Climate-Related Financial Risk Act Enacted

Governor Gavin Newsom signed into law SB 261, which requires companies with annual revenue of more than $500 million and that do business in California to disclose publicly the climate-related financial risks to their company and how they will address them. The information, supporters argue, will be useful for individuals and lawmakers when making public and private investment decisions. SB 261 would require reporting from more than 10,000 companies in California and around the world.

Reporting Requirement

SB 261 requires companies to prepare a report disclosing the entity’s climate-related financial risks and measures adopted to reduce and adapt to these risks. The first reporting is due on or before January 1, 2026, and reports will be biennial thereafter. The company is required to make a copy of the report available to the public on its own internet website. Reports can be consolidated at the parent company level.

Reports are to be in accordance with the recommended framework and disclosures contained in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and its measures adopted to reduce and adapt to climate-related financial risks.

Climate-Related Financial Risks

The bill defines a “climate-related financial risk” as a material risk of harm to immediate and long-term financial outcomes due to physical and transition risks. This includes 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.

Applicability

Companies subject to the requirements are corporations, partnerships, limited liability companies, or other business entities that:

• Were formed under the laws of California, the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the United States;

• have total annual revenues of more than $500 million; and

• do business in California.

The law excludes business entities subject to regulation by the Department of Insurance in California or that is in the business of insurance in any other state.

Penalties

The bill requires the California Air Resources Board (CARB) to adopt regulations that authorize it to seek administrative penalties from covered entities for failing to make the report publicly available on its internet website or publishing an inadequate or insufficient report.

CARB Public Report

The bill also requires CARB to contract with a climate reporting organization to biennially prepare a public report that contains specified information. This information includes a review of the disclosure of climate-related financial risk contained in a subset of publicly available climate-related financial risk reports and an analysis of the systemic and sector-wide climate-related financial risks facing the state.

Climate-Related Financial Risk Disclosure Fund

Companies must pay an annual fee for CARB’s actual and reasonable costs to administer and implement the bill. Proceeds from the fees will fund the newly created Climate-Related Financial Risk Disclosure Fund. The money from the fund will fund CARB for purposes of the bill.