- SB 261 requires companies with over $500 million in total annual revenue that do business in California to publish a climate-related financial risk report (Risk Report) by January 1, 2026, and every two years thereafter, detailing their climate-related financial risks and efforts to reduce and adapt to such risks.
- The California Air Resources Board (CARB), the regulatory entity empowered to implement SB 261, has provided additional detail on certain definitions in order to assist companies with compliance.
- CARB will exercise enforcement discretion and assess companies’ good faith efforts to comply with the reporting requirements when determining penalties for noncompliance.
Overview of SB 261
SB 261, California’s Climate-Related Financial Risk Act, was enacted in October 2023 and amended by SB 219 in September 2024. The disclosure requirements enacted under these bills are set forth in Health and Safety Code § 38533.
After the enactment of SB 261, CARB solicited public comments at the end of 2024 (the Information Solicitation), conducted a virtual public workshop in May 2025 (the Public Workshop) and released FAQs in July 2025 (the FAQs). While the information provided by CARB through these channels does not have the force of law, it has provided information to assist companies in preparing for compliance by January 1, 2026.
Covered Companies
During the Public Workshop, CARB proposed potential definitions for “doing business in California” and “total annual revenue” that draw from the state’s Revenue and Taxation Code (the CA RTC). The FAQs reiterate these initial concepts and indicate that CARB would consider a company to be doing business in California if it meets the criteria specified in CA RTC § 23101:
- the company is actively engaging in any transaction for the purpose of financial gain or profit; and
- either the company (i) is organized or domiciled in California, (ii) has in-state sales that exceed $735,019 (2024 dollars), (iii) has in-state real property and tangible personal property greater than $73,502 (2024 dollars) or 25 percent of the company’s total real property and tangible personal property in California, or (iv) pays more than $73,502 (2024 dollars) in compensation in California or 25 percent of the company’s compensation is paid in California.
The FAQs also indicate that CARB would determine total annual revenue by reference to the definition of “Gross receipts” in CA RTC § 25120(f)(2), which means, subject to certain enumerated exceptions, the gross amounts realized in a transaction that produces business income, in which the income, gain, or loss is recognized under the Internal Revenue Code (Title 26 of the U.S. Code).
Reporting Deadlines
The compliance deadline for covered companies to publish financial risk disclosure remains unchanged. Companies must publish their initial Risk Report on their website by January 1, 2026. CARB will open a public docket on December 1, 2025, where reporting companies must post the website links to their initial Risk Reports.
CARB has noted that companies often compile climate risk-related data on a fiscal year basis and processing such data takes time. Therefore, CARB expects the first Risk Report submissions to cover either fiscal year 2023/2024 or 2024/2025, depending on the company. CARB did not provide additional details on how companies should determine which of these two fiscal year periods to cover in their initial Risk Reports, and CARB has noted that it may adjust the covered reporting period. Companies will need to monitor future CARB regulations and guidance to confirm the proper reporting period.
“Climate-Related Financial Risk”
The FAQs clarify that covered companies are only required to identify material climate-related financial risks in their Risk Reports. CARB has also noted that the statute allows companies some flexibility in choosing the most appropriate reporting framework for reporting on their material climate-related financial risks, so long as companies apply the principles of that chosen framework. CARB identified one such framework from the Task Force on Climate-Related Financial Disclosures (which was also mentioned in the text of SB 261), which encourages companies to assess materiality of climate-related financial risks using the same standards employed to determine materiality in financial reports.
Good Faith Compliance Efforts
CARB has discretion when enforcing penalties for noncompliant climate-related reporting.
CARB has indicated that it will evaluate whether companies took good faith measures to comply with SB 261 when assessing penalties for noncompliance. CARB has indicated that it expects companies to submit initial Risk Reports under SB 261 using the best available information from the latest fiscal year for which that data is available. As required by statute, companies must provide a detailed explanation for reporting gaps and describe steps that they will take to prepare complete disclosures.
Next Steps
To prepare for the January 1, 2026, reporting deadline, companies should confirm whether they are covered by SB 261, determine the appropriate reporting framework to use, identify the fiscal years to be covered by the company’s inaugural Risk Report, determine disclosures to be made if the company has not identified material climate-related financial risks, commence drafting of the company’s Risk Report, and post the company’s Risk Report online and weblink to the CARB docket before January 1, 2026.
CARB is also seeking feedback on various aspects of its regulatory framework. Interested parties can submit feedback to CARB via email to climatedisclosure@arb.ca.gov.
Overview of SB 253
CARB is also preparing implementing regulations for California’s greenhouse gas emissions reporting law, SB 253 (for which initial disclosures covering a company’s scope 1 and scope 2 emissions will be required in 2026, on a date to be determined by CARB).
Litigation
There is ongoing litigation challenging SB 261 and SB 253. On July 1, 2025, U.S. District Judge Otis D. Wright II of the Central District of California heard arguments about whether the court should issue a preliminary injunction staying SB 251 and SB 253. Judge Wright II has yet to issue an opinion addressing the arguments from the July 1 hearing. Judge Wright II previously issued a scheduling order for the ongoing litigation, which contemplates a trial start date in October 2026.
Conclusion
We expect that companies of all sizes and across all industries will have questions as they prepare to comply with the requirements of SB 261 and SB 253.
