parent company also qualifies, then the parent company disclosure satisfies the requirement for both.   

It is estimated that 10,000 companies will be affected by this regulation. This means that organizations operating in California need to start thinking about how climate change may affect their financial health. Failure to comply may result in financial penalties of up to $50,000 USD per year.  

When Does Compliance Begin?  

Companies need to act soon. The law requires the first climate-related risk disclosures be published on or before January 1, 2026, with biennial updates thereafter. This first deadline provides only a limited window to prepare, making early action critical for meeting the stringent requirements. Companies should begin developing a plan, identifying relevant internal stakeholders, identifying where external expert support will be needed, and building internal systems to assess and manage climate risks. 

What Data Must Be Collected?  

The heart of SB 261 lies in its demand for clear, actionable climate-related disclosures in alignment with the internationally recognized TCFD framework. As such, companies must report the following: 

1. Climate-Related Financial Risks 

Companies must identify material risks to their operations, assets, and value chains associated with climate change, and disclose the potential financial impacts of the identified risks, over the short-, medium- and long-term. These risks are divided into two categories: 

• Physical Risks: Risks associated with events such as extreme weather, wildfires, floods, and droughts. 
• Transition Risks: Economic risks stemming from the global societal shift to low-carbon technologies and regulatory environments. 

Companies will also need to perform scenario analysis to determine how risks and impacts are expected to develop under different future climate states. The scenario analysis should include a low carbon scenario, such as a 2° Celsius or lower warming trajectory.  

2. Governance

Companies must describe the role of their board of directors and senior management in overseeing climate-related risks and opportunities. This includes outlining how these risks are identified, assessed, and managed at various levels of the organization. 

3. Risk Management and Adaptation 

Companies need to demonstrate how climate-related risks are addressed in broader business planning and strategy. This may include strategies like transitioning to renewable energy sources, reinforcing supply chain resilience, and adopting energy-efficient technologies. 

4. Metrics and Targets 

Companies must disclose the key metrics used to measure and manage climate-related risks and opportunities and describe any relevant climate-related targets (e.g., emissions reduction targets).   

Important Note on Greenhouse Gas Emissions Reporting:  

Senate Bill 253, passed along with SB 261 in October 2023, establishes reporting standards for GHG emissions. Scope 1, 2 and 3 emissions are part of the TCFD’s recommended disclosures, and entities may need to calculate them to fully understand their climate risks. Scope 3 emissions—those resulting from indirect activities such as supply chain operations—can be challenging to measure but are critical for comprehensive risk assessment.  

Senate Bill 253 will be covered in a future blog, so stay tuned! 

Why Does This Matter?  

As climate change accelerates, the financial risks tied to it become more significant. SB 261 seeks to ensure that businesses remain transparent and accountable for their actions, providing investors and stakeholders with the information they need to make informed decisions. The regulation also encourages businesses to take proactive steps in managing climate-related risks, helping mitigate potential long-term financial losses. By requiring companies to address these risks now, California is setting a nation-wide precedent for climate action that is inspiring similar measures in other states and regions such as Illinois, New York, and Washington. 

For businesses subject to SB 261, compliance will require careful planning, data gathering, and risk assessment. However, those who act now can not only meet the regulatory requirements but also position themselves as leaders in climate responsibility. 

Ready to get Started?  

Discover how Antea Group can assist you with comprehensive climate-related risk assessment and disclosure preparation. Learn more about our Climate-Related Risk Assessment services.  

FOOTNOTE: 

1 The State of California defines “doing business” if you meet any of the following: 

• Engaging in any transaction for the purpose of financial gain within California;  
• Are organized or commercially domiciled in California; or  
• The company’s California sales, property, or payroll exceed certain thresholds.