California Sets the Pace with Climate Risk Reporting Guidance

The California Air Resources Board (CARB) has unveiled a draft checklist to guide companies preparing to comply with SB 261, the state’s landmark climate risk disclosure law. The regulation requires all companies with over $500 million in annual revenue that conduct business in California to publish biennial reports detailing their exposure to climate-related financial risks and how they plan to manage them.

 

The first reports will be due on 1 January 2026, making California the first US state to mandate climate risk reporting on this scale. Given California’s economic influence, the regulation could effectively become a national benchmark, especially for businesses operating across state lines.

 

Clarifying the Scope of Disclosure

 

In response to concerns raised by the business community since the passage of SB 261, CARB has clarified several key areas of the law. Companies can rely on parent company disclosures where applicable, meaning subsidiaries are not required to submit their own separate reports. Insurers have also been confirmed as exempt from the regulation.

 

To reduce compliance burdens, CARB will permit companies to report using existing global standards, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the IFRS S2 standard developed by the International Financial Reporting Standards Foundation. Frameworks recognised by major exchanges or national governments will also be accepted.

 

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Emissions Reporting and Scenario Flexibility

 

One of the most anticipated elements of the guidance is the decision to delay the requirement for Scope 1, 2, and 3 greenhouse gas emissions disclosures. These elements, which are already the focus of a separate law, SB 253, will not be required in the first round of reporting under SB 261.

 

CARB has also relaxed expectations around scenario analysis. While companies will be expected to describe how climate-related scenarios could impact their business strategies, they will not be required to provide detailed quantitative modelling at this stage. This change comes in response to industry concerns about the complexity and cost of scenario planning, particularly for firms that may also fall under SB 253’s remit later in 2026.

 

Reporting Expectations: Four Pillars

 

The draft checklist is structured around four central categories. Companies must explain how their governance structures incorporate climate risk oversight, particularly at board and executive levels. They will be expected to outline how climate-related risks and opportunities are factored into business strategy over different time horizons, and to demonstrate the resilience of those strategies in a changing climate.

 

In the area of risk management, companies must show how climate risks are identified, assessed, and addressed, and how those processes are integrated into their broader enterprise risk systems. The final area focuses on metrics and targets, with companies expected to disclose the tools and benchmarks they use to monitor climate exposure and performance.

 

CARB has described the checklist as a flexible starting point. The intention is to allow companies to tailor disclosures to their specific operations and material risks, while still supporting comparability across sectors.

 

Strategic Implications for Business Leaders

 

For executives, the new regulation signals a clear shift in expectations. With no federal climate disclosure law currently in effect, California is stepping into a leadership role, offering a framework that may well shape national standards in the absence of federal guidance from the Securities and Exchange Commission.

 

An estimated 5,000 firms will fall under the law’s jurisdiction, including many based outside California but with substantial business activity in the state. This creates new urgency for leadership teams to embed climate risk into governance, financial planning, and operational strategy.

 

Broader Significance in a Global Context

 

The alignment of California’s rules with international standards like TCFD and IFRS S2 has drawn global attention. Regulators worldwide are watching closely to see how California’s policies influence corporate behaviour, investor decision-making, and future regulation at both federal and international levels.

 

Although the new law adds another layer to the patchwork of climate reporting rules around the world, it also promises greater transparency. For institutional investors, credit analysts, insurers, and regulators, these disclosures provide critical insights into how US companies are responding to the physical and transitional risks posed by climate change.

 

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Preparing for the 2026 Deadline

 

With the clock ticking toward the first reporting deadline, companies should begin assessing their governance capabilities, climate risk exposure, and internal reporting systems. They will also need to evaluate how their processes will eventually align with more detailed emissions disclosures under SB 253.

 

CARB’s draft checklist offers more than compliance instructions. It sets the tone for the future of climate reporting in the United States: one that integrates environmental risk into core business strategy, aligns with international standards, and provides transparency that markets can trust.

 

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