Overview
As federal climate disclosure efforts stall, California is forging ahead with two landmark laws—SB 253 and SB 261—that impose sweeping climate-related reporting obligations on large companies (we’ve previously detailed the laws here). Despite lingering legal challenges to the laws, on September 24, 2025, the California Air Resources Board (CARB) published a list of entities that it considers subject to these laws, including the first set of climate-related financial risk disclosures due January 1, 2026. With the countdown ticking, companies doing business in California should understand the scope of the laws, assess their exposure, and prepare for compliance.
Overview of California's Climate Disclosure Laws
SB 261 applies to companies with annual revenue exceeding $500 million that do business in California. It requires biennial public reports on climate-related financial risks, aligned with frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) or the IFRS S2 standard. Reports must address governance, strategy, risk management, and metrics. The first disclosures are due by January 1, 2026, and noncompliance may result in penalties of up to $50,000 per year. It is critical to note that business entities regulated by the California Department of Insurance and entities engaged in the business of insurance in any other state are excluded from the "covered entity" definition and thus are not subject to the SB 261 disclosure regime.
SB 253 applies to companies with annual revenue exceeding $1 billion that do business in California. These entities must annually report greenhouse gas emissions for the prior fiscal year, covering: Scope 1 emissions (direct emissions from sources that the reporting company owns or directly controls), Scope 2 (indirect emissions from energy consumed, purchased, or acquired), and Scope 3 emissions (indirect and downstream emissions from other sources, including but not limited to, those from supply chains and product use).
CARB currently anticipates a June 30, 2026 deadline for covered entities to submit their initial Scope 1 and Scope 2 disclosures along with independent assurances experienced in emissions accounting. Scope 3 disclosures are expected to start in 2027, with additional phased increases in the type and level of assurances required in 2030. Noncompliance may result in penalties of up to $500,000 per year, although CARB has indicated that grace periods will be available for companies making good faith efforts.
CARB’s Preliminary List of Covered Companies and Voluntary Survey
On September 24, 2025, CARB published a preliminary list of over 4,000 covered entities potentially subject to SB 253 and SB 261. However, CARB emphasized that the list—based on March 2022 data—is neither exhaustive nor definitive. Companies are responsible for compliance regardless of their inclusion or exclusion from the list and should independently assess their status.
The Court Challenge
In January 2024, the US and California Chambers of Commerce led filing of a lawsuit against CARB challenging both laws, asserting that they violate the US Constitution's Supremacy Clause, Dormant Commerce Clause, and First Amendment. The US District Court for the Central District of California immediately dismissed the Supremacy and Dormant Commerce clauses challenges but allowed the First Amendment claim to proceed.
The Chambers argue that the laws violate First Amendment rights because they "compel companies to publicly express a speculative, noncommercial, controversial, and politically-charged message that they otherwise would not express." The district court recently rejected this claim and denied the Chambers' motion to enjoin enforcement of the two laws, concluding that commercial speech regulation that requires only disclosure of "purely factual and uncontroversial information" generally is permissible under the applicable First Amendment jurisprudence where there is a legitimate state interest in imposing the requirement. The court found the state's interests in protecting investors and in reducing greenhouse gas emissions sufficient to satisfy that standard. An appeal to the Ninth Circuit was filed, and is currently pending before that court.
Anticipated Rulemaking and Next Steps
Outside of the legal challenge, we anticipate a flurry of rulemaking and other related activity over the next several weeks, as CARB races to finalize its implementation processes before the laws take effect on January 1, 2026. Based on its communications thus far, CARB is expected to issue notices of proposed rulemaking and open public comments periods on October 14, 2025. CARB is also expected to hold a public hearing on implementation regulations mid-December 2025.
In the interim, companies should begin preparing for compliance, including by:
- Evaluating whether they are a "covered entity" under both laws.
- Evaluating whether they meet the revenue and "doing business" thresholds.
- Understanding relevant frameworks and applicable criteria, such as the TCFD and IFRS S2 standards for SB 261 compliance. On Sept. 2, CARB published a "Draft Checklist" with guidance on complying with the initial SB 261 Jan. 1, 2026 reporting deadline.
- Coordinating across legal, sustainability, and finance teams.
- Budgeting for compliance-related costs.
- Conducting assessments, drafting disclosures, and engaging independent assurances providers or other consultants as appropriate.
Companies should also consider participating in public comment periods to make CARB aware of practical challenges and help shape the resulting rules and relevant guidelines. Counsel can assist with the preparation and participation processes, including by identifying potential collaborators, drafting comments for submission, and assessing risks and weighing options for navigating this new and uncertain compliance frontier.
