Navigating California's Groundbreaking Climate Laws: What Out-of-State Businesses Need To Know

California has enacted two critical climate-related laws — Senate Bill 253 (SB 253) and Senate Bill 261 (SB 261) — to address greenhouse gas (GHG) emissions and climate-related financial risks. While these laws are a cornerstone of California's ambitious climate agenda, they will also have sweeping implications for companies nationwide — and even globally — especially those in high-emission industries, consumer-facing businesses, supply chain-intensive sectors, and companies with complex operational footprints.

Whether your business is headquartered in California or simply interacts with California customers or markets, now is the time to understand what these laws require, how California will interpret "doing business in California," the revenue threshold that will trigger reporting obligations, and what steps you should be taking to prepare for compliance.

California's Climate Disclosure Laws at a Glance

SB 253: The Climate Corporate Data Accountability Act

Signed into law in October 2023, SB 253 requires U.S. businesses with over $1 billion in annual revenue that are "doing business in California" to report their GHG emissions in line with the GHG Protocol across three categories:

• Scope 1: Direct emissions (e.g., fuel combustion).
• Scope 2: Indirect emissions from purchased electricity.
• Scope 3: All other indirect emissions across the value chain (e.g., suppliers, transportation, product use).

Reporting deadlines:

• Scope 1 & 2: Required starting in 2026 (for 2025 data).
• Scope 3: Required starting in 2027, with the California Air Resources Board (CARB) authorized to set materiality thresholds.

Additional provisions:

• Third-party limited assurance is required in 2026, escalating to reasonable assurance over time.
• Enforcement will begin softly in 2026 — no penalties will be imposed if companies show a good faith effort and use existing data.

SB 261: The Climate-Related Financial Risk Act

Also signed in October 2023, SB 261 applies to U.S. companies with over $500 million in annual revenue that are "doing business in California." These companies must disclose their climate-related financial risks and risk mitigation strategies biannually.

Key requirements:

• Disclosures must align with the Task Force on Climate-related Financial Disclosures (TCFD).
• First reports are due by Jan. 1, 2026 (with reports available on public website by 1/1/26).
• Entities in the business of insurance are exempt.

What Does "Doing Business in California" Mean?

The scope of these laws is expansive. Businesses are deemed to be "doing business in California" if they meet thresholds based on California Revenue and Taxation Code § 23101, including:

• Over $735,000 in sales in California (2024 threshold, inflation-adjusted).
• Over $73,502 in property or payroll in California.
• Are organized or commercially domiciled in California.

These thresholds are relatively low, meaning that many out-of-state companies — including those with minimal or indirect California ties — may still be subject to these laws.

Potential Regulatory Risks to Watch

1. Broad Interpretations During Rulemaking

CARB is currently drafting implementing regulations for SB 253 and SB 261. Although the statute imposes a deadline to finalize the regulations by the end of 2025, CARB recently announced that it will not issue initial rules until the first quarter of 2026. Their work includes:

• Defining "revenue" and how to apply thresholds across parent-subsidiary structures.
• Determining how to calculate Scope 3 emissions and whether materiality thresholds will apply.
• Establishing how corporate control and ownership thresholds (50% or more) influence reporting obligations across affiliated entities.
• Clarifying the reporting format, assurance standards, and enforcement mechanisms.
• Refining and finalizing the definition of "doing business in California."

These choices will determine whether the rules apply narrowly or broadly — and could significantly impact your compliance burden.

2. Legal Challenge to California's Climate Disclosure Laws

In 2024, the U.S. Chamber of Commerce and several business groups filed a federal lawsuit against CARB, seeking to block the implementation of SB 253 and SB 261. The plaintiffs contend that these laws, which mandate large companies to disclose greenhouse gas emissions and climate-related financial risks, violate the First Amendment by compelling speech. A motion for preliminary injunction remains pending. While the legal challenge proceeds, CARB continues with its rulemaking and may influence how other states approach corporate climate reporting.

3. Compliance Deadlines Are Approaching

Despite ongoing legal and regulatory uncertainty, businesses should not delay compliance planning:

• Scope 1 and 2 reporting under SB 253 begins in 2026 (for 2025 data).
• Scope 3 reporting begins in 2027, subject to materiality thresholds to be set by CARB.
• Climate-related financial risk disclosures under SB 261 are due by Jan. 1, 2026, including Scope 1 and 2 GHG emissions.

While SB 253 provides for soft enforcement in 2026 — with no penalties imposed that year for companies demonstrating a good faith effort using available data — failure to prepare could still expose businesses to legal risk, reputational harm, and future penalties as enforcement tightens.

Corporate Disclosure Readiness: What the Data Tell Us

UCLA's 2025 report on corporate sustainability disclosure found that while Scope 3 emissions reporting has improved across the S&P 500, only half of companies provided a detailed breakdown. Just 24% disclosed a climate transition plan, and fewer than half reported interim emissions targets. Climate-related risk disclosures remain uneven, and only 7% of board members had environmental expertise. The takeaway: Despite progress, many firms remain underprepared for SB 253 and SB 261, particularly in terms of Scope 3 reporting and climate governance.

Navigating a Complex Reporting Landscape

The Scope 3 Challenge

The GHG Protocol Corporate Accounting and Reporting Standard provides requirements and guidance for companies and other organizations preparing a corporate-level GHG emissions inventory. Regulatory programs like CARB's focus on Scope 1 and often require third-party verification, while voluntary frameworks such as the GHG Protocol offer more flexibility for Scope 2 and 3 but lack uniform data and assurance requirements. Scope 3 reporting relies heavily on estimated activity data, and no true universal method exists. Companies preparing for SB 253 should prioritize building strong data systems, supplier engagement strategies, and internal controls to ensure reliable disclosure.

California Is Leading — But Other States Are Not Far Behind

California is the first U.S. state to implement mandatory Scope 1, 2, and 3 GHG disclosure and climate-related financial risk reporting laws. However, other states are beginning to move in a similar direction:

• Minnesota has enacted sector-specific climate legislation, including a statewide greenhouse gas inventory system and a 2023 law requiring annual climate risk surveys from large state-chartered financial institutions.
• Illinois and New York have proposed bills modeled on California's framework.
• At the federal level, the SEC's climate disclosure rule remains pending amid litigation and political uncertainty.

For multistate businesses, aligning with California's requirements may provide a critical head start as other jurisdictions follow suit.

How Your Business Can Prepare

1. Conduct a Carbon Footprint Baseline Inventory
   Start by assessing Scope 1 and 2 emissions using the GHG Protocol. For Scope 3, begin mapping your supply chain to identify emissions hotspots.
2. Assess Climate-Related Financial Risks
   Follow the TCFD framework to evaluate transition and physical risks across your operations, investments, and supply chain.
3. Monitor CARB Rulemaking and Legal Developments
   Stay updated as CARB finalizes definitions, enforcement rules, and materiality thresholds. Our team can help interpret new guidance as it's released.
4. Implement Governance and Reporting Systems
   Set up internal controls for data collection, reporting, and assurance. Align with your ESG and financial reporting practices.
5. Consult Legal Counsel
   These laws are legally and technically complex. Our attorneys can assess your exposure and help build a compliance roadmap tailored to your business model and industry.

Conclusion

California's SB 253 and SB 261 represent a paradigm shift in corporate climate accountability. Though implementation details are still taking shape, the laws' direction is clear: businesses will need to measure, manage, and disclose their emissions and climate-related risks — or risk losing access to one of the world's largest economies.

If your business is doing business in California — even indirectly — now is the time to act. Reach out to our team for guidance on next steps, tailored compliance strategies, and up-to-date insights on this evolving legal landscape.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.