California has long been a leader in climate policy in the United States, pushing forward regulations aimed at reducing carbon emissions, increasing transparency, and driving sustainability efforts across industries. In recent years, concerns over climate-related financial risks have intensified, prompting legislators to establish more robust disclosure requirements for businesses operating within the state.

Senate Bill 261: The Climate Related Financial Risk Act (SB 261) is one of two key components of California’s Climate Accountability Package (the other being SB 253: The Climate Corporate Data Accountability Act). SB 261 aims to enhance corporate transparency regarding climate-related financial risks. Signed into law in 2023 and requiring disclosures in 2026, SB 261 follows a broader trend of state and federal policies emphasizing environmental, social, and governance (ESG) disclosures. The bill builds upon existing global frameworks, particularly the recommendations set forth by the Task Force on Climate-related Financial Disclosures (TCFD), to ensure that businesses assess and report their exposure to climate-related risks.

Under SB 261, companies operating in California that generate annual revenues of $500 million or more that do business in California must disclose their climate-related financial risks.

In order to determine whether your company is considered as “doing business in California,” the Bill provides additional guidance to help see if your company meets the thresholds for disclosure.

A company is considered to be doing business in California if it meets any of the following thresholds:

• The company is organized or headquartered in CA;
• The company has sales in CA in a given tax year that exceed the lesser of $690,144 (2022) or 25% of the entity’s total sales (including sales by an agent or independent contractor of the entity);
• The company has real and tangible personal property in CA in a given tax year valued in excess of the less of $69,015 (2022) or 25% of the entity’s total real and tangible personal property;
• The company pays compensation in CA in a given tax year in excess of the lesser of $69,015 (2022) or 25% of the entity’s total compensation paid.

Once you have determined your applicability, the disclosures required under the Bill must align with the framework established by the TCFD, which identifies both risks and opportunities associated with climate change.

The TCFD framework categorizes climate-related risks into two main groups:

• Physical risks: These include acute risks from extreme weather events (e.g., hurricanes, wildfires, floods) and chronic risks such as rising sea levels and long-term temperature changes.
• Transition risks: These encompass risks related to the shift toward a low-carbon economy, including policy and regulatory changes, market shifts, reputational impacts, and technological advancements.

Additionally, the TCFD encourages companies to disclose the opportunities that climate change presents, such as cost savings from energy efficiency, new market growth, and innovation in sustainable products and services.

California’s SB 261 aligns with these guidelines, ensuring that businesses comprehensively assess their exposure to climate risks while identifying strategic opportunities for resilience and adaptation.

As companies prepare for SB 261 compliance, certain details regarding TCFD disclosure thresholds remain unclear. The California Air Resources Board (CARB) is expected to release additional guidance on the exact compliance requirements by July 1, 2025, as mandated by SB 219, an amendment bill introduced in Fall 2024.

For companies that are required to report, the first date of disclosure for SB 261 reports will be January 1, 2026.

Achieving compliance with SB 261 requires businesses to develop robust climate risk assessment processes and reporting mechanisms. This is where our expert consultants at CEMAsys can play a critical role in helping companies navigate these new regulations efficiently.

CEMAsys provides a suite of sustainability and climate risk management solutions designed to help companies comply with California’s SB 261 disclosure requirements:

• Assess gaps in existing climate risk disclosures to identify material information needed for the SB 261 reports.
• Conduct climate risk assessments closely aligned with TCFD recommendations, covering both physical and transition risks.
• Develop climate risk disclosures that meet California’s regulatory standards, ensuring transparency and investor confidence.
• Create and implement scenario analyses to evaluate the financial impact of various climate-related risks.
• Support public disclosure and reporting compliance to ensure alignment with CARB’s forthcoming guidelines and the SB 261 January 1, 2026 deadline.
• Integrate sustainability strategies that transform regulatory compliance into long-term business value, enhancing resilience to climate-related risks and strengthening overall risk management.

By leveraging CEMAsys’ expertise in climate disclosure and sustainability reporting, businesses can ensure compliance with SB 261 while strengthening their resilience in an evolving regulatory landscape in time for the January 1, 2026 disclosure date.

With companies now working toward SB 261 compliance, companies must act quickly to establish reporting frameworks that align with the state’s new disclosure requirements. By adopting best practices in climate-related financial risk assessment and leveraging solutions like those offered by CEMAsys, businesses can not only comply with regulations but also position themselves as leaders in sustainable corporate governance and risk management.