California's Climate-Related Financial Risk Act, also known as Senate Bill 261 (SB 261), is a groundbreaking piece of legislation to enhance corporate transparency and accountability regarding climate-related financial risks.
Signed into law in October 2023, SB 261 requires certain businesses operating in California to disclose their climate-related financial risks and the measures they're taking to address them.
What is California’s Climate-Related Financial Risk Act (SB 261)?
SB 261 is a state law that mandates large companies doing business in California to prepare and publicly disclose biennial reports on their climate-related financial risks. This act is part of California's broader efforts to combat climate change and promote sustainable business practices.
How does SB 261 work?
Under SB 261, covered entities must prepare a climate-related financial risk report every two years. These reports must be made publicly available on the company's website and should follow the recommended framework of the Task Force on Climate-Related Financial Disclosures (TCFD).
The California Air Resources Board (CARB) will contract with a non-profit climate reporting organization to review these reports and prepare a public analysis of the disclosures. This analysis will identify any inadequate or insufficient reports and provide insights into systemic and sector-wide climate-related financial risks facing the state.
What are the requirements of SB 261?
The key requirements of SB 261 include:
- Disclosure of climate-related financial risks in accordance with TCFD recommendations.
- Reporting on measures adopted to reduce and adapt to identified climate-related financial risks.
- Making the report publicly available on the company's website.
- Submitting a statement to the Secretary of State affirming that the report discloses climate-related financial risk.
When does SB 261 become mandatory?
SB 261 becomes mandatory on January 1, 2026. Covered entities must prepare and submit their first climate-related financial risk report by this date. Subsequent reports will be required bi-annually.
Who needs to comply with SB 261?
SB 261 applies to corporations, partnerships, and limited liability companies formed under the laws of any state, the District of Columbia, or the United States that:
- Do business in California
- Have total annual revenues exceeding $500 million USD
This threshold is lower than that of SB 253 (which applies to companies with revenues over $1 billion), meaning SB 261 will affect a larger number of businesses. It's estimated that over 10,000 companies may be subject to this regulation.
Why should you care about SB 261?
SB 261 is significant for several reasons:
- It sets a precedent for mandatory climate risk disclosure, which could influence similar regulations in other states or at the federal level.
- It helps investors, consumers, and policymakers make more informed decisions by providing transparency on companies' climate-related risks and strategies.
- It encourages businesses to proactively address climate risks, potentially leading to more resilient and sustainable business models.
- Non-compliance can result in penalties of up to $50,000 per reporting year.
How can Arbor help you with SB 261?
At Arbor, we understand the complexities of climate-related financial risk reporting and are here to support your compliance with SB 261. Our expertise in sustainability and carbon footprint calculation can help you:
- Assess your climate-related financial risks comprehensively
- Measure your carbon footprint with globally recognized standards
- Prepare TCFD-aligned reports that meet SB 261 requirements
- Implement systems for ongoing monitoring and reporting of climate risks
Our team of experts can guide you through the entire process, ensuring your reports are not only compliant but also provide valuable insights for your business strategy.
Summary
California's Climate-Related Financial Risk Act (SB 261) is a pioneering law requiring large companies operating in California to disclose their climate-related financial risks biennially. Starting January 1, 2026, businesses with annual revenues over $500 million must prepare and publicly share reports aligned with TCFD recommendations. This legislation aims to enhance transparency, promote sustainable business practices, and help stakeholders make informed decisions. With potential penalties for non-compliance, affected companies must start preparing now.
Another pressing law in California that businesses must look out for is SB 253 - California’s Climate Corporate Data Accountability Act.
Are you ready to navigate the complexities of SB 261 and turn climate risk disclosure into a strategic advantage?
Request a demo from Arbor today to learn how we can support your compliance journey and help you build a more resilient, sustainable business.
See a summary of both California SB 253 and SB 261.
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