California sets the pace on corporate responsibility

UPDATE (19th November 2025): Implementation of SB 261 is paused pending the outcome of an appeal, which is currently scheduled to be heard in January 2026.

The “Golden State” is about to roll out two landmark pieces of legislation that will affect all U.S. businesses above a certain size - raising the bar for transparency, accountability, and sustainability. These are SB 261, “The Climate-Related Financial Risk Act.” and “The Climate Corporate Data Accountability Act” or (Senate Bill) SB 253.

US businesses with annual revenues of over $1 billion (SB253) and $500 million (SB261) doing business in California, will be directly impacted. Smaller companies may also feel the effect.

SB261 “The Climate-Related Financial Risk Act” mandates that large companies with over $500 million in annual revenue that do business in the state must publicly disclose their climate-related financial risks and mitigation strategies.

SB 253 “The Climate Corporate Data Accountability Act”, mandates US businesses with over $1 billion in annual revenues and operating in California, to file detailed reports on their carbon emissions.

SB 261, “The Climate-Related Financial Risk Act.”

What is SB261 all about?

The requirement on organisations in scope is to disclose the financial risks they face arising from climate-change and what they are doing about them. It asks businesses to identify potential scenarios and outline mitigation / adaption plans. The analysis must cover both “physical” and “transitional” risks. Examples of physical risks include, rising temperatures, extreme weather events or water scarcity. Transitional risks cover secondary impacts, such as those from legislation; changes to customer buying habits; access to funding or the effect on company reputation. Importantly transitional changes present companies with positive opportunities as well as risks.

Understanding why California (as well as many other jurisdictions globally) are taking this course of action is key. In short, the legislation responds to a significant increase in volatility across financial markets. Climate change is having a real effect on costs. In 2024, Gallagher Re. reported that natural disasters caused economic losses of $417 billion globally. This was up by 15% on the previous year (which itself was a record). Moreover only 37% of this amount was covered by insurance. One consequence has been an ever-increasing spiral of insurance premiums; with many businesses in California unable to obtain cover at all. The barrage of floods, wildfires and other events in the last decade, has increased the clamour for transparent corporate accountability.

Hence the legislation aims to empower investors, government & other stakeholders to understand the resilience of a company’s business model and act accordingly. It asks, how a business protects itself against environmental & social volatility and how does its operations contribute to that volatility, either for better or for worse?! Nevertheless, management teams are strongly encouraged not simply to view the regulation as a painful tick-box exercise, that must be endured. Smart executive leaderships have used the process to fully understand their end-to-end value chains & future headwinds. Many have equipped themselves to develop proactive strategies for future health … as well as the zero-sum benefit of avoiding fines.

Inevitably, legal challenges to the bill exist, however the consensus is that these are extremely unlikely to delay implementation. So, for qualifying companies, it appears that reporting will come into effect from January 1st, 2026 (either for reporting year 2024 or 2025). If this seems vague, it is because unknowns still exist. Both SB 261 and SB253 laws are short, which leaves areas open for interpretation. For example, what constitutes, “doing business in California,” is not fully clear. Nor is what assurance will be required. What is known is that the legislation scopes private as well as publicly listed companies, which makes it more ambitious in its coverage. Additionally, a body known as the “Climate-Related Risk Disclosure Advisory Group,” has been established to review submissions, as well as feedback to government on future improvements to the act. The onus will be on businesses’ to, “comply or explain.” Whilst detailed quantitative measures are likely to be more lenient in the initial years; obligations will ratchet up over time, with an onus on continuous improvement. Because disclosure covers the full value chain, smaller businesses who may fall below the threshold, but who supply a larger business are liable to be pulled into its orbit.

In modelling an approach to SB 261, a recommended framework for businesses to follow is the “Taskforce for Climate-related Financial Disclosures” https://www.fsb-tcfd.org/ standard, or TCFD for short. It is testament to TCFD’s importance that in 2023 operational control was handed over to the international financial accounting body the IFRS foundation. To explain TCFD a little further, it consists of 4 key pillars:

Governance
Strategy
Risk management (physical and transitional)
Metrics and targets – e.g. here there is an overlap with SB253 on GHG reporting

Since its inception in 2017, over 5,000 organisations across 103 jurisdictions have reported following its structure, crucially helping businesses with the all-important element of scenario planning. Given its highly strategic nature, getting company leadership involved and establishing a steering group across functions is strongly recommended. This helps both align the exercise to financial impact and has a further advantage of enabling a broader view across the company’s entire value chain, which is a key factor in successful reporting.

For many US companies California’s twin laws represent the critical first transition from voluntary to mandatory climate reporting. Moreover, where California leads, others follow and New York, New Jersey, Colorado and Illinois, are all watching and waiting in the wings with near identical legislation. For business trading internationally, the EU’s Corporate Sustainability Reporting Directive https://finance.ec.europa.eu/regulation-and-supervision/financial-services-legislation/implementing-and-delegated-acts/corporate-sustainability-reporting-directive_en or CSRD; sets even more stringent standards. Plus, as mentioned at the outset of this piece, a plethora of countries across the globe are pushing ahead with similar regulation.

Disruption in the marketplace is coming quicker than ever. Business believing that change will be slow and this can sit peripheral to strategy, increasingly put themselves at risk. TerraVerde specialise in TCFD aligned advice with specific insights for companies in the travel & tourism sector.

SB 253, “The Climate Corporate Data Accountability Act”

What is SB253 all about?

Companies will need to measure and report upon their emissions of greenhouse gases (often termed as “carbon”) in accordance with the Greenhouse Gas Protocol. Both public and private companies are impacted, so long as revenues exceed the $1 billion annual revenue threshold. Requirements are comprehensive, as companies will need to disclose direct and indirect emissions. In technical terms this means: Scope 1 (fuel you burn); Scope 2 (fuel burnt on your behalf – predominantly electricity) and finally Scope 3 (roughly everything else). The last one of these (Scope 3) is the most telling and the most complex. It represents a “catch-all” for every indirect emission from a company’s value chain. 15 different sub-categories exist, including both upstream of production and downstream distribution. Typical items covered are business travel, employee commuting, waste & water usage, procured goods and sold products. Gathering and calculating the data accurately from third parties is notoriously challenging. However, on many occasions Scope 3 will account for a high percentage of a company’s footprint (frequently over 80%). Some small breathing space has been given in the schedule, as Scope 3 reporting will not come into force until 2027 (for 2026 emissions). However, Scopes 1 & 2 are required to be disclosed by June 2026 for 2025 activity. The law also requires that reports are validated via third-party assurance.

The SB 253 Act was passed in the State Assembly and signed into law in October 2023. It is estimated that circa 5,400 companies will fall within immediate scope and be asked to publicly share their emissions profiles. However, inclusion of the value chain in the measurement means that many smaller suppliers are likely to be sucked into its orbit. Transparency will be key, with disclosures needing to be available (& understandable) to all stakeholders including investors and local residents, via a digital platform. Failure to comply both risks fines and loss of company reputation.

So why is California taking this action? As with SB 261, the legislation responds to a significant increase in volatility across financial markets. Greenhouse gas emissions are seen to have a direct impact on climate change and global warming. Additionally of all areas of ESG, carbon is the most quantifiable. Hence this law aims to identify significant emitters of greenhouse gases and encourage them to decarbonise. Providing interested stakeholders e.g.: consumers and business partners; with transparent and verifiable data of a company’s impact, allows them to make informed choices. Additionally, the standardised format of the information is designed to protect investors from companies whose emissions levels may make them a higher risk. Hence, increasingly such data is determining access to capital. However, there are “carrots” as well as “sticks.” Company’s measuring their consumption are benefitting from reduced waste and cutting excess consumption. Case studies highlighting reduced operational costs are available. This is compounded by the extra loyalty and trust generated with consumers, suppliers, employees and investors, in today’s fast evolving commercial environment.

Will it happen?

This being the USA, the inevitable legal challenges have arisen. A lawsuit was filed by the U.S. Chamber of Commerce, claiming that accurate measurement was practically impossible and would lead to subjective reporting, effectively denying free speech. The requested injunction was recently overturned, with the judge denying the Chamber of Commerce’s motion. Though appeals will continue (the next one in 2026) the consensus is that these are extremely unlikely to succeed or to delay implementation. Many of California’s largest corporations are staunch supporters of the act. Furthermore, the margin among assembly regulators continues to widen, with the last vote being passed by 49 votes to 20.

Proliferation

Again, it is important to note that California is not acting in isolation. ESG / climate regulation is being enacted in many jurisdictions across the world including the UK, Japan, China, India and the UAE. For the “full fat” version, the EU’s Corporate Sustainability Reporting Directive (CSRD) https://finance.ec.europa.eu/regulation-and-supervision/financial-services-legislation/implementing-and-delegated-acts/corporate-sustainability-reporting-directive_en ; sets a most rigorous benchmark! In the US, multiple “blue states” including New York, Colorado, Illinois & New Jersey, are waiting in the wings with near identical legislation. So, businesses trading both with the 4th largest economy in the world and multi-nationally, will have little alternative but to comply. All this represents a fast-moving global shift towards the low-carbon economy. Spread is happening both geographically & vertically. Larger companies falling within scope need to measure their supply chain as part of the “Scope 3” assessment & collect data from 3rd party suppliers. So, even though such suppliers themselves may fall under the threshold; by virtue of supplying a larger business, they will be asked to share data, to a greater or lesser extent. N.B. It is telling that many recent business community surveys, highlight that regulation is the foremost factor driving ESG adoption.

Our tips & guidance for businesses:

Assess if your business is in scope. If yes, then address the collection of 2025 emissions data asap.
Accurate data collection which conforms to the GHG protocol, is a key challenge in achieving a successful carbon measurement; especially if companies are measuring for the first time. An initial step is to run a scoping assessment of GHG categories which are material and need to be included. This is best done by check against the company purchase ledger. For example, items representing under 5% of Scope 3 do not need disclosure. However, companies must demonstrate how they have reached this decision. Also be aware that data may exist in different formats across the organisation e.g. Excel, emails, bills etc. and gatekeepers may be busy with business-as-usual activities!
Don’t let the perfect get in the way of the good. Best practice is to gather “activity data” (e.g. weight). If this is not available, then spend is a viable alternative, especially for the baseline year. Carbon foot printing is a continuous process and refinements in accuracy and GHG Protocol best practice can be improved year upon year.
Identify who will be responsible for data collection within the company and brief them accordingly. Candidates can come from multiple departments, but if the business does not have a dedicated carbon accounting / sustainability team, then the responsibility frequently sits with finance, who have experience both of data collection and analysis.
Using a reputable carbon accounting software platform is highly recommended. Many exist on the market. This will ensure your emissions can be verified, trackable and scalable for the future.
Unlike the SB 261 climate impact act (see previous article), although C-suite sponsorship is vital; overall the activity is more tactical, so the board can delegate work to subject matter experts.
However, results should not be kept in a silo. Successful carbon reduction projects have a strong track record of controlling consumption. Hence the positive impacts on cost savings, means that results can be aligned to financial performance. Furthermore, inspiring front-line staff (in procurement, marketing or operations) to adopt best practice into their roles, embeds the changes into company culture. The above help place decarbonisation at the core of an organization’s business strategy.
Uncertainties remain! For example, the exact meaning of, “doing business in California” is not yet clear. The State of California Franchise Tax Board definitions are a starting point, but not definitive. The body charged with implementation is the California Air Resources Board. “CARB” has recently released an enforcement notice & also intends to share reporting templates for public consultation. We also recommend reading the law itself, which is mercifully short! Businesses should take advice and avoid getting caught out … bearing in mind the June 2026 reporting obligation (for 2025 data).
Remember that SB 253 disclosures will require 3rd party assurance, at latest by 2030.

In closing:

Disruption in the marketplace is coming quicker than ever. The “soft law” of voluntary certifications is turning to the “hard law” of regulation. Companies will need to treat their carbon accounting in the same way as their financial accounting. (It is no coincidence that the accounting body IFRS has taken the lead role globally in ESG reporting). Data will need to stand up to external stakeholder scrutiny and be disclosed transparently to such parties. Business believing that change will be slow and this can sit peripheral to strategy, increasingly put themselves at risk. Conversely, many blue-chip companies have already addressed their operations and are on target to reducing their impact in line with the best global standards.

TerraVerde specialise in carbon accounting and reduction advice, with specific insights for companies in the travel & tourism sector. For more information, contact patrick.richards@terraverde-solutions.com

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