From Obligation to Opportunity: Making SB 261 Work for You

Understanding the New Reporting Requirements

California is moving ahead with new climate risk reporting rules under SB 261, passed in 2023 along with SB 253, which focuses on greenhouse gas (GHG) emissions. SB 261 requires large companies—those making over $500 million a year and doing business in California—to report on their climate-related financial risks and how they’re managing them. These reports must follow the Task Force on Climate-Related Financial Disclosures (TCFD) framework, though the state may update this to the newer IFRS S2 standard.

Starting January 1, 2026, companies must publish these reports on their websites every two years. The California Air Resources Board (CARB) can fine companies up to $500,000 for noncompliance. While SB 219, passed in 2024, changed some deadlines for GHG reporting under SB 253, it confirmed that the SB 261 reporting timeline is fixed, and the requirements are now part of the state’s health and safety code.

Using SB 261 as a Catalyst for Building a Climate Risk Strategy

Whether or not a company has developed a climate risk disclosure report before, this legislation offers a valuable opportunity to strengthen climate risk integration into business strategies. SB 261 and the TCFD framework encourages a thoughtful approach to developing a climate risk program over time. The original bill adds a crucial element: companies need to describe how they’re planning to reduce and adapt to these climate-related financial risks. This is in line with how the TCFD has been implemented in practice, often resulting in Climate Risk and Opportunities reports. In these reports, companies identify the potential physical and transition risks under the categories prescribed under the TCFD and the opportunities their business model is set up to take advantage of. For example, a traditional energy company may see a transition risk in a policy re-instituting a price on excessive methane loss but an opportunity in their pneumatic device replacement program that has positioned them as a low emissions operator. Once the reports are submitted, they’ll be analyzed, likely by a third party, promoting a process that will evolve over time.

Leveraging Simplified Reporting with TCFD

The TCFD guidelines may sound complex, but they’re pretty straightforward. They focus mainly on qualitative descriptions of how companies are addressing climate change and preparing for various future scenarios, such as varying degrees of temperature rise and accompanying socioeconomic changes. While quantitative aspects, such as those required under SB 253 for GHG emissions, can be included, the emphasis is more on providing business-useful information on incorporating processes for managing climate risk, reporting on progress, and plans to mitigate those risks. For example, if a company has disclosed a target to reach a certain emissions intensity by 2030, this report would indicate their progress towards that target as of the most recent date they feel confident disclosing information for.

Customizing TCFD Risk Scenarios for Success

When companies start incorporating climate risk using the TCFD framework, they often rely on broad, general comparisons and existing efforts. The scenarios available for analysis are usually macro-level projections that aren’t designed to fit individual companies perfectly. This can lead to oversimplifications and responses that can seem more routine than actionable. Customizing these scenarios is crucial for getting meaningful insights.

The real opportunity here is to take a more strategic approach. Companies should identify which risks matter most to their operations, focus on material aspects of the scenarios for their businesses, and involve the right teams to create a more practical climate risk strategy.  In the ideal model, there would be an effective integration with the enterprise risk management team, the operations team, and other impacted business teams. Their task is to align on a reasonable number of targets and processes to effectively respond to the types of changes envisioned in these climate scenarios. For example, a well-developed internal cost of carbon can inform capital decisions and be used across business teams to help evaluate and justify projects.

Setting a Foundation for Future Reports

Even if a company takes a more basic approach, acknowledging the various climate risks and opportunities outlined by the TCFD can provide value. For businesses that have gone through the reporting process before, this is a chance to refine and improve their next report. It can be beneficial to work with a knowledgeable facilitator who understands company culture and can tailor a project plan to fit. This way, the report can serve a more proactive purpose rather than just being a reactive document.

Getting Ahead with SB 261 and SB 253

As we move forward, it’s important to remember that these reports aim to provide useful insights, similar to financial reports, about how companies are managing climate-related goals and risks. Using SB 261 requirements to kick off a climate program will help create industry-specific analyses and ensure that companies start weaving these considerations into their functional processes.

Importantly, California’s review and analysis component of the legislation should help highlight trends, best practices, and lessons learned for future reporters. Early adopters will be recognized for their efforts, and companies already doing climate risk reporting won’t have to duplicate efforts. Plus, reports can be submitted at the “parent-company” level, so local facilities won’t need to create California-specific reports. Overall, these regulations are in line with the overarching goal of gradually integrating climate-related risks into business practices.

For more information on the GHG disclosure legislation (SB 253), also moving forward, check out the most recent May 29 webinar from CARB. It includes expert work from Montrose staff comparing various GHG standards and protocols commissioned by CARB.

If you want help getting there, reach out to one of our climate risk and GHG experts.

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