Navigating California’s Climate Related Financial Risk Act (SB 261)
Introduction
As the federal government grapples with climate disclosure regulations, California has taken decisive action to lead on corporate climate accountability. Through landmark legislation like SB 253, SB 261, and AB 1305, the state is setting a higher standard for transparency in greenhouse gas emissions, climate risk management, and the use of carbon offsets. These laws aim to ensure that companies operating in California not only disclose their environmental impacts but also take measurable steps toward sustainability
With climate change posing significant risks to businesses, California’s SB 261 aims to improve transparency around how companies assess and manage these risks. This regulation mandates climate-related financial risk disclosures, offering a clearer picture of both physical and transition risks. In this blog post, we examine the requirements of SB 261, key deadlines, and how companies can effectively incorporate climate risk management into their overall strategy to build resilience and maintain regulatory compliance.
What is SB 261 aspiring to do
California’s SB 261 aims to enhance transparency around how companies are assessing and addressing climate-related financial risks. By requiring companies to disclose their risk management strategies, the law aspires to help businesses, investors, and policymakers understand the financial impact of physical risks (such as extreme weather events) and transition risks (such as regulatory changes and market shifts) related to climate change. The goal is to ensure that companies are better equipped to handle these risks and align their operations with California’s broader climate goals.
Who is impacted
Public and private companies with annual revenues exceeding $500 million that do any business in California.
Companies within scope must disclose regardless of if risks are deemed material to the company’s financial performance or operations.
What disclosures are required
SB 261 requires companies to publicly report on their climate-related financial risks and the measures a company has adopted to reduce and adapt to these risks, in line with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations.
The disclosure must be included in the company’s biennial climate risk report, which must be publicly accessible and include:
Detailed assessment of the physical and transition risks a company faces due to climate change.
Disclosure of the measures in place to adapt to the risk associated with climate change.
Key deadlines
As the bill stands, once in effect disclosures will be required once every two years.
October 15, 2024: Hearings on the constitutional challenges to SB 253 and SB 261 will take place. These hearings could lead to significant changes in the law’s reporting requirements.
January 1, 2026: Initial climate-related financial risk reports are due, with disclosures required biennially thereafter.
How to get started
To comply with SB 261, companies should start by conducting a comprehensive climate-related financial risk assessment. This process involves identifying physical risks (e.g., extreme weather, flooding, fires) and transition risks (e.g., regulatory changes, shifting market dynamics) that could affect operations, revenue streams, and long-term viability.
Scenario Analysis: Running different climate scenarios (aligned with TCFD recommendations) to understand how various climate-related events could impact financial performance.
Governance & Oversight: Establishing strong internal governance structures to ensure that climate risks are factored into all business decisions.
Data Collection: Ensuring data from across the organization—whether related to energy usage, supply chain impacts, or financial reporting—is accurate, consolidated, and can be tracked over time.
Our recommendation
We see SB 261 as an opportunity for companies to enhance their resilience to climate risks while simultaneously positioning themselves as leaders in sustainability. Rather than viewing compliance as a burden, we encourage companies to leverage these requirements to improve long-term business stability and build investor confidence. Early preparation will not only ensure regulatory compliance but also provide a competitive advantage in an increasingly climate-conscious market.
Where Bespoke ESG can support
Bespoke ESG can help companies turn what might feel like a compliance burden into a strategic advantage. Our team offers support across several critical areas:
Tailored Risk Assessments: We work with businesses to develop customized climate risk assessments, ensuring that companies are not only prepared to disclose but also able to use the information to make strategic decisions.
TCFD Alignment: Our experts guide companies through aligning their reporting with TCFD recommendations, from scenario planning to disclosures. We ensure your reporting is thorough and meets both regulatory requirements and stakeholder expectations.
Integrating Climate Risk into Broader Strategy: We assist in embedding climate risk management into your overall business strategy, enabling companies to improve their risk resilience, unlock cost-saving opportunities, and innovate in ways that align with sustainability goals.
Disclaimer: The information provided in this document is for general informational purposes only and does not constitute legal advice. Regulatory advice is provided solely within the scope of contracts between Bespoke ESG and its clients.