In passing the laws, the California legislature found that “current disclosure standards are voluntary, and thus inadequate, for meeting accelerating climate risks.”  As a result, the legislature determined that addressing the climate crisis required “consistent, higher level, and mandatory disclosures … from all major economic actors … to ensure a sustainable, resilient, and prosperous future …”

Failure to file the mandated reports could subject corporate entities to administrative penalties of up to $500,000 per year for violations of SB 253 and up to $50,000 per year for violations of SB 261.  

SB 253 and SB 261 require broad climate-related disclosures on GHG emissions and climate-related risks

The Climate Corporate Data Accountability Act (SB 253) requires covered entities to submit annual reports broadly disclosing greenhouse gas (GHG) emissions from all of their activity (whether in California or not).  Beginning in 2026, covered entities will be required to publicly disclose Scope 1 and Scope 2 emissions in an annual report:

• Scope 1 emissions are all direct GHG emissions from sources owned, or directly controlled by, a covered entity (e.g., fuel combustion activities).

• Scope 2 emissions are all indirect GHG emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a covered entity.

And, beginning the following year in 2027, covered entities will also be required to publicly disclose Scope 3 emissions in their annual report:

• Scope 3 emissions are all indirect upstream and downstream GHG emissions from sources not owned or directly controlled by a covered entity (e.g., purchased goods and services, business travel, employee commutes, processing and use of sold products). 

Recognizing the difficulties often inherent in calculating Scope 3 emissions – which naturally rely upon the collection of information from third-parties outside the business entity – the bill specifies that Scope 3 emission calculations can rely on primary and secondary data sources, including industry average data, proxy data, and other generic data.

The calculation of reportable GHG emissions must be done in accordance with the Greenhouse Gas Protocol standards and guidance developed by the World Resources Institute and the World Business Council for Sustainable Development.  The required public disclosures will also need to be verified by an independent assurance provider retained by each covered entity.

Similarly starting in 2026, the Climate-Related Financial Risk Act (SB 261) requires covered entities to prepare biennial climate-related financial risk reports that disclose (i) climate-related financial risks they face, and (ii) measures taken to reduce and adapt to any disclosed financial risks.

Climate-related financial risk is broadly defined as “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks.”  The bill specifies that climate-related risks can include those “to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.”  

The Bills Apply to Thousands of Public and Private Business Entities

Unlike the GHG reporting requirements for publicly traded companies anticipated from the federal Securities and Exchange Commission, both SB 253 and SB 261 apply to public and private companies. 

Under SB 253, any partnership, corporation, limited liability company, or other business entity earning over $1 billion in annual revenue and doing business in California must file the required annual report (note that the $1 billion revenue threshold can be generated in any jurisdiction, i.e., the threshold is not tied to revenue earned in-state).  SB 261’s threshold is lower, covering any business entity with over $500 million in annual revenue that does business in California (although insurance companies are exempt).

The bills broadly define “doing business” so that a wide range of activities will trigger the reporting requirements, including:

1. Actively engaging in any transaction for the purpose of financial or pecuniary gain or profit;

2. Being organized or commercially domiciled in California; or

3. Engaging in sales in the state, holding real and/or personal property in the state, or having payroll in the state that exceeds certain specified amounts.

In passing the bills, the legislature estimated that 5,344 business entities will be subject to SB 253, and over 10,000 business entities will subject to SB 261. 

The broad range of expertise at Hogan Lovells US LLP – including the Environment and Natural Resources, Sustainable Finance and Investment, Corporate and Finance, and Infrastructure, Energy, Resources and Projects teams – are available to advise clients on GHG emissions disclosures and climate-related financial risk reports pursuant to SB 253 and 261.