California SB 261: Climate Risk Disclosure for Corporate Accountability

State governments are increasing corporate climate risk disclosure requirements, and California is leading the way. Senate Bill 261 (SB 261), also known as the Climate-Related Financial Risk Act, introduces new obligations for organizations to report on the financial risks they face due to climate change.

What is SB 261?

SB 261, signed into law in October 2023, requires specified organizations to disclose climate-related financial risks every two years. It is part of California’s Climate Accountability Package, alongside SB 253, which mandates reporting of greenhouse gas (GHG) emissions. These laws create a dual-reporting system that holds corporations accountable for their emissions and financial exposure to climate change.

Specifically, organizations must analyze and disclose the financial impacts of climate change on their operations, supply chains, and long-term strategy. Reports must provide a detailed assessment of risks and mitigation strategies, including:

• Physical risks such as extreme weather events, droughts, and wildfires
• Transition risks such as changing regulations
• Governance structures, including how boards oversee climate risks
• Risk assessment and financial planning measures to mitigate exposure

SB 261: Who Needs to Comply?

SB 261 applies to corporations, partnerships, limited liability companies, and other business entities operating in California that meet the following criteria:

• Annual revenue of at least $500 million
• A business presence in California

An organization does not need to be headquartered in California to be covered by SB 261. Any business generating significant revenue from California-based activities must comply, even if its operations are primarily based elsewhere. This broad applicability means thousands of organizations across multiple industries must assess and disclose their climate-related financial risks.

SB 261 Exempt Entities

Certain entities are exempt from SB 261’s reporting requirements. These exempt entities include:

• Insurance companies that are covered under separate climate risk disclosure regulations set by the National Association of Insurance Commissioners (NAIC)
• Foreign organizations without a US subsidiary, unless they operate through a domestic entity that meets the revenue and business presence criteria

Although organizations with revenues below the $500 million threshold are not directly regulated by SB 261, many will face indirect pressure to disclose climate risks if they are part of a larger company’s supply chain. As covered entities work to comply, they may require climate risk assessments from suppliers and partners, increasing expectations for climate-related financial transparency across industries.

How is SB 261 Different from SB 253?

SB 253, or the Climate Corporate Data Accountability Act, requires large organizations to report their GHG emissions. It applies to businesses operating in California and with at least $1 billion in annual revenue.

While the two differ, SB 253 and SB 261 create a dual reporting system in California. SB 253 tracks emissions, while SB 261 tracks financial exposure to climate risks. Many organizations must comply with both, which requires integrating emissions tracking with broader climate risk assessments.

SB 261 Compliance Timeline

SB 261 introduces a biennial reporting requirement for specified organizations operating in California. The first round of Climate-Related Financial Risk Reports is due in 2026, based on fiscal year 2025 data.

This timeline allows time for businesses to develop internal processes, data collection frameworks, and risk assessment methodologies before the first reporting deadline. The second reporting cycle will then begin in 2028.

SB 261 Enforcement & Penalties

Organizations that fail to comply with SB 261 may face financial penalties and legal enforcement actions. The California Air Resources Board (CARB) is responsible for monitoring compliance, and the California Attorney General has the authority to take legal action against non-compliant entities.

• Fines of up to $50,000 per year may be imposed for missing, incomplete, or misleading reports. These penalties apply to organizations that fail to submit their required Climate-Related Financial Risk Reports or provide insufficient disclosures.
• Potential legal action can be pursued by the California Attorney General against organizations that fail to meet reporting obligations, misrepresent climate risk information, or attempt to bypass compliance requirements.

While SB 261’s penalties are lower than those for SB 253 (which imposes fines of up to $500,000 per year for GHG reporting failures), enforcement actions could still result in significant reputational damage, regulatory scrutiny, and legal costs for non-compliant businesses. Organizations should take proactive steps to ensure their climate risk reports are comprehensive, accurate, and aligned with global disclosure frameworks.

SB 261 Compliance Challenges & Risks

While SB 261 establishes a clear climate risk disclosure framework, businesses face several challenges and uncertainties in preparing for compliance. Ongoing legal challenges, changing regulations, and supply chain pressures all contribute to difficulties in implementing a robust compliance process.

Legal Challenges

SB 261 is facing legal opposition from business groups, including the US Chamber of Commerce, which argue that the law compels speech in violation of the First Amendment. These groups contend that forcing companies to disclose climate-related financial risks infringes on corporate free speech rights.

The outcome of these legal challenges remains uncertain, but organizations should proceed with compliance preparations while litigation is ongoing. Even if the law is modified or delayed, the growing trend toward mandatory climate risk disclosure suggests that similar regulations will emerge at both state and federal levels soon.

Supply Chain Impacts

Although SB 261 only applies to organizations with revenues exceeding $500,000, its effects will extend downstream to smaller businesses within corporate supply chains. Large organizations required to disclose climate-related financial risks may begin demanding risk data from suppliers to strengthen their reporting accuracy.

This could result in contractual climate disclosure requirements for smaller firms, even though they are not directly regulated under SB 261. Suppliers that fail to provide climate risk assessments may risk losing contracts with larger companies that are striving to meet compliance obligations.