SB 253 and SB 261: California’s New Climate Disclosure Rules, Explained

October 4, 2023

Corporate climate disclosure is the current focus of legislative bodies around the world. From the US Securities and Exchange Commission’s (SEC) proposed climate disclosure rule to the EU Commission’s Corporate Sustainability Reporting Directive, more companies are becoming subject to mandatory climate reporting.

California, which is both a Democrat state and the US’s largest state economy, recently passed its own stringent environmental disclosure laws. These laws, which would require companies to report their greenhouse gas emissions and climate-related financial risks in detail, have the potential to transform how companies address climate issues. 

Here, we dig into the implications of the state’s new climate legislation.

What is SB 253 and SB 261?

Both the California State Assembly and Senate recently passed two new bills as part of a ‘Climate Accountability Package.’ The first has been dubbed SB 253, the Climate Corporate Data Accountability Act,  while the second is called SB 261, Greenhouse Gases: Climate-Related Financial Risk

SB 253 will require large businesses operating in California to disclose their greenhouse gas emissions. On the other hand, SB 261 asks companies to disclose their material climate-related financial risks. The two bills are the first in the country to require companies to disclose their climate-related information in a standardized and consistent manner.

Which companies are affected?

Companies that do business in California and exceed a total annual revenue of US$1bn will be required to report under SB 253, even if they’re not headquartered in the state. 

Under SB 261, companies with total annual revenue of more than US$500mn that do business in California will be required to comply. For both bills, public and private companies will be impacted.

What will it require?

SB 253 will require large businesses to report their greenhouse gas emissions annually and in line with the Greenhouse Gas Protocol. This includes the mandatory disclosure of both their Scope 1 and Scope 2 (direct) emissions by 2026. By 2027, companies will be required to report on their Scope 3 (indirect) emissions from the previous financial year.

All emissions disclosures will need to be audited by independent, third-party providers.

SB 261 asks companies to prepare a report disclosing their climate-related financial risks and the actions they are taking to reduce and adapt to them. The disclosures must be aligned with the TCFD’s recommendations and made available on the company’s website.

What are the implications for California businesses?

California’s new climate rules represent a major milestone in corporate climate reporting and accountability. 

Both the SEC’s proposed climate disclosure rule and the federal contractor disclosure and target requirement have made headlines due to their national importance. However, both are still waiting to be finalized. This means SB 253 and SB 261 are the first corporate climate disclosure requirements to actually take effect in the country.

Unlike other popular disclosure rules (including the SEC’s), California’s legislation would apply to both private and public companies. With the rules covering nearly all companies doing business within the state, SB 253 would apply to more than 5,300 companies total, while SB 261 would cover over 10,000 companies.

The SB 253 bill is also particularly demanding in scope. Unlike most other climate disclosure requirements, it demands that all companies report their Scope 3 emissions, regardless of materiality. However, the bill acknowledges existing challenges with Scope 3 reporting and would not penalize companies for ‘misstatements … made with a reasonable basis and disclosed in good faith.’

Both SB 253 and SB 261 have also received significant support from the private sector. Microsoft, IKEA, Adobe, Patagonia, Atlassian, and Salesforce have publicized their support for at least one of the bills.

How can companies prepare?

There are a number of actions companies can take to be better prepared for the 2026 reporting deadline shared by both bills. Companies preparing to report under the SEC’s proposed rule will see a lot of overlap as they get their disclosures ready. Most large companies are likely already reporting their climate-related information. But to better prepare for SB 253 and SB 261, it’s worth investing further in data management and reporting processes, as well as working closely with suppliers to ensure Scope 3 data is as comprehensive and accurate as possible.

The Scope 3 requirement should also set off alarm bells for smaller companies that supply larger businesses operating in California. These customers will likely require their suppliers to provide detailed, up-to-date emissions data.

Since SB 261 requires climate risk reporting in line with the TCFD, companies not yet reporting under TCFD guidelines should get started as soon as possible — even before SB 261 comes into effect. For those already reporting against the TCFD, you can ensure you’re prepared for SB 261’s disclosure deadline by conducting a peer benchmarking and disclosure assessment with Manifest Climate. Our software will help you uncover gaps and opportunities in your existing disclosures.

Getting started on your climate journey? Manifest Climate can help.

Manifest Climate is a Climate Risk Planning software that helps companies supercharge their climate strategies. Our platform is the world’s best at assessing climate disclosures. We help to highlight your climate disclosure and management gaps and provide data-driven recommendations for improvement. Our technology also helps your team save up to 75% in manual effort and up to 50% in compliance costs.