Addressing climate change requires understanding its profound corporate financial risks, impacting business strategy, operations, and long-term viability for investors.
The California Air Resources Board (CARB) is advancing a new climate-related financial risk disclosure program. This landmark law requires major corporations to report on the financial risks they face from climate change.
CARB has issued a new draft checklist and guidance document to assist companies in preparing their first reports, which are due at the start of next year.
Who must report?
The new law, Senate Bill (SB) 261, applies to U.S. companies that do business in California and have annual revenues exceeding $500 million. However, it specifically exempts businesses in the insurance industry. A parent company may file a consolidated report that includes its subsidiaries.
Reporting requirements and frameworks:
The initial report must be prepared and publicly disclosed biennially starting on January 1, 2026. Companies have a degree of flexibility in how they report and can choose from several established frameworks to meet the disclosure requirements, including:
- The Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
- The International Financial Reporting Standards Sustainability Disclosure Standards (IFRS S2).
- Any report required by a regulated exchange, national government, or other governmental entity.
Reports should focus on disclosing material climate-related financial risks and the measures taken to reduce and adapt to them. A key guiding principle is to provide information that is useful for investors and other stakeholders.
CARB clarifications:
CARB’s new guidance addresses common questions from businesses as they prepare for the new reporting mandates.
Exemptions: The law explicitly excludes entities in the insurance business.
Data Usage: The use of either calendar year or fiscal year data is permitted for the report.
Third-Party Reports: Companies can use reports prepared for other purposes as long as they meet the requirements of the California statute and are posted on the company’s own website.
Public Docket: A public docket will be open from December 1, 2025, to July 1, 2026, for companies to post a link to their public reports, enhancing transparency.
Minimum Requirements: The checklist outlines minimum disclosures for key areas such as governance, strategy, risk management, and metrics. However, for this initial report, CARB will not require the disclosure of Scope 1, 2, and 3 emissions data to avoid duplication with another state law, SB 253.
