What Companies Need to Know to Ensure Compliance

Relief is not immediately in sight for companies subject to key California greenhouse gas emission laws. A federal court in California recently denied a motion for a preliminary injunction to pause compliance with SB-253, California’s greenhouse gas emissions reporting law, and SB-261, California’s climate-related financial risk disclosure law. As a result, SB-253 and SB-261 remain the only enforceable emissions reporting and climate-related risk disclosure requirements in the United States.

Despite the absence of implementing regulations, large public and private companies that conduct any business in California should prepare now to ensure compliance with SB-253 and SB-261 requirements even if such businesses are located outside of California.

What is SB-253?

SB-253 requires companies with total annual revenues in excess of $1 billion that do business in California to publicly report scope 1, scope 2, and scope 3 greenhouse gas emissions.

Scope 1 emissions are greenhouse gas emissions from operations that are owned or controlled by the reporting company. Scope 2 emissions are emissions from the generation of purchased or acquired electricity, steam, heating or cooling consumed by the reporting company. Scope 3 emissions are indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.

Although the calculation of scope 1 and scope 2 emissions is straightforward, the accurate calculation of scope 3 emissions in accordance with Greenhouse Gas Protocol standards and guidance can be extremely complicated.

What is SB-261?

SB-261 requires companies with total annual revenues in excess of $500 million that do business in California to publicly report climate-related financial risk.

Notably, although California law requires the California Air Resources Board (“CARB”) to adopt implementing regulations, CARB has acknowledged that it will not finalize the regulations until the end of this year. According to an Aug. 7 public notice, CARB staff will hold a virtual workshop Aug. 21 to present a “draft framework for a fee regulation,” and draft definitions to determine covered entities, including for such essential terms as for “revenue,” “doing business in California,” and “parent-subsidiary” relationships. Staff will also provide updates on the regulatory development timeline and discuss “considerations for assurance requirements” under emissions-reporting rules. In addition, staff will “take input on proposed minimum reporting requirements” and “discuss phasing in details for Scope 3 emissions in relation to the largest sectors of emissions.”

However, the regulations will likely not be finalized until shortly before the initial reporting deadline.

What is the underlying litigation?

The U.S. Chamber of Commerce and several other business groups filed a complaint against CARB in January 2024 challenging SB-253 and SB-261. (see Chamber of Commerce of the United States, et al. v. California Air Resources Board, et al. (United States District Court, Central District of California, Case No. 2:24 cv 00801)). As to both SB-253 and SB-261, the complaint alleged violations of the First Amendment, the Supremacy Clause, and the Dormant Commerce Clause. In November 2024, the Court dismissed the plaintiffs’ Supremacy Clause and Dormant Commerce Clause claims. In February 2025, the plaintiffs filed a motion for preliminary injunction based on the remaining First Amendment claim.

Why was the preliminary injunction motion denied?

The Court issued an order denying the plaintiffs’ motion for preliminary injunction because the plaintiffs did not show a likelihood of success on the merits with respect to their First Amendment challenges to SB-253 and SB-261. This ruling, in effect, would appear to be outcome-determinative in the litigation.

To obtain a preliminary injunction, a plaintiff must establish that: (1) they are likely to succeed on the merits; (2) they are likely to suffer irreparable harm absent an injunction; and (3) the balance of equities tips in their favor. The success of a First Amendment challenge often depends on the level of scrutiny the Court applies to the challenged law.

Here, the Court found that SB-261 is subject to intermediate scrutiny because SB-261 concerns non-factual disclosures. Intermediate scrutiny means the government may compel a disclosure of commercial speech only if it directly advances a substantial government interest and the restriction is not more extensive than necessary to serve that interest.

The Court found that SB-253 is subject to a lower standard of scrutiny within this category because, according to the Court, SB-253 requires the disclosure of purely factual and uncontroversial information. Under the lowered scrutiny standard in Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio, 471 U.S. 626 (1985), a required disclosure complies with the First Amendment if it is reasonably related to a substantial government interest.

Government interests in SB-253

The State raised three government interests in support of SB-253: 1) The provision of reliable investor information regarding the impact of climate-related risks; 2) The reduction of greenhouse gas emissions; and 3) The prevention of misleading speech (i.e., the prevention of “greenwashing” or emission reduction pledges that mislead stakeholders about the environmental integrity of a company’s actions).

As to the first government interest, the Court ruled that SB-253 is reasonably related to California’s interest in providing investors with climate related risk information because a large percentage of SB-253’s covered companies are public and most, if not all, of the private companies have California investors. As to the second interest, the Court noted that the State provided sufficient evidence to show that SB-253’s requirements are reasonably related to the State’s interest in reducing emissions. The Court agreed with the plaintiffs as to the third interest.

However, because the Court found SB-253 to be reasonably related to the State’s dual interests of providing investors with reliable information and reducing greenhouse gas emissions, the Court determined that the plaintiffs were unlikely to succeed on the merits in their facial First Amendment challenge to SB-253.

Government interests in SB-261

The State asserted the same three government interests in support of SB-261. As to the first interest, the Court concluded that SB-261 directly advances a substantial government interest in providing investors with climate related risk information. Interestingly, the Court found that the plaintiffs showed a likelihood of success on the merits regarding the State’s emissions reduction and misleading speech claims under the heightened intermediate scrutiny standard. However, because the plaintiffs did not show a likelihood of success on the merits as to the first interest, the Court held that the plaintiffs did not show a likelihood that SB-261’s compelled disclosures violate the First Amendment.

Ultimately, the Court concluded that the plaintiffs did not show a likelihood of success on the merits with respect to either of the facial First Amendment challenges to SB-253 or SB-261. The Court also noted that the plaintiffs did not show irreparable harm by SB-253 or SB-261 based on compelled speech in violation of the First Amendment because the plaintiffs did not demonstrate that the laws violated the First Amendment.

Finally, the Court stated that the balance of equities favored denial of the plaintiffs’ motion for preliminary injunction because their First Amendment claims were unlikely to succeed, and enjoining SB-253 and SB-261 would delay the State from advancing the public interests for which it adopted the laws. Therefore, the Court denied the plaintiffs’ motion for preliminary injunction.

What comes next?

Given the Court’s ruling, businesses subject to SB-253 and SB-261 must comply with disclosure requirements beginning in 2026, unless at best they are given some temporary relief by the still incomplete implementing regulations. Critically, SB-253 requires the disclosure of fiscal year 2025 scope 1 and scope 2 emissions starting in 2026 and fiscal year 2026 scope 3 emissions starting in 2027. Therefore, companies that meet the laws’ total annual revenue requirements and that do any business in California should begin preparing now to comply to ensure compliance.