A Comprehensive Guide to S.B. 253 and S.B. 261 (and more) for Energy Leaders and Companies
By Neesha Basnyat
February 2024
Introduction
Large companies face continuous challenges in navigating the evolving landscape of environmental regulations and commitments, especially in the past few years. On August 16, 2022, President Biden signed the Inflation Reduction Act into law, the largest piece of climate regulation in American history. Against the backdrop of this historic federal climate action, California has passed their own environmental legislation that will affect large companies in the coming years.
The Golden State has long been a trailblazer amongst the 50 states in the fight against climate change and the promotion of sustainable practices, taking steps towards greenhouse gas emission reduction, a clean energy economy, and sustainable development. In alignment with this commitment, Governor Newsom signed both S.B. 253 and S.B. 261 into law on October 7, 2023.
- S.B. 253, or The Climate Corporate Data Accountability Act, mandates that all US-based companies doing business in California and generating revenues exceeding $1 billion in California measure, validate, and disclose their scopes 1, 2, and 3 emissions starting from 2026 (based on 2025 data).
- S.B. 261, or The Climate-Related Financial Risk Act, mandates that US companies doing business in California and generating revenues exceeding $500 million must publicly disclose their climate-related financial risks and the strategies they employ to address them biennially starting in 2026.
In this eBook we unpack the implications of California’s S.B. 253 and S.B. 261 which are crucial to maintain compliance, foster sustainability, and facilitate readiness and strategic implementation.
Executive Summary
With the passing of S.B. 253, The Climate Corporate Data Accountability Act, and S.B. 261, The Climate-Related Financial Risk Act, large US-based companies doing business in the state of California may face significant ramifications to the way they report climate data in the coming years. While these climate rulings are just within the state, they will affect MNCs around the world and do not stand isolated. They join a host of other global climate disclosure rulings, including the SEC Climate Disclosure Proposal, the European Sustainability Reporting Standards (ESRS), and the EU Non-Financial Reporting Directive (NFRD).
The movement towards more reporting and more climate data transparency has been steadily growing. While many companies currently report the information required by these rulings, they do so adhering to different equations and frameworks. Complying with emerging disclosures laws in the future may require changing where and how this information is reported.
California’s Climate Legislation
California has been at the forefront of progressive climate legislation for decades, leading the way in the United States with a series of groundbreaking laws and initiatives aimed at combating climate change, reducing greenhouse gas emissions, and promoting sustainable energy practices. As one of the world’s largest economies, California’s actions and legislation often have ripple effects across the globe. With its long history of environmental advocacy and innovation, the state has consistently demonstrated a strong commitment to addressing the impacts of climate change and fostering a sustainable future for its residents and beyond.
Historical context of California’s climate laws
The foundation for California’s aggressive approach to climate legislation can be traced back to the early 2000s, when the state took pioneering steps towards establishing itself as a global leader in environmental policy. One pivotal moment in this trajectory was the passage of the California Global Warming Solutions Act of 2006, also known as Assembly Bill 32 (A.B. 32). This landmark legislation required the state to measure, report, and verify their carbon emissions and set ambitious targets for reducing greenhouse gas emissions, requiring the state to bring emissions back to 1990 levels by 2020. A.B. 32 also introduced a comprehensive cap-and-trade program, cementing California as a trailblazer in carbon market initiatives.
Each year the California Air Resources Board (CARB) produces a statewide Greenhouse Gas Emissions Inventory tracking progress on the state’s GHG targets. Figure 1 shows California’s annual GHG emissions from 2000 to 2021 in relation to the 2020 GHG limit established by AB 32 (431 MMTCO2e). California’s GHG emissions dropped below this 2020 GHG Limit in 2014 (428.2 MMTCO2e) and have remained below this level since that time.
Following the success of A.B. 32, California continued to solidify its commitment to combating climate change with the passage of Senate Bill 32 (S.B. 32) in 2016. Building upon the foundation laid by A.B. 32, S.B. 32 strengthened California’s climate goals by mandating a further reduction in greenhouse gas emissions to 40% below 1990 levels by 2030. This legislative move showcased California’s enduring dedication to long-term sustainability and environmental stewardship.
In addition to these pivotal laws, California has implemented a suite of complementary measures and regulations aimed at promoting renewable energy, using electric vehicles, reducing emissions, and fostering the widespread adoption of clean technologies. These efforts, combined with stringent emissions standards and ongoing investment in renewable energy infrastructure, have firmly positioned California as a vanguard in the fight against climate change, serving as a model for other states and nations to emulate.
As California continues to navigate the complexities of climate change and environmental sustainability, the state’s commitment to enacting bold climate legislation remains unwavering.
S.B. 253: The Climate Corporate Data Accountability Act
Overview
The Climate Corporate Data Accountability Act, also known as California Senate Bill 253 (S.B. 253), was introduced to address the increasing concerns surrounding corporate transparency and accountability in relation to climate-related risks and impacts. S.B. 253 mandates that all US-based companies, public or private, generating revenues exceeding $1 billion in California, disclose their emissions extensively, encompassing scopes 1, 2, and 3, starting from 2026 (based on 2025 data). The bill also necessitates third-party validation of their disclosures.
S.B. 253 was proposed by Senator Scott Wiener (D-San Francisco) in January 2023. The Governor signed it into law on October 7, 2023 and included a signing message with the bill. This message addressed the “likely infeasible” implementation deadlines, concern with reporting structure and protocol, and concern over the financial impact of the bill. The Governor’s administration as well as the California Air Resources Board (CARB) are tasked with monitoring these potential issues and their impact.
S.B. 253 underscores the critical need for corporations to proactively communicate their climate-related role, strategies, and goals. The legislation seeks to promote transparency and provide shareholders, investors, and the public with comprehensive, standardized data on how companies are addressing and mitigating climate-related risks, as well as the impact of these risks on their long-term viability.
Additionally, S.B. 253 is designed to align with global efforts to enhance corporate climate disclosure standards, in accordance with initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD) framework. By requiring corporations to furnish comprehensive climate-related data, the bill seeks to support the integration of climate risk assessment and management into corporate decision-making processes, fostering a more robust and sustainable approach to business operations and investment practices.
Objectives and Goals of the Law
The ultimate objective of the Climate Corporate Data Accountability Act is to facilitate a greater understanding of how climate-related factors may affect corporate performance, financial stability, and resilience. Through enhanced transparency and accountability, the legislation aims to empower investors, consumers, and other stakeholders to make more informed decisions, promote sustainable investment practices, and drive a transition towards a low-carbon economy.
Key Provisions and Requirements
All business entities with total annual revenues in excess of $1 billion and that do business in California are required to annually measure and publicly disclose:
- their scope 1 and scope 2 greenhouse gas emissions starting in 2026 (based on 2025 data)
- their scope 3 greenhouse gas emissions starting in 2027 (based on 2026 data)
These businesses need to obtain an assurance engagement, performed by an independent third-party assurance provider, of the entity’s public disclosure.
S.B. 261: The Climate-Related Financial Risk Act
Overview
The Climate-Related Financial Risk Act, also known as California Senate Bill 261 (S.B. 261), pertains to the disclosure of climate-related financial risks by large businesses operating in California. The bill aims to address the growing concerns regarding the impact of climate change on the financial landscape and to ensure that companies incorporate climate risk mitigation measures into their business strategies.
S.B. 261 was proposed by Senator Henry Stern (D-Los Angeles) in January 2023. The Governor signed it into law on October 7, 2023 and included a signing message with the bill. This message addressed how the implementation deadlines don’t allow sufficient time for CARB to “carry out the requirements in this bill,” as well as concern over the financial impact of the bill, which will be closely monitored by CARB.
Under S.B. 261, major US businesses with annual revenues exceeding $500 million that operate in California are required to biennially disclose climate-related financial risks and their corresponding mitigation strategies to the public. The legislation seeks to enhance transparency and accountability, enabling stakeholders, investors, and the public to gain insight into how climate-related risks may affect the financial well-being and long-term viability of these businesses.
By mandating the disclosure of climate-related financial risks, S.B. 261 aims to encourage companies to proactively assess and address the potential impacts of climate change on their operations, supply chains, and financial performance. This includes evaluating risks stemming from physical climate hazards, as well as risks associated with the transition to a low-carbon economy, such as regulatory changes, market shifts, and technological advancements.
Objectives and Goals of the Law
Through the disclosure of climate-related financial risks and mitigation strategies, S.B. 261 seeks to foster more robust and sustainable business practices, integrate climate considerations into corporate decision-making, and promote investment in climate-resilient strategies. The public availability of this information allows investors and stakeholders to make informed decisions and encourages companies to adopt measures that enhance their resilience to climate-related challenges.
S.B. 261 underscores California’s commitment to addressing climate change as a financial risk and the state’s proactive efforts to align its financial sector with climate goals. By integrating climate risk assessment and disclosure into business operations, S.B. 261 aims to facilitate a more comprehensive understanding of climate risks and encourage businesses to implement strategies that contribute to a more resilient and sustainable economy.
Key Provisions and Requirements
All business entities with total annual revenues in excess of $500 million and that do business in California are required to biennially prepare a climate-related financial risk report starting in 2026 disclosing the following:
- their climate-related financial risk, in accordance with the recommended framework and disclosures contained in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017)
- their measures adopted to reduce and adapt to climate-related financial risk
S.B. 261 vs. S.B. 253: What’s the Difference?
S.B. 253 and S.B. 261 go hand-in-hand. Both these climate rulings were signed into law on the same day in 2023, and both affect large US-based companies doing business in California and require the reporting of climate data starting in 2026. However, there are a few key differences in these laws.
- S.B. 261 affects companies generating revenues exceeding $500 million, while the cutoff for S.B. 253 is $1 billion. This means that S.B. 261 will affect more companies.
- While S.B. 261 will be more far-reaching, reporting on climate-related financial risks and the strategies they employ to address them biennially will be far easier for companies to do than complying with S.B. 253, which requires the measurement, validation, and disclosure of their scopes 1, 2, and 3 emissions – no easy task for companies of that size.
Impact Analysis
The Current Legislative Landscape
S.B. 253 and S.B. 261 come amidst a time of global climate disclosure laws.
SEC Climate Disclosure Rule
The US Securities and Exchange Commission (SEC) has proposed a landmark climate disclosure rule intended to enhance transparency and ensure that companies disclose material climate-related information to investors. The proposed rule seeks to establish consistent and comprehensive reporting requirements for climate-related risks and impacts, reflecting the growing recognition of climate change as a critical factor influencing business operations and financial performance. This regulation would standardize climate-related disclosures across all public companies in the US (not just those in California exceeding $1 billion or $500 million in revenue), enabling investors to make more informed decisions and fostering greater accountability in addressing climate risks.
This climate disclosure rule is poised to have a significant impact on companies across various sectors. It would require businesses to disclose their direct and indirect greenhouse gas emissions, as well as provide insights into their climate-related risks and strategies for mitigating these risks – essentially what S.B. 253 and S.B. 261 aim to address, although there are more requirements in the SEC Rules. Also similar to S.B. 253 and S.B. 261 is the alignment with TCFD framework reporting.
Additionally, companies will need to disclose how climate considerations factor into their long-term business and financial planning. The rule is expected to prompt companies to conduct more thorough assessments of their climate-related risks, leading to a heightened focus on incorporating climate considerations into their strategic decision-making processes. It is also likely to propel businesses to adopt stronger climate-related policies and demonstrate a commitment to sustainability. A timeline for this rule has not been announced yet, but it is expected to go into effect in 2025.
European Sustainability Reporting Standards (ESRS)
The European Union (EU) announced in 2023 the finalization of the European Sustainability Reporting Standards (ESRS), marking a significant milestone in corporate sustainability reporting. The ESRS framework seeks to provide a comprehensive and standardized set of reporting requirements for companies operating within the EU, with the aim of enhancing the transparency and comparability of sustainability-related disclosures. By detailing specific guidelines and metrics for reporting ESG factors, the ESRS is poised to play a pivotal role in reshaping the landscape of corporate sustainability reporting in the EU.
The implementation of the ESRS will impact all companies subject to the 2021 Corporate Sustainability Reporting Directive (CSRD), requiring them to adhere to more stringent and harmonized reporting standards. With the framework’s emphasis on uniform sustainability reporting, companies will be obligated to disclose a wide array of ESG information, including carbon emissions, diversity and inclusion metrics, supply chain sustainability, and other indicators.
Approximately 11,700 large companies and groups across the EU are subject to this ruling, which covers large public-interest companies with more than 500 employees. However, “certain types of companies and certain disclosure requirements are subject to phase-in periods before reporting becomes mandatory,” and several disclosure requirements are voluntary. These exceptions are currently extended to companies with fewer than 750 employees, and allow them to omit Scope 3 emissions data for the first year, and omit certain disclosures related to biodiversity, value chain workers, communities, and consumers for the first 2 years. The same companies affected by S.B. 253 and S.B. 261 may or may not already be subject to CSRD and reporting to ESRS standards depending on whether they do business in California and have revenue in excess of $500 million.
The ESRS is expected to drive a cultural shift within organizations, compelling them to adopt more robust sustainability practices and integrate ESG considerations into their strategic decision-making processes. By providing a consistent and structured framework for reporting, the ESRS aims to bolster the reliability and comparability of sustainability disclosures, enabling investors to make more informed decisions and fostering greater trust and accountability within the corporate sector. Companies will need to proactively assess their sustainability practices, invest in improved data collection and reporting mechanisms, and align their strategies with the ESRS to navigate the new reporting landscape effectively. With 2024 data at the center of 2025 reporting, companies need to start preparations for compliance immediately if they have not already done so.
EU Non-Financial Reporting Directive (NFRD)
The CSRD expanded upon the Non-Financial Reporting Directive (NFRD), a significant regulatory framework that aimed to enhance transparency and accountability within European businesses by mandating the disclosure of non-financial information related to environmental, social, and employee matters, respect for human rights, anti-corruption, and bribery issues. Enacted by the EU, the NFRD required certain large companies with over 500 employees to annually report on their non-financial performance. The directive also provided guidelines for the reporting methodology, ensuring a consistent and comparable approach to non-financial reporting across different companies.
Until CSRD regulations take effect, qualifying organizations must continue to follow the rules introduced by the NFRD. This means that NFRD regulations continue to be the guiding factor for ESG and non-financial reporting in the near future. The directive encouraged companies to integrate non-financial factors into their strategic decision-making and risk management processes, strengthening their overall sustainability and responsible business practices.
The Current Company Landscape
There is a legislative precedent set to address climate risks in businesses and enhance and standardize reporting. Currently, the EU’s NFRD is the only large-scale mandatory climate reporting. While the NFRD has helped shape the way companies report, there is still no one ideal standard, and this only applies to large public companies in the EU. The ESRS and SEC Climate Disclosure Rule will further standardize climate reporting, and companies need to start now to comply with these new laws. However, neither require compliance and disclosure this year.
Almost all large public companies release annual ESG reports, with reporting increasing tremendously over the last decade. These ESG reports for the most part address companies’ greenhouse gas emissions and climate-related financial risks and the strategies required by S.B. 253 and S.B. 261, respectively. There are a number of sustainability reporting frameworks used to structure this information, including the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Carbon Disclosure Project (CDP).
Compliance and Implementation
Companies, especially public U.S.-based companies, report on many ESG disclosures and follow many different formats or combinations of frameworks. There is no standardization to reporting yet, which makes it difficult for investors and stakeholders to compare the non-financial information disclosed by different companies. Even though ESG reporting has become the standard, some companies publish this information in different places too. For example, some companies release impact reports that may have a larger focus on their social impact and giving, some companies release sustainability reports with a larger emphasis on environmental sustainability, and others release DEI reports which separate out DEI initiatives and human capital information.
There is a growing movement toward more reporting and more transparency, standardization, and consistency in reporting. The CSRD and accompanying ESRS as well as the SEC Climate Disclosure Rule are making this movement law. Companies must comply with EU reporting as laid out in the ESRS and continue to assess developing regulations from the SEC.
On top of this, many companies will also need to comply with S.B. 253 and S.B. 261. These laws were recently passed, and so disclosures are not required until 2026. However, this requires collecting data throughout 2025 using methods decided on in 2024. On top of this, there will likely be reporting standards and requirements to adhere to that have yet to be announced. While the scope of S.B. 253 and S.B. 261 are much smaller than the CSRD and the SEC Climate Disclosure Rule, companies will still need to monitor the rulemaking process for disclosure and any accompanying standards.
Thankfully it seems that reporting will align with the TCFD framework, which is the same framework that will likely be used by the SEC. Compliance with S.B. 253 and S.B. 261 will likely be straightforward for any company that has already invested in ESG reporting, with the exception of Scope 3 emissions.
Reporting of Scope 3 emissions as required by S.B. 253 will perhaps be the most difficult to comply with. Scope 3 emissions refer to indirect emissions originating from business operations by sources that are not directly owned or controlled by an organization, such as supply chain, transportation, product usage, or disposal. While calculations laid out by GHG Protocol are most widely used, mapping out and calculating emissions for large companies with revenues exceeding $1 billion should not be underestimated.
Resources for Further Learning
About the Author
Neesha Basnyat is a freelance science and sustainability writer, researcher, and editor with a background in Biology and the Environmental Sciences. Some of her favorite things to write about include environmental policy, reducing waste, ecology research, green technology, and outdoor recreation. In her free time, she loves traveling, spending time outdoors, and rock climbing. Her portfolio can be viewed here. Neesha was contracted by EnergyCAP to write this article.
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