California is often the vanguard of climate-related policies and programs. From legislation requiring the state to reduce overall greenhouse gas (GHG) emissions and procure electricity from renewable and carbon-free sources to the Cap-and-Trade Program and Low Carbon Fuel Standard, businesses operating in California must constantly stay informed of the shifting regulatory landscape.
In 2023, California enacted two laws continuing this trend. Senate Bill (SB) 253, known as the Climate Corporate Data Accountability Act, is the first law in the United States to require businesses to disclose their GHG emissions in an annual report submitted to the California Air Resources Board (CARB). SB 261, known as the Climate-Related Financial Risk Act, requires businesses to assess and report every two years to CARB on how climate-related financial risks may impact their market position, operations, and supply chains. In 2024, SB 219 amended both SB 253 and SB 261 to clarify reporting requirements and extend certain deadlines.
SB 253 requires businesses to begin reporting emissions data in 2026, while SB 261’s climate-related financial risk reports are due on January 1, 2026. If they haven’t already, covered businesses should begin preparing now. This article summarizes SB 253’s and SB 261’s reporting requirements, processes, and penalties for noncompliance. It also provides an update on litigation challenging both laws in federal court and steps taken by CARB to implement SB 253 and SB 261.
SB 253: CLIMATE CORPORATE DATA ACCOUNTABILITY ACT
SB 253, as amended by SB 219, directs CARB to adopt regulations by July 1, 2025, requiring “reporting entities” — businesses with total annual revenues over $1 billion that are formed under state or federal law and do business in California — to annually disclose their Scope 1, Scope 2, and Scope 3 emissions. SB 253 defines each scope as follows:
- Scope 1 emissions are “all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.”
- Scope 2 emissions are “indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.”
- Scope 3 emissions are “indirect upstream and downstream greenhouse gas emissions, other than Scope 2 emissions, from sources that the reporting entity does not own or directly control. These may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.”
Examples of Scope 1 emissions (direct emissions) include company-owned vehicles or heavy machinery; on-site fuel combustion (e.g., diesel backup generators or natural gas boilers); and process emissions (e.g., from cement production or refining operations). Scope 2 emissions (indirect) are associated with the generation of purchased energy.
Scope 3 emissions, typically the largest share of a company’s GHG footprint, are the most complex and resource-intensive to measure. These emissions result indirectly from a company’s operations and are not directly emitted by the company. Upstream examples include employee travel, waste disposal, capital goods, and inbound transportation. Downstream examples include delivery, use, and disposal of sold products, franchises, and investments. SB 219’s amendments to SB 253 delayed Scope 3 reporting requirements until 2027.
To accurately measure emissions, reporting entities will likely need legal counsel, environmental consultants, and accounting/auditing support. The California Chamber of Commerce estimates initial compliance costs exceed $1 million per company, with ongoing annual costs between $300,000 and $900,000, plus additional costs for supply chain data collection and verification. SB 253 allows penalties up to $500,000 for misreporting but includes a safe harbor provision for good-faith Scope 3 emissions reporting through 2030. The law also requires third-party assurance of emissions reports, with specific requirements to be defined by CARB.
SB 261: CLIMATE-RELATED FINANCIAL RISK ACT
SB 261 applies to any “covered entity” with total annual revenues over $500 million that is formed under state or federal law and does business in California. Beginning January 1, 2026, covered entities must biennially disclose on their website a report covering two categories of climate-related financial risk information, defined as information related to the “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks.” This report must also be submitted to CARB.
The two required categories are:
- The covered entity’s climate-related financial risk, following the framework and disclosures recommended in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017); and
- The covered entity’s measures adopted to reduce and adapt to the disclosed risks.
Unlike SB 253, SB 261 is self-executing and does not depend on CARB regulations, although the law directs CARB to adopt rules specifying administrative penalties — capped at $50,000 — for failure to publish a report or for inaccuracies. Business groups estimate initial compliance costs to range from $300,000 to $750,000, with recurring biennial costs between $150,000 and $500,000.
CARB’S IMPLEMENTATION OF SB 253 AND SB 261
On December 5, 2024, CARB issued an Enforcement Notice stating that it would “exercise its enforcement discretion” for the first reporting cycle, provided that reporting entities demonstrate good-faith efforts to comply. CARB explained that it understood businesses “may need some lead time to implement new data collection processes” and that, for the first reporting year, businesses may rely on information already in the businesses’ possession to determine their scope 1 and scope 2 emissions.
This prompted criticism from SB 253 and SB 261 authors, California State Senators Scott Wiener and Henry Stern, in a December 11, 2024 letter. They stated they were “beyond frustrated” with CARB’s lack of progress and warned that, unless CARB acts swiftly, they would consider calling leadership before the Legislature for oversight hearings in 2025.
On December 16, 2024, CARB issued an Information Solicitation requesting stakeholder input on the implementation of SB 253 and SB 261 (as amended by SB 219). Though the comment deadline (February 14, later extended to March 21) has passed, the questions and stakeholder feedback offer valuable insight for affected businesses who will have another opportunity to comment during CARB’s formal rulemaking process.
As of this publication, CARB has not yet issued its notice of proposed rulemaking in the California Regulatory Notice Register, which would initiate the formal rulemaking process and a 45-day public comment period. CARB conducted a widely attended virtual workshop on May 29, 2025, to further discuss the rulemaking efforts and its current views of potential regulatory approaches. Rulemaking proceedings, especially for proposed regulations that generate substantial public interest often require close to the full year allowed by statute to promulgate the regulations.
LEGAL CHALLENGES TO SB 253 AND SB 261
After the enactment of SB 253 and SB 261 in October 2023, the U.S. Chamber of Commerce and various other business groups filed suit in January 2024 in the U.S. District Court for the Central District of California. The motion for preliminary injunction is currently scheduled to be heard on July 1, 2025, though a ruling may not issue until later this summer.
NEXT STEPS
Amid active litigation and delayed regulatory implementation, significant uncertainty remains around SB 253’s reporting requirements and general compliance timelines. However, consistent with CARB’s Enforcement Notice, reporting entities and covered entities should begin good-faith efforts to comply with both SB 253 and SB 261 by 2026. Companies subject to California’s new climate disclosure laws should take immediate steps to engage consultants and establish internal systems to collect the required data.