Manufacturers Across California Face Imminent Legal Requirements Over Climate Risks
Starting January 1, 2026, companies with over $500 million in annual revenue doing business in California will be required to publicly disclose their climate-related financial risks biennially, based on 2025 data. This requirement is part of SB 261, California's Climate-Related Financial Risk Act.
According to the California Air Resources Board (CARB), the disclosures must be complete, specific, and decision-useful. Companies must publish a publicly accessible climate-related financial risk report or a link to such a report. CARB will open a public docket on December 1, 2025, where companies must post these links for public access.
Preparing for SB 261 Compliance
To prepare for disclosure under SB 261, companies should:
- Conduct thorough climate-related financial risk assessments, focusing not just on emissions but on physical, regulatory, and transition risks posed by climate change.
- Develop internal governance and data management systems that ensure disclosures are accurate, comprehensive, and can be updated biennially.
- Review and align reporting frameworks to produce reports that meet CARB’s expectations of specificity and usefulness.
- Prepare to publicly host disclosures on their own platforms, as CARB will only host links, not the full reports.
- Monitor ongoing CARB rulemaking developments and FAQs to stay current with clarifications and compliance guidance, including responding to public consultations on definitions and implementation details.
The Five-Step Roadmap for SB 261 Compliance
The roadmap for SB 261 compliance includes:
- Assessing climate risks and opportunities.
- Conducting a materiality assessment.
- Executing scenario analysis.
- Beginning to operationalize the strategy.
- Building out disclosures consistent with the TCFD and publishing the report.
Opportunities for Manufacturers
Manufacturers face multiple climate-related risks, but they also stand to benefit from various opportunities. These include developing low-carbon or recyclable products, cost savings from waste reduction and circular processes, and onsite renewables that provide energy independence.
When executing scenario analysis, companies should analyze the impact of future climate scenarios on their business's strategy and resilience, using at least two climate scenarios in their modeling, including one with a high-emissions scenario.
Building Credibility and Trust
The report developed under SB 261 is not just an opportunity to comply with the new law, but to build credibility and trust with various stakeholders. It should be transparent and compelling. The World Economic Forum's 2024 Annual Report states that companies that comprehensively assess their risk exposure and make adequate adaptation investments can have a positive anticipated payback, ranging from $2 to $19 for every dollar invested.
[1] California Air Resources Board (CARB). (n.d.). SB 261: Climate-Related Financial Risk Disclosures. Retrieved from https://ww2.arb.ca.gov/cc/cap-and-trade/regulation/sb-261-climate-related-financial-risk-disclosures
[2] California Air Resources Board (CARB). (n.d.). SB 261: Climate-Related Financial Risk Disclosures Frequently Asked Questions. Retrieved from https://ww2.arb.ca.gov/cc/cap-and-trade/regulation/sb-261-climate-related-financial-risk-disclosures/faqs
[3] California Air Resources Board (CARB). (n.d.). SB 261: Climate-Related Financial Risk Disclosures Rulemaking. Retrieved from https://ww2.arb.ca.gov/cc/cap-and-trade/regulation/sb-261-climate-related-financial-risk-disclosures/rulemaking
[4] California Air Resources Board (CARB). (n.d.). SB 261: Climate-Related Financial Risk Disclosures Public Consultations. Retrieved from https://ww2.arb.ca.gov/cc/cap-and-trade/regulation/sb-261-climate-related-financial-risk-disclosures/public-consultations
- To align with SB 261, companies in finance should not only focus on climate-related financial risks in their business, but also in their investments, as these risks can significantly impact long-term financial performance.
- With the climate-related financial risk disclosures, environmental science is increasingly intertwined with business decisions, as companies need to understand the physical, regulatory, and transition risks posed by climate change to maintain credibility and trust with investors.
- The implementation of SB 261 could potentially open up new opportunities for businesses in the manufacturing sector, as they can invest in low-carbon and recyclable products, energy-efficient processes, and renewable energy infrastructure to mitigate climate risks and capitalize on potential market opportunities.
