California has established itself as a global leader in climate disclosure by integrating physical climate risk reporting into its broader regulatory framework through Senate Bill 261 (SB 261), the Climate-Related Financial Risk Act, which was later amended by SB 219. Together, these laws represent a significant step in requiring companies to evaluate and publicly disclose the climate risks that threaten their operations, supply chains, and financial stability.
Under SB 261, any corporation, partnership, limited liability company, or other U.S.-based entity “doing business in California” with annual revenues exceeding $500 million must prepare a climate-related financial risk report. This requirement applies to both in-state and multinational companies, emphasizing California’s role as a standard-setter with influence well beyond its borders. Insurance companies regulated by California’s Department of Insurance are exempt due to their separate climate disclosure obligations.
The scope of required reporting is extensive. Companies must disclose both physical and transition climate risks, following the framework of the Task Force on Climate-related Financial Disclosures (TCFD) or its successor, the International Sustainability Standards Board’s (ISSB) IFRS S2 standard. Physical risks include acute, event-driven hazards, such as hurricanes, floods, and wildfires, as well as chronic, long-term changes like sea level rise, desertification, and prolonged temperature increases. Transition risks, on the other hand, relate to regulatory, technological, and market shifts tied to decarbonization.
Importantly, SB 261 requires not only disclosure of risks but also a discussion of governance, risk management practices, and strategies for adaptation. Companies must explain how their boards and executive leadership oversee climate risks, how these risks are integrated into enterprise risk management, and what actions are being taken to build resilience.
The law requires a reporting cycle every two years. The first reports, which cover fiscal year 2025 data, are due by January 1, 2026. After that, reports must be submitted every two years. They must be available to the public on the company’s website and sent to the California Air Resources Board (CARB). CARB has the authority to appoint a third-party “climate reporting body” to review disclosures, summarize systemic risks, and identify inadequate reports.
Noncompliance carries consequences. Companies that fail to submit reports, or submit reports deemed inadequate, may face administrative penalties of up to $50,000 per year. This enforcement underscores California’s dedication to making climate risk disclosure a regulatory requirement rather than an optional practice.
SB 261, as refined by SB 219, places California at the forefront of climate governance. By requiring systematic, transparent, and forward-looking disclosures of physical and transition climate risks, the state is providing markets, policymakers, and investors with the information needed to make better decisions. In doing so, California is not only safeguarding its economy from climate-related disruptions but also establishing a precedent that could inspire wider adoption of climate risk disclosure standards across the United States and internationally.
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