California has enacted a groundbreaking set of climate disclosure regulations that will affect thousands of companies doing business in this area. The laws - SB 253, SB 261, and AB 1305 - are Senate Bills that together form the core of California’s Climate Accountability Package, a comprehensive legislative effort enacted in October 2023.
These Californian laws require businesses to disclose greenhouse gas (GHG) emissions and climate-related financial risks, with enforcement beginning as early as January 2026. California law in this area directly responds to the growing impact of climate change. It is notably more expansive than current federal regulations or SEC proposals, imposing broader compliance obligations and disclosure requirements.
In this article, we’re taking a closer look at what the California climate disclosure laws mean for businesses, who is impacted by them, and how firms can prepare for the new legislation.
Understanding the California Climate Disclosure Laws
The California Climate Disclosure Laws are built around three key pieces of legislation. Together, they form the foundation of the state’s Climate Accountability Package, which establishes climate disclosure rules and ESG legislation that impact companies subject to the new requirements. These laws require companies that meet certain revenue thresholds and operate in California to disclose emissions, climate risks, and climate-related claims, emphasising the importance of carbon emission reduction strategies.
SB 253 – Climate Corporate Data Accountability Act
SB 253 requires public and private companies with over $1 billion in annual revenues doing business in California to disclose their Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions. This framework focuses on comprehensive emissions reporting, ensuring companies measure their direct and indirect impact. To comply with these requirements, companies must follow the GHG Protocol (Greenhouse Gas Protocol) as the standardised framework for measuring and reporting greenhouse gas emissions.
By including Scope 3 - often the largest and most complex category of emissions across supply chains - the law raises accountability and provides regulators, investors, and stakeholders with a complete view of a company’s carbon footprint. Efficient processes for collecting and managing emissions data, especially across the supply chain, are essential for accurate reporting and compliance. The law aims to help companies reduce greenhouse gas emissions as part of their compliance efforts.
SB 261 – Climate-Related Financial Risk Act
SB 261 applies to companies with more than $500 million in annual revenue doing business in California. Financial institutions are also required to comply with SB 261. These firms must publish reports every two years on climate-related financial risks, following standards such as the Task Force on Climate-related Financial Disclosures (TCFD), now overseen by the International Sustainability Standards Board.
This law links climate risk to corporate resilience, forcing businesses to evaluate physical threats (like wildfires or droughts) and transition risks (such as regulatory or market shifts) that may impact financial performance. Companies must also outline mitigation strategies for climate-related financial risks in their reports. Non-compliance or inaccurate reporting can increase litigation risk for companies. The goal is to integrate climate risk into corporate governance and long-term decision-making.
AB 1305 – Voluntary Carbon Market Disclosures Act
AB 1305 addresses transparency around climate-related claims and voluntary carbon markets. Companies making statements about “carbon neutrality,” “net zero,” or using offsets must disclose detailed information about the projects, credits, and methodologies supporting those claims. They must substantiate such claims to avoid legal and regulatory risks, as failure can result in significant consequences under California's new laws and SEC regulations.
Specifically, regarding voluntary carbon offsets, AB 1305 imposes disclosure obligations requiring companies to provide information about the offset project details, verification standards, and accountability measures. This framework is designed to reduce the risk of greenwashing, ensuring that public sustainability statements are credible and backed by verifiable data. By scrutinising offsets and voluntary disclosures, AB 1305 helps protect stakeholders and builds trust in corporate climate commitments.
What are Scope 1, 2, and 3 emissions?
Companies are responsible for measuring and disclosing their Scope 1, 2 and 3 carbon emissions using the Greenhouse Gas Protocol (GHG Protocol) methodology under California's climate disclosure rules:
Scope 1 – Direct emissions
Scope 1 covers emissions from sources a company owns or directly controls, such as fuel burned in company vehicles or emissions from on-site manufacturing facilities.
Scope 2 – Indirect energy emissions
Scope 2 includes indirect emissions from the generation of purchased energy, like the electricity used to power offices or the heating and cooling supplied to buildings.
Scope 3 – Value chain emissions
Scope 3 encompasses all other indirect emissions across a company’s value chain, from supplier activities and business travel to product distribution and end-of-life disposal. The supply chain often accounts for most of a company's indirect emissions, making it a critical focus for disclosure. To meet regulatory requirements, companies need efficient processes to track and report Scope 3 emissions data accurately.
Organisations must publicly report these emissions to comply with climate disclosure regulations. The data is also required to go through limited-assurance processes by external audit firms.
For a closer look at the difference between Scopes 1, 2, and 3, take a look at our blog.
Which businesses must comply with the new climate regulations?
Large companies, including publicly listed companies, public companies, and private companies operating in California, are among the companies subject to these laws when they come into effect in January 2026. The companies subject to the new disclosure requirements include those with annual revenues above specified thresholds, such as $500 million or $1 billion, depending on the regulation. This includes US companies formed in the United States, even if they are headquartered outside of California, as long as they have significant California sales or operations in the state.
Limited liability companies (LLCs) that meet the annual revenues and California sales thresholds are also affected. Eligible companies must comply with these requirements regardless of their business structure, provided they exceed the annual revenue criteria.
Business in California and climate risk
Operating in California means facing escalating climate hazards - from wildfires and droughts to heatwaves and shifting precipitation patterns. These risks can disrupt supply chains, damage assets, and erode profitability. In 2025 alone, California’s wildfires contributed to billions in insurance losses. The California disclosure laws push firms to quantify and anticipate such exposures, transforming climate risk from a long-term assumption into a measurable, reportable factor.
To address these challenges, businesses should develop mitigation strategies that reduce greenhouse gas emissions and protect their operations from future climate-related disruptions.
Climate disclosure and investor confidence
Transparent climate reporting is increasingly vital for investor trust. Research shows that credible climate disclosures correlate with stronger firm valuations. Reliable climate disclosures provide investors with the information needed to make informed investment decisions and to assess the financial risks and opportunities associated with a company's sustainability efforts. Institutional investors now treat climate reporting on par with financial disclosures, engaging companies directly to improve transparency and governance standards.
Building operational resilience
Companies can identify inefficiencies and vulnerabilities across their operations and supply chains by systematically measuring emissions and climate-related financial risks. Implementing efficient processes for emissions data collection not only streamlines tracking but also enhances operational resilience. This visibility enables proactive planning, reduces the risk of climate-related disruptions, and strengthens resilience in California’s increasingly volatile business environment.
Accessing sustainable capital
Strong climate disclosure practices also enhance financial positioning. Firms with robust, auditable disclosures often enjoy lower borrowing costs, easier access to green financing, and higher investor appeal. Companies with clear net-zero emissions commitments attract investors and can easily access sustainable capital. Studies indicate that markets reward companies with higher-quality reporting through stronger valuations and improved long-term stability.
When do the California Climate Disclosure Laws come into effect?
The compliance timeline for California’s ESG disclosure regulations requires companies to submit their first reports for Scope 1 and 2 emissions by 2026. These requirements are established under Senate Bill 253 (SB 253) and Senate Bill 261 (SB 261), which set the compliance deadlines for the state's climate disclosure rules. Climate-related financial risk reports are due by 1 January 2026 and updated every two years. Scope 3 emissions reporting is required starting in 2027, though early tracking is strongly recommended. Companies should know that the compliance timeline may be subject to revisions or delays, so staying updated on regulatory changes is crucial.
Companies must begin monitoring their data now. Initially, as part of the phased compliance process for climate disclosure rules, companies will need to obtain limited assurance for their emissions data, with a transition to reasonable assurance required in later years to provide greater confidence in the accuracy and reliability of reported sustainability data.
Are there penalties for non-compliance?
Companies can be fined up to $500,000 per year for noncompliance under SB 253 and charged up to $50,000 per year for failing to submit or submitting inadequate SB 261 reports. These fines are considered civil penalties imposed for non-compliance with climate-related reporting laws. Scope 3 emissions are subject to limited enforcement until 2030, so there are no set fines, provided disclosures are made in good faith.
The California Air Resources Board oversees and implements these regulations, including developing rules, ensuring compliance, and verifying emissions data for companies operating within the state. Non-compliance with these requirements also increases litigation risk, as companies may face private lawsuits or enforcement actions related to inaccurate or incomplete disclosures.
Despite ongoing legal challenges-most notably from the U.S. Chamber of Commerce - California’s laws remain in effect. A federal court ruling in November 2024 allowed lawsuits to proceed but denied all motions to block enforcement, meaning companies must still comply while the legal process unfolds.
How to get started with sustainability reporting
The California Climate Disclosure Laws represent the most comprehensive state-level climate regulations in the US. Businesses must take proactive steps to stay ahead of enforcement and investor expectations.
Here are the key actions to get started:
- Audit existing emissions data to identify gaps and ensure reporting aligns with the GHG Protocol, the standardised framework for calculating and disclosing greenhouse gas emissions.
- Engage suppliers early to collect Scope 3 data, which often accounts for the largest share of a company’s climate impact.
- Select third-party assurance providers to verify emissions disclosures and build credibility with regulators and investors.
- Align internal processes with TCFD standards to assess and disclose climate-related financial risks as part of broader sustainability risk management.
- Expand reporting beyond environmental data by including social and governance ESG factors, reflecting comprehensive corporate accountability.
- Use sustainability software to automate GHG data collection across Scope 1, 2, and 3, streamline TCFD-aligned risk reporting, and ensure audit-ready compliance with detailed disclosure rules.
- Comply with AB 1305 by disclosing details on voluntary carbon offsets, including project information and verification standards, to enhance transparency and reduce greenwashing risks.
California’s new climate disclosure laws set a high standard for transparency, requiring businesses to measure emissions, report climate-related financial risks, and validate sustainability claims. Preparing early with the right systems in place is essential for compliance, investor trust, and long-term resilience.
KEY ESG’s sustainability software provides audit-ready carbon emission reports and allows stakeholders to track changes in regulatory requirements and adapt quickly to accommodate them.
Request a free demo of our ESG software today to learn how we can help your business and comply efficiently and confidently with the California Climate Disclosure Laws.
California has enacted a groundbreaking set of climate disclosure regulations that will affect thousands of companies doing business in this area. The laws - SB 253, SB 261, and AB 1305 - are Senate Bills that together form the core of California’s Climate Accountability Package, a comprehensive legislative effort enacted in October 2023.
These Californian laws require businesses to disclose greenhouse gas (GHG) emissions and climate-related financial risks, with enforcement beginning as early as January 2026. California law in this area directly responds to the growing impact of climate change. It is notably more expansive than current federal regulations or SEC proposals, imposing broader compliance obligations and disclosure requirements.
In this article, we’re taking a closer look at what the California climate disclosure laws mean for businesses, who is impacted by them, and how firms can prepare for the new legislation.
Understanding the California Climate Disclosure Laws
The California Climate Disclosure Laws are built around three key pieces of legislation. Together, they form the foundation of the state’s Climate Accountability Package, which establishes climate disclosure rules and ESG legislation that impact companies subject to the new requirements. These laws require companies that meet certain revenue thresholds and operate in California to disclose emissions, climate risks, and climate-related claims, emphasising the importance of carbon emission reduction strategies.
SB 253 – Climate Corporate Data Accountability Act
SB 253 requires public and private companies with over $1 billion in annual revenues doing business in California to disclose their Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions. This framework focuses on comprehensive emissions reporting, ensuring companies measure their direct and indirect impact. To comply with these requirements, companies must follow the GHG Protocol (Greenhouse Gas Protocol) as the standardised framework for measuring and reporting greenhouse gas emissions.
By including Scope 3 - often the largest and most complex category of emissions across supply chains - the law raises accountability and provides regulators, investors, and stakeholders with a complete view of a company’s carbon footprint. Efficient processes for collecting and managing emissions data, especially across the supply chain, are essential for accurate reporting and compliance. The law aims to help companies reduce greenhouse gas emissions as part of their compliance efforts.
SB 261 – Climate-Related Financial Risk Act
SB 261 applies to companies with more than $500 million in annual revenue doing business in California. Financial institutions are also required to comply with SB 261. These firms must publish reports every two years on climate-related financial risks, following standards such as the Task Force on Climate-related Financial Disclosures (TCFD), now overseen by the International Sustainability Standards Board.
This law links climate risk to corporate resilience, forcing businesses to evaluate physical threats (like wildfires or droughts) and transition risks (such as regulatory or market shifts) that may impact financial performance. Companies must also outline mitigation strategies for climate-related financial risks in their reports. Non-compliance or inaccurate reporting can increase litigation risk for companies. The goal is to integrate climate risk into corporate governance and long-term decision-making.
AB 1305 – Voluntary Carbon Market Disclosures Act
AB 1305 addresses transparency around climate-related claims and voluntary carbon markets. Companies making statements about “carbon neutrality,” “net zero,” or using offsets must disclose detailed information about the projects, credits, and methodologies supporting those claims. They must substantiate such claims to avoid legal and regulatory risks, as failure can result in significant consequences under California's new laws and SEC regulations.
Specifically, regarding voluntary carbon offsets, AB 1305 imposes disclosure obligations requiring companies to provide information about the offset project details, verification standards, and accountability measures. This framework is designed to reduce the risk of greenwashing, ensuring that public sustainability statements are credible and backed by verifiable data. By scrutinising offsets and voluntary disclosures, AB 1305 helps protect stakeholders and builds trust in corporate climate commitments.
What are Scope 1, 2, and 3 emissions?
Companies are responsible for measuring and disclosing their Scope 1, 2 and 3 carbon emissions using the Greenhouse Gas Protocol (GHG Protocol) methodology under California's climate disclosure rules:
Scope 1 – Direct emissions
Scope 1 covers emissions from sources a company owns or directly controls, such as fuel burned in company vehicles or emissions from on-site manufacturing facilities.
Scope 2 – Indirect energy emissions
Scope 2 includes indirect emissions from the generation of purchased energy, like the electricity used to power offices or the heating and cooling supplied to buildings.
Scope 3 – Value chain emissions
Scope 3 encompasses all other indirect emissions across a company’s value chain, from supplier activities and business travel to product distribution and end-of-life disposal. The supply chain often accounts for most of a company's indirect emissions, making it a critical focus for disclosure. To meet regulatory requirements, companies need efficient processes to track and report Scope 3 emissions data accurately.
Organisations must publicly report these emissions to comply with climate disclosure regulations. The data is also required to go through limited-assurance processes by external audit firms.
For a closer look at the difference between Scopes 1, 2, and 3, take a look at our blog.
Which businesses must comply with the new climate regulations?
Large companies, including publicly listed companies, public companies, and private companies operating in California, are among the companies subject to these laws when they come into effect in January 2026. The companies subject to the new disclosure requirements include those with annual revenues above specified thresholds, such as $500 million or $1 billion, depending on the regulation. This includes US companies formed in the United States, even if they are headquartered outside of California, as long as they have significant California sales or operations in the state.
Limited liability companies (LLCs) that meet the annual revenues and California sales thresholds are also affected. Eligible companies must comply with these requirements regardless of their business structure, provided they exceed the annual revenue criteria.
Business in California and climate risk
Operating in California means facing escalating climate hazards - from wildfires and droughts to heatwaves and shifting precipitation patterns. These risks can disrupt supply chains, damage assets, and erode profitability. In 2025 alone, California’s wildfires contributed to billions in insurance losses. The California disclosure laws push firms to quantify and anticipate such exposures, transforming climate risk from a long-term assumption into a measurable, reportable factor.
To address these challenges, businesses should develop mitigation strategies that reduce greenhouse gas emissions and protect their operations from future climate-related disruptions.
Climate disclosure and investor confidence
Transparent climate reporting is increasingly vital for investor trust. Research shows that credible climate disclosures correlate with stronger firm valuations. Reliable climate disclosures provide investors with the information needed to make informed investment decisions and to assess the financial risks and opportunities associated with a company's sustainability efforts. Institutional investors now treat climate reporting on par with financial disclosures, engaging companies directly to improve transparency and governance standards.
Building operational resilience
Companies can identify inefficiencies and vulnerabilities across their operations and supply chains by systematically measuring emissions and climate-related financial risks. Implementing efficient processes for emissions data collection not only streamlines tracking but also enhances operational resilience. This visibility enables proactive planning, reduces the risk of climate-related disruptions, and strengthens resilience in California’s increasingly volatile business environment.
Accessing sustainable capital
Strong climate disclosure practices also enhance financial positioning. Firms with robust, auditable disclosures often enjoy lower borrowing costs, easier access to green financing, and higher investor appeal. Companies with clear net-zero emissions commitments attract investors and can easily access sustainable capital. Studies indicate that markets reward companies with higher-quality reporting through stronger valuations and improved long-term stability.
When do the California Climate Disclosure Laws come into effect?
The compliance timeline for California’s ESG disclosure regulations requires companies to submit their first reports for Scope 1 and 2 emissions by 2026. These requirements are established under Senate Bill 253 (SB 253) and Senate Bill 261 (SB 261), which set the compliance deadlines for the state's climate disclosure rules. Climate-related financial risk reports are due by 1 January 2026 and updated every two years. Scope 3 emissions reporting is required starting in 2027, though early tracking is strongly recommended. Companies should know that the compliance timeline may be subject to revisions or delays, so staying updated on regulatory changes is crucial.
Companies must begin monitoring their data now. Initially, as part of the phased compliance process for climate disclosure rules, companies will need to obtain limited assurance for their emissions data, with a transition to reasonable assurance required in later years to provide greater confidence in the accuracy and reliability of reported sustainability data.
Are there penalties for non-compliance?
Companies can be fined up to $500,000 per year for noncompliance under SB 253 and charged up to $50,000 per year for failing to submit or submitting inadequate SB 261 reports. These fines are considered civil penalties imposed for non-compliance with climate-related reporting laws. Scope 3 emissions are subject to limited enforcement until 2030, so there are no set fines, provided disclosures are made in good faith.
The California Air Resources Board oversees and implements these regulations, including developing rules, ensuring compliance, and verifying emissions data for companies operating within the state. Non-compliance with these requirements also increases litigation risk, as companies may face private lawsuits or enforcement actions related to inaccurate or incomplete disclosures.
Despite ongoing legal challenges-most notably from the U.S. Chamber of Commerce - California’s laws remain in effect. A federal court ruling in November 2024 allowed lawsuits to proceed but denied all motions to block enforcement, meaning companies must still comply while the legal process unfolds.
How to get started with sustainability reporting
The California Climate Disclosure Laws represent the most comprehensive state-level climate regulations in the US. Businesses must take proactive steps to stay ahead of enforcement and investor expectations.
Here are the key actions to get started:
- Audit existing emissions data to identify gaps and ensure reporting aligns with the GHG Protocol, the standardised framework for calculating and disclosing greenhouse gas emissions.
- Engage suppliers early to collect Scope 3 data, which often accounts for the largest share of a company’s climate impact.
- Select third-party assurance providers to verify emissions disclosures and build credibility with regulators and investors.
- Align internal processes with TCFD standards to assess and disclose climate-related financial risks as part of broader sustainability risk management.
- Expand reporting beyond environmental data by including social and governance ESG factors, reflecting comprehensive corporate accountability.
- Use sustainability software to automate GHG data collection across Scope 1, 2, and 3, streamline TCFD-aligned risk reporting, and ensure audit-ready compliance with detailed disclosure rules.
- Comply with AB 1305 by disclosing details on voluntary carbon offsets, including project information and verification standards, to enhance transparency and reduce greenwashing risks.
California’s new climate disclosure laws set a high standard for transparency, requiring businesses to measure emissions, report climate-related financial risks, and validate sustainability claims. Preparing early with the right systems in place is essential for compliance, investor trust, and long-term resilience.
KEY ESG’s sustainability software provides audit-ready carbon emission reports and allows stakeholders to track changes in regulatory requirements and adapt quickly to accommodate them.
Request a free demo of our ESG software today to learn how we can help your business and comply efficiently and confidently with the California Climate Disclosure Laws.
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