To Speak Or Not To Speak: An Update On California's Climate Disclosure Laws

As 2025 draws to a close, companies doing business in California should be keeping a close eye on two acts likely to significantly impact their reporting obligations in 2026: the 2023 California Climate Corporate Data Accountability Act (SB 253) and Climate-Related Financial Risk Act (SB 261), as amended. SB 261 requires public and private companies that do business in California with over $500 million in annual revenues to prepare and publish biennial reports disclosing climate-related financial risks beginning on January 1, 2026. SB 253 requires public and private companies doing business in California with total annual revenues exceeding $1 billion to disclose their annual scope 1, 2, and 3 greenhouse gas (GHG) emissions. We provided an overview of both acts in our last post.

The California Air Resources Board (CARB) is tasked with implementing SB 253 and SB 261. Following two CARB workshops (and a flurry of guidance), proposed regulation(s) were expected in October, with a final rulemaking in December, but the timeline has been delayed. CARB has issued a notice that, due to the volume of comments received, it has extended the pre-rulemaking comment period through October 27, 2025, and will finalize the rulemaking (including the fee-related provisions) in the first quarter of 2026. Pending litigation is also likely playing a role in the delay. The January 1, 2026, statutory compliance date for SB 261 is fast approaching, and enforcement post-January 1, 2026, will depend on what the court decides.

LITIGATION UPDATE

Litigation brought by the U.S. Chamber of Commerce and other parties in the Central District of California challenging SB 253 and SB 261 has been stayed in the trial court and is now before the U.S. Court of Appeals for the Ninth Circuit.¹ A First Amendment facial challenge is the only surviving claim. On August 13, 2025, the trial court denied the plaintiffs' request for a preliminary injunction, finding that the First Amendment did apply to the plaintiffs' claims because they involved commercial speech subject to less than strict scrutiny. Ultimately, the trial court determined that SB 253 and SB 261 were reasonably related to, and directly advanced, California's substantial interest in providing reliable information that allows investors to make informed judgments about the impact of climate-related risks. Several other interests advanced by the state were rejected. While the preliminary injunction standard involved making a colorable First Amendment claim, the decision appears to go straight to the heart of the Constitutional merits.² If that is true, entities should expect the law to move forward until formally enjoined and/or until the U.S. Supreme Court weighs in. A motion for injunction pending the appeal is currently before the Ninth Circuit, with relief requested by November 3, 2025.³ On October 24, 2025, Exxon Mobil Corporation separately brought suit in the Eastern District of California, also on Constitutional grounds.⁴

REGULATORY UPDATE

Since our last post, CARB hosted another public workshop and published an SB 261 FAQ, a checklist, a "Preliminary List of Reporting/Covered Entities," and an SB 253 "Draft Scope 1 and 2 GHG Reporting Template." As more guidance is issued, it is becoming clear that regulatory implementation that addresses private industry's concerns is proving difficult on a statutorily tight deadline. The state of regulatory definitions in both laws and CARB guidance for SB 261 is discussed below. We will provide an update on SB 253 in a future post.

Update on Key Definitions to Define In-Scope Entities

At its August 22 public workshop, CARB changed course on its definition of "revenue," proposing one that captures "the total global amount of money or sales a company receives from its business activities, such as selling products or providing services," without deductions, instead of the California Revenue and Taxation Code (RTC) definition of "gross receipts." CARB again pointed to the RTC for the meaning of "doing business in California," but also proposed using the Secretary of State Business Entity database as a preliminary list, which includes entities with designated agents for service of process in California. It also proposed carving out excepted entities, including non-profits, entities with only teleworkers in the state, and Independent System Operators (ISOs). Additionally, CARB proposed defining a parent as an entity that owns more than 50% of its subsidiary's voting stock in alignment with the Cap-and-Trade regulation, but did not clarify where a foreign parent would be required to report or include its revenue to the $500 million threshold, if ever. As amended, the laws allow for parent-level reporting, but do not necessarily require it. CARB also proposed charging a flat, annual fee per entity of $3,106 for SB 253 and $1,403 for SB 261, to be adjusted annually for inflation, fund deficits, and surpluses. Slides for the second workshop with revised, working definitions can be found on CARB's website. Commentary on the workshop lasted longer than the workshop itself, so the delay in assessing comments is not unexpected.

CARB's Target List of Covered Entities

CARB is also addressing enforcement challenges in advance by publishing a list of companies presumed to be covered by SB 261. As stated in the second workshop, CARB matched up Dunn & Bradstreet's list of U.S.-based companies with greater than $500 million in annual sales and the California Secretary of State list of companies registered as doing business in California. The preliminary list includes 4,160 entities, which can be found here. In addition, CARB posted a survey allowing users to identify "...other companies that you think should be on the preliminary list of reporting/covered entities." Entities potentially subject to California's emerging climate disclosure requirements should review the list to see if they have been identified as a covered entity subject to the forthcoming rules.

Update on SB 261

SB 261 requires covered entities to prepare and publish on their websites a climate-related financial risk report by January 1, 2026, and biennially thereafter. CARB has committed to opening a public docket on December 1, 2025, which will allow entities to post the location of the link to their first report. The public docket will remain open until July 1, 2026. While the enforcement notice issued last year does not explicitly apply to SB 261, the decision to issue a preliminary list and keep the docket open for six months gives some clues as to how CARB may exercise its enforcement discretion. With the existence of digital archiving platforms like the Wayback Machine, however, short of a court injunction, entities should not assume they can avoid penalties if planning to finalize disclosures after January 1, 2026.

CARB has also issued guidance on the type of report it expects to see. As stated in the checklist that was published in September, entities should use one of three frameworks for their first report:

• The Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) (June 2017) published by the TCFD (or any successor),
• The International Financial Reporting Standards Sustainability Disclosure Standards, as issued by the International Sustainability Standards Board (IFRS S2), or
• A report developed in accordance with any regulated exchange, national government, or other governmental entity, including a law or regulation issued by the United States government.

The above options provide flexibility, depending on sector, and other regulatory obligations. IFRS generally provides for more robust disclosures than TCFD. Foreign entities that already report under the IFRS S2 standard, for example, may feel more comfortable, and realize efficiencies by, sticking with that approach for compliance with California law than they would by switching to another permitted reporting standard. An entity should state within the report which option it has chosen.

Both standards seek to disclose "transition risk" and "physical risks" under climate change scenarios. Transition risks are "risks related to the transition to a lower-carbon economy," including policy/legal risk, technology risk, market risk, and reputational risk. Physical risks are "risks related to the physical impact of climate change," both acute and chronic. Climate "opportunity" should also be assessed under these reporting standards, including "efforts to mitigate and adapt to climate change, such as resource efficiencies and cost savings, the adoption of low-emission energy sources, the development of new products and services, access to new markets, and building resilience along the supply chain." In addition to the TCFD guidance found online, the U.S. Environmental Protection Agency (EPA) has simple definitions and examples on its SEC rule webpage (for now), which used the TCFD standard prior to being stayed by the courts.

As the most relaxed standard permitted by CARB, the TCFD is a more accessible and lower cost starting point for many domestic entities and other entities that are not otherwise required to make environmental disclosures. A host of TCFD materials can be found in several languages online. The TCFD is focused on disclosure of four categories: (1) Governance, (2) Strategy, (3) Risk Management, and (4) Metrics and Targets.

1. Governance: Entities should disclose what their governance is around climate-related financial risks. In doing so, they should consider what management structure they have put in place to address this issue (if any), up to the board level (if applicable).
2. Strategy: Entities should disclose their short-, medium-, and long-term strategy to address climate risks. In doing so, they should consider the material risks and opportunities, the impacts, and the anticipated qualitative resilience of the strategy. CARB does not require a scenario-based assessment for the first report.
3. Risk Management: Entities should disclose how they identify, assess, and manage climate-related risks, to the extent short-, medium-, or long-term material issues exist. In doing so, they should consider what policies and procedures are in place and how they are integrated into the organization's overall risk management strategy.
4. Metrics and Targets: To the extent a material issue exists in the short-, medium, or long-term, entities should disclose how they are keeping track of it. In doing so, they should consider what metrics and targets exist (if any). CARB is requiring a qualitative assessment only and is not requiring a quantitative assessment (i.e., disclosure of actual Scope 1/2/3 emissions) for the first report.

The assessments described in each of these categories are intended to guide companies in determining which information is material to their business. Public companies subject to periodic SEC reporting requirements should consider disclosure with the same materiality standard as other disclosures and refer to the guidance offered in the TCFD document titled Implementing the Recommendations of the TCFD as the minimum applicable standard, with the exception of scenario-based strategy disclosure and quantitative metrics and targets in light of CARB guidance. Any applicable sector-specific TCFD materials should also be considered. As stated by this guidance, "When providing disclosures outside mainstream financial filings, asset managers and asset owners should consider materiality in the context of their respective mandates and investment performance for clients and beneficiaries."⁵ The same is true for review of the disclosure prior to release. "Organizations that provide climate-related financial disclosures in reports other than financial filings should follow internal governance processes that are the same or similar to those used for financial reporting."⁶ For the first report, CARB has posted minimum requirements for the disclosure in its Climate Related Financial Risk Report Checklist. Similar to the logic in its enforcement notice for SB 253, a good faith effort to comply with the checklist should mitigate penalty risk in light of the uncertainties surrounding the final regulation.

While SB 261 does not force entities to implement governance, strategy, risk management, and/or metrics and targets around climate-related risks and opportunities, entities that do so will be ahead of the trend if the SEC rule moves forward again and may be better able to meet evolving investor expectations on climate risk disclosures. Absent issuance of an injunction or final ruling overturning the laws, companies should presume the laws stand and should continue good faith efforts to comply. Companies that make good faith efforts to comply and that follow recognized frameworks for the disclosure will not risk penalties in the initial reporting cycle.

Footnotes

1. Chamber of Commerce et al. v. California Air Resources Board, et al., No. 2:24-cv-00801 (C.D. Cal.); Chamber of Commerce et al. v. Randolph, et al., No. 25-5327 (9th Cir.).

2. Order Denying Plaintiffs' Mot. for Prelim. Inj., No. 2:24-cv-00801-ODW (PVCx) (C.D. Cal. Aug. 13, 2025).

3. Mot. for Inj. Pending Appeal, No. 25-5327 (9th Cir. Sept. 15, 2025).

4. Exxon Mobil Corp. v. Sanchez, et al., No. 25-1462 (E.D. Cal.).

5. TCFD, Implementing the Recommendations of the TCFD at 8 (Oct. 2021), available at https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Implementing_Guidance.pdf (last visited Oct. 20, 2025).

6. Id.

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