Businesses face continued uncertainty regarding California's climate reporting requirements contained in Senate Bill 253 (the Climate Corporate Data Accountability Act) and Senate Bill 261 (the Climate-Related Financial Risk Act). Adopted in October 2023, the climate disclosure laws require large businesses doing business in California, including both publicly traded and privately held companies, to publicly disclose their greenhouse gas emissions (SB 253) and their climate-related financial risk (SB 261). With compliance deadlines fast approaching next year, the path toward compliance remains unclear due to ambiguous requirements, pending legal challenges and delays in rulemaking.
Climate Disclosure Laws
Senate Bill 253 requires companies doing business in California and generating more than $1 billion in annual revenues to publicly disclose Scope 1 and Scope 2 greenhouse gas emissions annually next year and Scope 3 emissions in 2027.
- Scope 1 emissions are direct greenhouse gas emissions that stem from sources the company owns or directly controls, regardless of location, including fuel combustion activities.
- Scope 2 emissions are indirect greenhouse gas emissions from the company's consumed electricity, steam, heat or cooling purchased or acquired by a company, regardless of location.
- Scope 3 emissions are indirect upstream and downstream greenhouse gas emissions, other than Scope 2 emissions, from sources that the company does not own or directly control, and may include purchased goods and services, business travel, employee commutes, and processing and use of sold products.
Companies face penalties up to $500,000 per reporting year for failure to comply.
Beginning January 1, 2026, Senate Bill 261 requires companies doing business in California and generating more than $500 million in annual revenues to disclose climate-related financial risks and information on how the company is addressing such risks. Companies face penalties up to $50,000 per reporting year for failure to comply.
Federal Lawsuit
In January 2024, a lawsuit brought by the U.S. and California Chambers of Commerce as well as the American Farm Bureau Federation, Los Angeles County Business Federation, Central Valley Business Federation and Western Growers Association, sought to overturn both climate disclosure laws on constitutional grounds including the First Amendment, Dormant Commerce Clause, and Supremacy Clause. Thus far, the efforts to overturn the laws have been unsuccessful.
On August 13, 2025, the U.S. District Court denied plaintiffs' motion to preliminarily enjoin both laws on First Amendment grounds. In reviewing the arguments, the Court concluded that "the Plaintiffs have not shown a likelihood of success on the merits with respect to either of its facial First Amendment challenges to SBs 253 and 261."
With respect to SB 253, the Court concluded that the law "requires reporting of only factual – and not misleading – information" and that the law is "reasonably related to the State's substantial government interest in reducing emissions." With respect to SB 261, the Court concluded that the law's disclosure requirements are not factual. However, the State demonstrated the law's benefit in providing investors with "reliable information that enables investors to make informed judgments about the impact of climate-related risks on their economic choices."
Finally, the Court concluded that the plaintiffs failed both to demonstrate that the laws violate the First Amendment and that they will suffer irreparable harm. The Court found that blocking the laws would delay California from "advancing the public interests for which it adopted the laws."
With no immediate legal reprieve in sight, companies must be prepared to comply with the climate disclosure laws.
Delay in Regulatory Clarity
SB 253 tasked the California Air Resources Board (CARB), the agency with regulatory oversight, to promulgate regulations implementing the law, including establishing the date in 2026 when businesses must submit their first emissions disclosure report. CARB originally had until January 1, 2025 to adopt these regulations, but the California legislature extended that date to July 1, 2025. CARB failed to meet the July 1, 2025 date, making it unclear when CARB will promulgate the final regulations.
It is also unclear whether CARB will provide additional regulatory guidance to businesses complying with SB 261, which has a looming January 1, 2026 compliance deadline.
Recognizing its own rulemaking delays, CARB issued an enforcement notice in December 2024, announcing it would use its "enforcement discretion" regarding the first SB 253 report, provided businesses "demonstrate good faith efforts to comply with the requirements of the law." Thus, CARB will "not take enforcement action for incomplete reporting against entities, as long as the companies make a good faith effort to retain all data relevant to emissions reporting for the entity's prior fiscal year."
In a "Frequently Asked Questions" guidance document posted on July 9, 2025, CARB clarified that it would also apply enforcement discretion to businesses demonstrating "good faith" efforts to comply with SB 261's financial risk disclosure requirements.
Key Takeaways
With the Court refusing to block the climate disclosure laws for the time being, businesses must be prepared to comply with the 2026 disclosure deadlines. Although the Court could ultimately overturn the laws, the litigation will likely continue for years. Companies cannot rely on the Court overturning the laws to avoid their compliance obligations.
CARB's willingness to exercise enforcement discretion is good news for companies grappling with compliance challenges due to the lack of regulatory clarity. At the same time, CARB's Fact Sheet highlights the significant ambiguities that remain, including the absence of clear definitions for many key components of the laws. Further, the Court's refusal to block the climate disclosure laws may embolden CARB to take a more aggressive regulatory position in the future. Prudent businesses should be diligently developing a comprehensive compliance plan, including gathering and organizing climate-related data, to comply with laws.
Originally published by Environment+Energy Leader.
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