While it is not too late to comply, companies should begin addressing their reporting requirements as soon as possible to meet early 2026 deadlines.
The legal framework
California’s climate disclosure regime contains two principal regulations: the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261). These rules require companies to disclose data about greenhouse gas emissions and assess and report financial risks linked to climate change.
Who must comply?
Both US and non-US companies must comply if they “do business in California” and meet specified revenue thresholds. For SB 253, any public or private company operating in California with over $1 billion in annual revenue – regardless of where they are headquartered – must annually report their greenhouse gas emissions. On the other hand, SB 261 applies to entities with revenue above $500 million, requiring biennial climate-risk disclosures. Importantly, the definition of “doing business” will most likely be aligned with state tax codes, meaning even out-of-state and non-US companies will be involved if they generate significant sales, own assets, or pay wages in California.
What do companies report?
Under SB 253, companies must disclose greenhouse gas emissions annually across three categories:
- Scope 1: Direct emissions from owned or controlled sources.
- Scope 2: Indirect emissions from purchased electricity or energy.
- Scope 3: All other indirect emissions from the supply chain, travel, waste, etc.
Scope 3 reporting is particularly challenging due to its reliance on supply-chain data; therefore, disclosure is phased into two segments. Reporting Scope 1 and 2 emissions will be required beginning in 2026 (by June 30), followed by Scope 3 in 2027.
SB 261 requires large companies to publish climate-related financial-risk reports every two years. These reports must follow the Task Force on Climate-Related Financial Disclosures (“TCFD”) or the International Sustainability Standards Board (“ISSB”) framework, detailing risks, opportunities, and mitigation measures. The first reports must be completed and made public by January 1, 2026.
Timelines and enforcement
Both SB 253 and SB 261 take effect in 2026. Penalties for non-compliance are significant: $500,000 per year under SB 253 and $50,000 per year under SB 261. Notably, SB 253 includes safe harbour provisions for inaccuracies in Scope 3 reporting made in “good faith.”
Impacts and opportunities
California’s climate disclosure rules are estimated to affect 5,400 companies within the scope of SB 253; even more companies are within the scope of SB 261. This will potentially influence national and global standards, given California’s economic influence. For companies, compliance may mean investing in new data systems and auditing processes, as well as developing robust reporting strategies. While this is a challenge, it also offers an opportunity: firms can use this mandate to find inefficiencies, manage risks, and demonstrate their climate leadership credentials for investors and consumers.
Preparing for compliance
Businesses subject to these rules should start now. This means:
- Finding out whether the company meets the revenue threshold for each regulation.
- Establishing systems and/or the right tool to measure and report all required greenhouse gas emissions.
- Assessing climate-related financial risks and aligning disclosures with TCFD or equivalent frameworks.
- Preparing board and executive stakeholders for disclosure and potential auditing.
Looking ahead
The California climate disclosure rules redefine expectations for corporate transparency, risk management, and sustainability impact. Regardless of where a company is headquartered, operating in California means navigating one of the world’s newest climate policy landscapes. By acting early, companies can position themselves not only for compliance but also to use climate data to create value.
Please contact Holtara to learn more and see how we can help.
