California recently made news with its Climate Corporate Data Accountability Act, which Governor Gavin Newsom signed on October 7th. On the same day, Newsom signed a related bill, Greenhouse Gases: Climate-Related Financial Risk, also known as SB 261. Together, the two bills form the state’s Climate Accountability Package, which positions the Golden State as a climate leader in the U.S. and should prompt similar legislation from other states.
Now, private and public companies that operate in California must prepare for the acts’ requirements. For information on the Climate Corporate Data Accountability Act (SB 253), visit our blog. To learn more about the Climate-Related Financial Risk bill—which requires reporting from 2024 onward—read on.
What Is California’s Climate-Related Financial Risk Bill?
Like climate disclosure rules in many other jurisdictions, SB 261 is driven by the belief that the business sector must understand and prepare for the physical effects and financial impact of climate change. According to the bill:
“Failure of economic actors to adequately plan for and adapt to climate-related risks to their businesses and to the economy will result in significant harm to California, residents, and investors, in particular to financially vulnerable Californians who are employed by, live in communities reliant on, or have invested in or obtained financing from these institutions.”
Companies that fall within the scope of SB 261 are expected to prepare and publish a report disclosing the climate-related financial risks they face and the measures they are deploying to reduce and adapt to those risks. Businesses must make the report available to the public on their website and submit a statement to California’s secretary of state affirming that their report discloses their climate-related financial risks.
Companies subject to the regulation should prepare their reports using the framework and recommendations provided by the Task Force on Climate-related Financial Disclosures (TCFD) in its Final Report of Recommendations.
Which Companies Must Comply with SB 261?
SB 261 sets a lower revenue threshold than SB 253, requiring private and public companies with annual revenues of $500 million or more to report their climate-related financial risks. SB 253 applies to private and public companies with annual revenues of at least $1 billion.
The regulation will apply to organizations formed under California’s laws or the laws of any other U.S. state or the District of Columbia that do business in California, including:
- Limited liability companies
- Other business entities
It does not include businesses that are subject to regulation by California’s Department of Insurance or are in the business of insurance in any other state.
According to legal analysis, the regulation will apply to over 10,000 businesses.
What Is the Timeline for Reporting Under SB 261?
This regulation requires businesses within its scope to begin reporting by December 31, 2024. From then on, risk reports must be submitted annually. Reports must cover both the climate-related financial risks faced by the company and the measures taken to reduce and adapt to these risks.
If a company publishes an inadequate report or does not make its report publicly available on its website, it may face administrative penalties. SB 261 directs the California Air Resources Board to adopt regulations that give it the authority to impose penalties on noncompliant businesses.
Understanding the Impact of Climate Change in California
SB 261 compels companies operating in California to publicly acknowledge the financial risks posed by climate change and explain how they are managing them. Collectively, their reports will provide a more comprehensive look at the economic and social harm that can result if these risks are not quickly addressed.
Naturally, a variety of stakeholders will want to understand the potential overall impact of climate change on California’s business sector. SB 261 requires the state board to appoint a climate reporting organization to annually review a subset of company reports and publish its findings. The review must also include the organization’s analysis of systemic and sector-wide, climate-related financial risks facing the state.
With the reporting requirement for SB 261 kicking in next year, large companies operating in California need to start assessing how the effects of climate change will impact their operations and outlook. And because their reports must be based on the TCFD framework, businesses need to quickly familiarize themselves with its components. They can start by reading our recent blog on Understanding the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).