California Air Resources Board Publishes Draft SB 261 Guidance

Last night, the California Air Resources Board (CARB) released draft guidance on the Climate‐Related Financial Risk Act (Health & Safety Code Section 38533/Senate Bill 261). This disclosure mandate will require subject companies to publish their first biennial climate-related financial risk report by January 1, 2026.

The bulk of the draft guidance consists of a checklist to be used in preparing the climate risk report required by Section 38533. The draft guidance also provides clarification on some of the questions CARB has received as part of its Section 38533 public engagement process. The draft guidance is further described in this post.

The draft guidance follows on the heels of CARB's August 21 Virtual Public Workshop. The checklist items are consistent with the "How" slides from the Workshop, as supplemented by CARB's related verbal commentary. The Workshop is discussed in this Ropes & Graypost.

The Draft Checklist

The checklist is intended to be used as a starting point for reporting entities, taking into account that legislative direction provides various compliance options and that a company's climate-related financial risk report may be more detailed than what is outlined in the guidance, depending on the company and its circumstances.

CARB notes that the draft guidance does not have the force of law and is not intended to (and cannot) establish new mandatory requirements beyond those already in the statute. CARB further notes that, if a discrepancy exists between the guidance and Section 38533 or any future CARB regulations, the statute and regulations will control.

The checklist is largely broken down by each of the four Task Force on Climate-related Financial Disclosures (TCFD) pillars: (1) governance; (2) strategy; (3) risk management; and (4) metrics and targets. At the August 21 Workshop, CARB indicated that these four overriding principles underpin the climate-related risk disclosures under Section 38533.

The draft guidance indicates that the details a reporting entity should disclose in each of the four topical sections will vary depending on the company, the discretion of the preparers of the disclosure and the reporting framework used (principally TCFD or IFRS S2). According to CARB, the key guiding principle in preparing the climate risk report should be meeting the needs of users. More specifically, CARB indicates that reporting entities should focus on disclosing climate-related financial risks, and measures adopted to reduce and adapt to climate-related financial risk, that are material to the reporting entity's operations and financial outlook, using the lens of decision-usefulness for investors and other stakeholders.

CARB notes that its recommendations are largely based on the 2017 TCFD framework, which is expressly contemplated by Section 38533. The CARB guidance is intended to be read in addition to the recommendations and reporting guidance made available by the TCFD and/or in connection with the IFRS S2 climate standard, depending on which reporting framework is used. Based on CARB's commentary, this appears to include supplemental sector guidance.

Information on the Reporting Framework Used

The draft guidance indicates that each report should contain a statement on:

• Which reporting framework is being applied; and
• Using that reporting framework as a reference point, which recommendations and disclosures have been compiled and which have not. According to the draft guidance, this should be accompanied by a short summary of why recommendations/disclosures have not been included as well as a discussion of any plans for future disclosures.

Governance

The draft guidance indicates that the following is the minimum CARB requirement for disclosure:

• Describe the organization's governance structure, if any, for identifying, assessing and managing climate-related financial risks. Details should include a discussion of any management oversight of climate-related risks and opportunities and should provide a description pertaining to board oversight of those risks and opportunities.

Strategy

The draft guidance indicates the following minimum CARB requirement for disclosure:

• Describe the actual and potential impacts of climate-related risks and opportunities on the company's operations, strategy and financial planning (where material). This includes describing:

At the August 21 Workshop, CARB verbally indicated that scenario analysis is not part of its minimum expectations for the initial reporting period. The September 2 draft guidance appears to take a consistent approach and provides additional commentary.

The draft guidance indicates that reporting entities are expected to discuss the resilience of their strategy in the context of future climate change. The discussion may be qualitative in nature. Where a qualitative scenario-based assessment is feasible and relevant for a particular company, CARB encourages its inclusion.

Risk Management

According to the draft guidance, the disclosures for the purposes of implementation of Section 38533 are for reporting entities to not only describe climate-related financial risks but also to disclose how those risks are managed and integrated into the company's business practices.

According to the draft guidance, the following are the minimum CARB requirements for disclosure:

• Describe how the reporting entity identifies, assesses and manages climate-related risks, including a description of the process the reporting entity uses for identifying, managing and assessing climate-related risks, and how those considerations and processes are integrated into its overall risk management.

Metrics and Targets

Consistent with CARB's verbal remarks at the August 21 Workshop, the guidance indicates that Scope 1, 2 and 3 emissions data is not a minimum CARB requirement for the initial Section 38533 reporting period. CARB notes in the draft guidance that it has received stakeholder input that gathering this data may not be feasible by January 1, 2026 and/or may be duplicative with the requirements of Section 38532 (the greenhouse gas emissions reporting requirement).

The draft guidance indicates the following minimum CARB disclosure requirements:

• Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities adopted to reduce and adapt to climate-related risk, where this information is material.

Additional Clarifications

CARB also provided additional clarifications on questions relating to Section 38533 received as part of its public engagement process. The clarifications do not answer the thornier interpretive questions that companies are grappling with (some of which have been asked at CARB's Workshops). However, the clarifications may be helpful around the margins for some companies.

• Use of calendar versus fiscal year data.Section 38533 does not specify the use of calendar or fiscal year data. Per the FAQs previously published by CARB, covered entities should use the most recent/best available data for their first report.
• Use of other climate-related financial risk disclosures for California reporting.All climate-related financial risk reports must meet the requirements of Section 38533 and then be posted on the reporting entity's own website, as required by that section. Reporting entities must then post the location of the public link on the public docket to be established by CARB (the public docket is discussed in this Ropes & Graypost).
• Inclusion of in-scope subsidiaries in a parent company report.If a parent company is submitting a climate-related financial risk disclosure report on behalf of its subsidiaries, the subsidiaries do not need to break out their own information separately. Under the statute, climate-related financial risk reports may be consolidated at the parent company level.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.