Unpacking Regulation: SB 261: Climate-related Financial Risk Act

May 20, 2024

While the United States waits for the SEC’s climate disclosure rules to be affirmed, California is moving forward with the Climate-related Financial Risk Act (SB 261). This landmark climate disclosure and financial reporting law will require companies with business in California and a gross revenue of more than $500 million to disclose their climate-related financial risks and methods to reduce and adapt to those risks. This is a lower threshold than its sister law, SB 253, which requires businesses with revenues over $1 billion to report their Scope 1, 2, and 3 greenhouse gas emissions. Therefore, some companies may only be obligated to report under SB 261.

With the passing of SB 261, companies are required to report by January 1, 2026, and biennially file a climate-related financial risk report that includes the following:

Physical and transition risks
Measures to reduce and adapt to identified risks
Strategy priorities and steps to address gaps

Per the ruling, companies should leverage the Task Force on Climate-related Financial Disclosure (TCFD) framework to disclose the reporting requirements for SB 261. However, companies can utilize a different format if it meets the TCFD Recommendations, at a minimum.

As of 2024, TCFD has transitioned to the International Sustainability Standards Board (ISSB), which develops sustainability-related disclosure standards under the International Financial Reporting Standards (IFRS). The ISSB has two global standards - General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and Climate-related Disclosures (IFRS S2). While the four pillars remain the same (i.e., governance, strategy, risk management, and metrics/targets) from TCFD to IFRS S2, the overall disclosure requirements are more detailed in their requests, such as those related to target validation.

To comply with SB 261, companies must do the following:

Publish the climate report on their company’s website and be prepared to provide evidence to the California State Air Resources Board (format to be determined)
Verify greenhouse gas emissions with an independent third-party*
Pay an annual fee to the state board to fund the implementation of the bill

*Companies should consider third-party verification of greenhouse gas emissions if reduction claims are integral to their climate risk mitigation strategy. Note, verification must be completed if the company falls under the requirements for SB 253.

The penalty for non-compliance consists of fines of up to $50,000 in a reporting year. The preliminary timeline is outlined below, and more details are likely to be confirmed next year.

Preliminary Timeline for SB 261* and SB 253

In conclusion, the introduction of California's Climate-related Financial Risk Act (SB 261) marks a significant step towards mandatory climate risk disclosure for qualifying companies. As businesses gear up to comply with the reporting requirements, it is evident that climate-related risk disclosure is becoming an increasingly essential aspect of corporate governance. With the impending deadline for compliance, companies must embrace the evolving standards set forth by ISSB, thereby contributing to a more transparent and sustainable financial landscape. By adhering to the requirements outlined in SB 261, organizations can fulfill regulatory obligations while demonstrating their commitment to environmental stewardship and responsible financial management in an era of heightened climate awareness.