As the market anticipates the Securities and Exchange Commission’s (SEC’s) final climate disclosure rule, companies operating in California will soon have to prepare for climate reporting regardless of the SEC’s decision. The recent enactment of two landmark Senate bills in California — SB 253 and SB 261 — have transformed the climate reporting landscape in the U.S., affecting thousands of private and public companies operating within the state. These changes emphasize the urgency for companies to review and align their existing carbon emission measurements and sustainability reports with these new requirements. Companies that have yet to prepare, particularly private companies not subject to the SEC’s proposed climate disclosure rule, will be remiss to neglect the implications of this important development.
SB 253, effective from 2026, mandates companies with an annual revenue of $1 billion or more and operating in California to submit annual emissions disclosure reports. These reports will encompass emissions from direct operations (Scope 1); indirect emissions from purchased energy (Scope 2); and indirect upstream and downstream value chain emissions, including purchased goods, services and travel (Scope 3). The requirement for independent verification of these emissions, to be conducted by a third-party designated by the California Air Resources Board, adds an extra layer of rigor to the process. Notably, the inclusion of Scope 3 emissions means that small and midsize businesses within larger companies’ value chains will be obligated to collect and report data even if they do not meet the $1 billion revenue threshold.
In the first year of reporting, the initial emphasis will be on reporting scopes 1 and 2 emissions, expanding to Scope 3 emissions by 2027. Between 2027 and 2030, companies can find some relief via a safe harbor clause for errors in Scope 3 emissions if disclosures are made on a reasonable basis and disclosed in good faith.
SB 261, effective from 2026, demands covered entities (businesses with total annual revenues of $500 million or more) operating in California to develop a climate-related financial risk report. These reports must align with a global framework developed by the Task Force on Climate-related Financial Disclosures (TCFD), which covers four core elements: governance, strategy, risk management, and metrics and target. In particular, the governance and strategy disclosure requirements will require board and senior management input. This piece of legislation underpins the importance of transparency in climate-related financial risks not only for compliance but also for enhancing investors’ and other stakeholders’ confidence in the long-term sustainability of businesses.
Businesses need to consider the scope and differences between the California acts and the proposed SEC rule:
For companies with a presence in both the state of California and the European Union (EU), another major development is the enactment of the Corporate Sustainability Reporting Directive (CSRD), which is a comprehensive sustainability reporting requirement that applies to EU companies and EU subsidiaries of non-EU companies that meet two of the following three thresholds: at least €25 million in total assets, at least €50 million in net turnover and more than 250 employees. The CSRD encompasses not only climate but also other environmental, social and governance aspects, such as workforce and governance risks. It also requires that companies assess double materiality — financial (to the business) and impact (to society at large).
The passages of SB 253 and SB 261 represent a significant shift in climate reporting requirements for U.S. and global businesses with operations in California. Compliance with these new laws is not just a regulatory necessity but a strategic imperative, as businesses must integrate them into their operations.
Crucially, these steps are not just about compliance; they are also about positioning your business as a proactive, responsible entity in the face of climate change and climate-related risk. For larger businesses directly impacted by these regulations, getting ahead will show investors and stakeholders your commitment to long-term sustainable value creation. For smaller businesses indirectly impacted because of where you are within the value chain of large businesses, readiness will be rewarded by a competitive advantage over ill-prepared companies that do not have the measurement and reporting infrastructure required by larger businesses.
