California Finalizes First Climate Disclosure Rules
The California Air Resources Board has approved initial regulations for its landmark climate disclosure laws, setting an August 2026 deadline for greenhouse gas reporting. The move establishes a new, complex compliance reality for companies operating in the state, with a framework that mirrors the trend toward granular reporting in other regulated areas like pay equity.
The new rules stem from two key pieces of legislation, SB 253 and SB 261, collectively known as the Climate Accountability Package, which Governor Gavin Newsom signed into law in October 2023. These laws mandate that large public and private companies doing business in the state report their greenhouse gas emissions and climate-related financial risks. The stated goal is to enhance corporate transparency and standardize disclosures on carbon emissions. SB 253, the Climate Corporate Data Accountability Act, applies to over 5,300 companies with more than $1 billion in annual revenue that operate in California. It requires them to report their direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions starting in 2026, based on 2025 data. Reporting for value chain emissions (Scope 3) will follow in 2027. The companion law, SB 261 or the Climate-Related Financial Risk Act, has a lower threshold, affecting companies with revenues exceeding $500 million. It requires these businesses to publish biennial reports on their climate-related financial risks and their strategies to mitigate them, with the first report initially due January 1, 2026. While the regulations for SB 253 are moving forward, enforcement of SB 261 has been temporarily paused by a Ninth Circuit court injunction pending the outcome of a legal challenge from the U.S. Chamber of Commerce. The California Air Resources Board (CARB) has indicated it will set a new reporting date for SB 261 after the legal issues are resolved. The requirements extend beyond those of the SEC's climate disclosure rule by applying to private companies and mandating Scope 3 emissions reporting, which is often the largest source of a company's emissions. Penalties for non-compliance can be substantial, with fines up to $500,000 per year for violations of SB 253. Third-party assurance will be phased in for emissions reports. Limited assurance for Scope 1 and 2 emissions is required starting in 2026, escalating to a more stringent "reasonable assurance" level by 2030. Assurance for Scope 3 emissions is slated to begin in 2030, contingent on a CARB review of market readiness. The California Chamber of Commerce has estimated that the initial cost for a company to comply with these new disclosure rules could be over $1 million. CARB will fund its new oversight programs through annual fees levied on the regulated companies, which are estimated to be around $3,106 per entity for SB 253 and $1,403 for SB 261.
