California SB 253 and SB 261

California SB 253 applies to large public and private U.S. entities with revenues greater than $1 billion that do business in the state of California. Over 5,000 public and private companies are estimated to be directly affected by SB 253. Numerous smaller companies will likely be indirectly impacted through the inclusion of scope 3 emissions, or indirect emissions, in the law.

California SB 261 applies to U.S. companies that do business in California with a total annual revenue of at least $500 million. Because this threshold is lower than SB 253, some companies will need to comply with just SB 261, while others will need to comply with both. Over 10,000 public and private companies are estimated to be affected by SB 261.

The Franchise Tax Board of California considers companies to be “doing business” in the state if any of the following criteria are met:

• Engage in any transaction for the purpose of financial gain within California
• Are organized or commercially domiciled in California
• California sales, property, or payroll exceed the outlined amounts

California SB 253 requires both public and private U.S. businesses operating in California and with revenues greater than $1 billion to publicly report their greenhouse gas emissions. ​​These reports must include scope 1, 2, and 3 emissions. They must also be verified by a third party and will be stored on an accessible digital platform overseen by the California State Air Resources Board (CARB). This public registry will be easily accessible and searchable to allow users to review specific entities’ disclosures and analyze relevant data.

• Scope 1: Direct emissions from activities of the company, such as fuel combustion from onsite gas-fired boilers or diesel generators, and emissions produced by company-owned vehicles.
• Scope 2: Emissions from the generation of purchased or acquired electricity, steam, heat, or cooling consumed by the reporting company but generated elsewhere, such as a power plant.
• Scope 3: Indirect emissions from all other sources in the company’s supply chain, including employee commuting, business travel, purchased goods and services, raw materials, and distribution.California SB 253 requires both public and private U.S. businesses operating in California and with revenues greater than $1 billion to publicly report their greenhouse gas emissions. ​​These reports must include scope 1, 2, and 3 emissions. They must also be verified by a third party and will be stored on an accessible digital platform overseen by the California State Air Resources Board (CARB). This public registry will be easily accessible and searchable to allow users to review specific entities’ disclosures and analyze relevant data.

Third-party limited assurance for scope 1 and 2 emissions will be required for companies under California SB 253 beginning in 2026. In 2030, this will expand to reasonable assurance for scope 1 and 2. Scope 3 data will be subject to review by the CARB in 2027, and then limited assurance for scope 3 emissions disclosures will begin in 2030.

• Limited assurance: The third-party audit and evaluation process examines controls and processes in place, but not to the same extent as reasonable assurance.
• Reasonable assurance: The audit and evaluation process is more comprehensive in effort and indicates a greater degree of confidence in the sustainability data and reporting.

Companies that fail to comply with California SB 253 could face civil penalties of up to $500,000 per year. ​​Penalties for scope 3 reporting, which is generally the most complex scope to report on, will be applied only to companies that fail to file. Businesses won't face administrative penalties for misstatements around scope 3 emissions disclosures that were made “with a reasonable basis and disclosed in good faith.”

While SB 253 doesn’t directly apply to companies with under $1 billion in revenue, it will likely increase demand for their scope 1 and 2 reporting. This is due to the inclusion of scope 3 data in SB 253’s requirements. Scope 3 emissions include those that come from suppliers, distributors, partners, and customers. This means large companies impacted by SB 253 may request that data from their smaller partners and suppliers.

California SB 261 requires U.S. entities with annual revenues over $500 million operating in California to produce biennial reports that outline climate-related financial risks in accordance with recommendations from the Task Force on Climate-Related Financial Disclosure (TCFD) framework. They will also be required to include their ​​mitigation strategies to reduce and adapt to the climate-related financial risks disclosed in those reports.

​​Additionally, impacted entities must make their reports publicly available on their websites. Following the release of these reports, the CARB will work with a nonprofit climate reporting organization to prepare a larger biennial public report on the disclosures submitted during that period. In this larger report, they will also identify any inadequate or insufficient reports that were submitted.

California SB 261 defines climate-related financial risk as “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks 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.”

In addition to identifying these climate-related financial risks, companies will also need to outline the strategies they employ to address or mitigate them.

Companies that ​​the state board finds to be in violation of SB 261 will face penalties of up to $50,000 per reporting year.

The U.S. Securities and Exchange Commission’s (SEC) climate disclosure rule, unveiled in March 2024, contains key differences from California’s climate disclosure laws. Unlike California SB 253 and SB 261, the SEC’s climate disclosure rule only requires disclosures from scope 1 and 2 where material and doesn't extend into scope 3 emissions reporting. The California laws apply to both public and private companies operating in California above a particular revenue threshold, while the SEC rule only applies to publicly listed companies. The SEC’s climate disclosure rule also utilizes the United States’ Supreme Court’s definition of materiality, focused primarily on impacts to the business and ultimately information that would be material to investors. California’s climate disclosure laws require disclosure regardless of materiality, where the SEC’s rule does not.

Regardless of whether you are just getting started on tracking and measuring your ESG metrics or whether you’re just brushing up on the latest regulations, Net Zero Cloud can help. Check out our web page, demo, and datasheet to learn more.