SB 253 and SB 261: California ESG and Climate Disclosure Rules

When Congress stalls on climate policy, California fills the vacuum. It did so with vehicle emissions standards and cap-and-trade. Now, with SB 253 and SB 261, signed into law by Governor Gavin Newsom in October 2023 and amended by SB 219 in 2024, it has built the most comprehensive mandatory climate disclosure regime in the United States. The two laws require thousands of large companies doing business in the state to publicly report their greenhouse gas emissions and climate-related financial risks. Unlike the SEC’s climate rule, which targets only public registrants, California’s framework captures private companies too. Here is what the regulation actually demands.

Who Must Comply With SB 253 and SB 261?

Both laws apply to any partnership, corporation, limited liability company, or other business entity formed under US law that meets two conditions: it exceeds the relevant revenue threshold, and it is “doing business in California.”

The revenue thresholds differ. SB 253 applies to entities with more than $1 billion in total annual revenue. SB 261 applies to entities with more than $500 million. CARB defines revenue as gross receipts under California Revenue and Taxation Code Section 25120(f)(2), and to account for annual fluctuations, applicability is determined by the lesser of the entity’s two prior fiscal years of revenue. A company hovering near the threshold in a single year will not be caught unless it exceeds it in both.

The “doing business in California” test is based on sales alone. Under CARB’s adopted regulation, an entity qualifies if it is organised or commercially domiciled in the state, or if its California sales exceed $757,070 (the inflation-adjusted threshold for 2025), or 25% of the entity’s total sales. CARB excluded the property and payroll tests found elsewhere in the tax code. A company with $1.2 billion in global revenue and $800,000 in Californian sales falls within scope of SB 253, regardless of where it is headquartered.

SB 219, signed in 2024, introduced an important structural flexibility: parent companies may file consolidated reports on behalf of their in-scope subsidiaries, provided they hold majority ownership or control. Applicability is still assessed at the individual entity level, but reporting can be rolled up. For large corporate groups, this is one of the first decisions to make.

What SB 253 Requires: Greenhouse Gas Emissions Reporting

SB 253, the Climate Corporate Data Accountability Act, is the emissions pillar. Covered entities must annually disclose their greenhouse gas emissions following the Greenhouse Gas Protocol, the most widely used international standard for corporate carbon accounting.

The requirements phase in. From 2026, companies must report their Scope 1 emissions (direct emissions from owned or controlled sources) and Scope 2 emissions (indirect emissions from purchased electricity, heating, and cooling). The first filing deadline is August 10th 2026. Beginning in 2027, companies must also report Scope 3 emissions: all indirect emissions across the value chain, spanning 15 categories including purchased goods and services, business travel, employee commuting, upstream transportation, and the end use of sold products. For the average company, Scope 3 represents roughly 75% of total emissions. Measuring it credibly requires data from hundreds or thousands of third parties, and CARB is still refining the precise Scope 3 framework through an ongoing rulemaking process.

Third-party assurance ramps up in parallel. No independent verification is required for the inaugural 2026 filing. Limited assurance for Scope 1 and 2 becomes mandatory from 2027 through 2029, escalating to reasonable assurance from 2030 onward. Whether Scope 3 will eventually require assurance is still to be determined by CARB.

Recent analysis by the R Street Institute puts the average annual cost of climate-related disclosure compliance at approximately $533,000 per company across jurisdictions, with $237,000 of that devoted to greenhouse gas quantification alone.

What SB 261 Requires: Climate-Related Financial Risk Disclosure

SB 261, the Climate-Related Financial Risk Act, addresses the other side of the equation: not how much carbon a company produces, but how climate change threatens its finances. Covered entities must publish a biennial report on their climate-related financial risks and the measures they are taking to mitigate them. The report must be posted on the company’s website and a link filed with CARB’s public docket.

Reports must align with the Task Force on Climate-Related Financial Disclosures (TCFD) framework, the International Sustainability Standards Board’s IFRS S2, or another framework required by a government or stock exchange. Whichever framework a company chooses, its report must address four pillars. Governance: how the organisation’s board and management oversee climate-related risks. Strategy: how climate risks and opportunities affect the business model, planning, and financial position. Risk management: the processes used to identify, assess, and manage climate risks. Metrics and targets: the data and benchmarks used to measure and monitor exposure. Companies already reporting under the EU’s Corporate Sustainability Reporting Directive or the ISSB standards will find considerable overlap, but should map their existing disclosures against SB 261’s specific requirements to identify gaps. Legislative analyses estimated that more than 10,000 businesses would fall within SB 261’s scope.

The Carve-Outs: Who Is Exempt?

Five categories of entity are exempt from both SB 253 and SB 261: nonprofit and charitable organisations that are tax-exempt under the Internal Revenue Code; federal, state, and local government entities, including companies majority-owned by government bodies; insurance companies regulated by the California Department of Insurance or in the business of insurance in any other state; entities whose only business in California is the presence of remote employees; and companies whose sole Californian activity consists of wholesale electricity transactions. The insurance exemption was originally limited to SB 261 by statute. CARB extended it to SB 253 in its February 2026 regulation, though it has been directed to coordinate with the California Department of Insurance to evaluate whether further requirements are warranted.

SB 253 and SB 261 Penalties: What Non-Compliance Costs

Under SB 253, CARB can impose administrative penalties of up to $500,000 per entity per reporting year for violations including non-filing, late filing, and material misstatement. Under SB 261, penalties are capped at $50,000 per year. CARB has signalled enforcement discretion for the 2026 cycle, encouraging companies to submit what they have rather than waiting for perfection. Companies that were already collecting emissions data before December 2024 are expected to file; those that were not may submit a non-collection statement, though this is considered a last resort.

Critically, SB 253 includes a safe harbour for Scope 3: companies will not face penalties for good-faith errors in their value-chain disclosures through 2030, provided those disclosures were made on a reasonable basis. This reflects a pragmatic acknowledgment that Scope 3 measurement remains, in the words used during the original legislative debate, “more of an art than a science.”

The Legal Challenge to SB 253 and SB 261

The constitutional validity of both laws remains contested. A coalition led by the US and California Chambers of Commerce, joined by the American Farm Bureau Federation and several regional business groups, has challenged both laws on First Amendment grounds, arguing that the laws compel companies to speak on a politically charged subject. The court dismissed early claims based on federal preemption and extraterritoriality, leaving compelled speech as the sole surviving theory.

In November 2025, the Ninth Circuit issued a preliminary injunction pausing enforcement of SB 261, but declined to do the same for SB 253. CARB has confirmed it will not enforce SB 261’s original January 1st 2026 deadline and will set a new one after the appeal is resolved. Oral arguments took place on January 9th 2026. In a notable exchange, Judge Nguyen asked California’s counsel whether the state would accept severing the Scope 3 requirement from SB 253 if the court found it constitutionally problematic. The state indicated openness to that possibility, raising the prospect that Scope 3 may be the framework’s most legally vulnerable element.

SB 253 remains fully in effect. Companies subject to it should treat the August 2026 deadline as firm.

What Companies Should Do Now

For firms in scope, the operational priorities are clear. First, determine whether the “doing business in California” criteria and revenue thresholds apply, using CARB’s sales-only test and the lesser-of-two-years rule. Second, map the corporate structure to identify which entities fall under SB 253 and SB 261. Third, for SB 253, begin centralising Scope 1 and 2 emissions data consistent with the Greenhouse Gas Protocol and engage assurance providers early, as market capacity is limited. Fourth, for SB 261, continue building climate risk reporting capability despite the injunction. The stay could be lifted with little warning, and companies that have already invested in TCFD or ISSB-aligned disclosures will be best positioned to comply quickly.

California’s climate disclosure laws represent a structural shift in American corporate environmental accountability. SB 253 and SB 261 have demonstrated that a single state with a broad jurisdictional definition can impose transparency obligations on companies that would otherwise face none. Whether the courts allow that precedent to stand is the question on which everything now turns.