Get started: California's Climate-Related Financial Risk Act

Get started: California's Climate-Related Financial Risk Act

California's Senate Bill 261 (SB 261), the “Climate-Related Financial Risk Act”, requires large companies to publicly report on their climate-related financial risks and the measures they are taking to manage them. This short article explains the rules and links to additional resources, including an open source template for compliant disclosures.

Overview

Key Dates

Initial reports are due at the beginning of 2026.

• 1 January 2026: deadline for the first climate-related financial risk report.

• Biennially thereafter: reports must be updated and published every two years.

Scope of Regulation and Disclosure

The regulation applies broadly, targeting any partnership, corporation, limited liability company, or other business entity with over $500 million in total annual revenue that conducts business in California.

The disclosure must detail climate-related financial risks in line with the globally recognised TCFD framework, covering both physical risks (such as extreme weather) and transition risks (such as regulatory changes and changing consumer sentiment). Companies must also outline their strategies for managing these risks, such as governance structures, risk management processes, and any relevant targets.

Goals of the Regulation

Global investor expectations. Climate risk disclosures are becoming a ubiquitous feature of capital markets outside of the United States, with mandatory disclosures in place in Europe, Japan, Brazil, Singapore, China, and various other jurisdictions. SB 261 ensures that businesses operating in California meet the expectations of investors around the world.

• Encourage businesses to engage with the risks they face. Not all businesses face climate related risks. But for those that do have material concerns, the disclosure exercise is an opportunity to increase awareness of these within the business and to develop risk management strategies.

• Bolster the Californian economy. Businesses in California face a wide range of climate risks, from devastating wildfires to loss of agricultural revenue. On the flipside, many will benefit from climate related opportunities, such as growing demand for innovative new technology. Climate disclosures give investors the information they need to allocate capital more effectively in light of these factors, reducing systemic risk and lowering the cost of capital in sectors with growth potential.

The Underlying Framework for SB 261

SB 261 is explicitly built upon the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD created a globally-lauded, voluntary framework organised around four pillars: Governance, Strategy, Risk Management, and Metrics & Targets. SB 261 effectively makes alignment with this framework a legal requirement in California.

The global regulatory landscape has since evolved. The International Sustainability Standards Board (ISSB) has now released IFRS S2, its climate-specific disclosure standard designed to represent a global baseline. Critically, the ISSB has fully incorporated the TCFD's recommendations into IFRS S2. In essence, IFRS S2 is the successor to the TCFD, building upon its foundation with more detailed and prescriptive requirements.

For companies reporting under SB 261, this means that whilst California's law cites the TCFD, aligning with the more comprehensive IFRS S2 is the most forward-looking approach. Doing so ensures TCFD compliance whilst preparing the business for the new global standard.

Learn More

For the full legislative text and official guidance, visit the California Legislative Information portal for SB-261 Climate-related financial risk.