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Do You Do Business in California? A Look into the New SB 261 Legislation

November 20, 2023

California recently passed climate-related legislation that will affect thousands of businesses throughout the US and internationally. One piece of the passed legislation, SB 261, will require covered entities to publicly disclose a climate-related financial risk report every other year starting January 1, 2026. Read on.

California’s New Climate Disclosure Framework:

In 2023, the California Legislature passed, and Gov. Gavin Newsom signed into law, the Climate Corporate Data Accountability Act (SB 253 by Sen. Scott Wiener) and the Climate-Related Financial Risk Disclosure Act (SB 261 by Sen. Henry Stern). Together, the two laws will require corporate emissions data and climate-related risk disclosures from large companies. Both laws cover public and private companies and will serve as critical complements to the pending U.S. Securities and Exchange Commission climate disclosure rule, which will only apply to publicly traded corporations.

This blog clarifies some of the terms of the SB 261 legislation. A separate blog will highlight and clarify the terms of SB 253 at a later date.

Who is affected by California’s SB 261?

The Climate-Related Risk Disclosure Act (SB 261) will apply to an estimated 10,000 U.S. and multinational companies, including publicly and privately held corporations, LLCs, and partnerships that have greater than $500 million in revenue and are “doing business” in California.

To further clarify who would be required to produce such a report, the legislation refers to the definition of “doing business” in California. Although at this time, the parameters surrounding “doing business” in California are still being finalized within the terms of this new legislation, California’s Franchise Tax Board (CFTB) has already used and defined this phrase for identifying businesses that are taxable in the state.

The CFTB considers you to be “doing business” if you meet any of the following criteria:

  • Are engaged in any transaction for the purpose of financial gain within California.
  • Are organized or commercially domiciled in California.
  • For 2022, your California sales, property or payroll exceed (either threshold or 25% of total) the following amounts:
    • California sales: $690,144
    • California real and tangible personal property: $69,015
    • California payroll compensation: $69,015

The California Air and Resource Board (CARB) will finalize the definition of “doing business” in California during regulation development. However, the above should be used now to assess whether your business is potentially impacted.

What is required:

The legislation will require covered entities to prepare a climate-related financial risk report every other year starting January 1, 2026, and submit the reports to CARB. Submissions will be reviewed by the Climate-Related Risk Disclosure Advisory Group, which will identify inadequate reports, as well as propose additional policy changes and best practices for disclosure. In addition to submitting these climate-related financial risk reports to the CARB, subject companies will need to make the reports available on their websites.

In the climate-related financial risk report, businesses would need to disclose their (i) climate-related financial risk consistent with recommendations from the Task Force on Climate-Related Financial Disclosure (TCFD) framework or on an equivalent standard, such as the International Sustainability Standards Board’s (ISSB) sustainability standards and (ii) the measures adopted to mitigate and adapt to the disclosed climate-related financial risk.

What should businesses be doing now?

Businesses can respond by creating an action plan for climate disclosure now. Potentially impacted businesses should be assembling a technical team to determine if they will be subject to the new laws. Once determined they are subject, a plan should be prepared to collect and report on the required data and other information that will meet CARB scrutiny.

We can help you perform a materiality assessment and provide general consultative guidance regarding the TCFD framework or the ISSB standards to meet the new SB 261 legislation. Contact us to learn more.

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