California has taken a pioneering step in climate change governance by becoming the first U.S. state to mandate sustainability reporting for businesses. This groundbreaking initiative, spearheaded by the California Air Resources Board (CARB), introduces corporate greenhouse gas reporting and climate-related financial risk disclosures, set to commence in August 2026. However, the implementation of these regulations is not without its challenges, including ongoing legal disputes.
The state legislature passed the Climate Accountability Package in 2023, which includes Senate Bill 253 and its companion, Senate Bill 261. SB 253 mandates that companies operating in California with revenues exceeding $1 billion must annually report their Scope 1 and Scope 2 emissions starting in 2026. The reporting for Scope 3 emissions will follow in 2027. SB 261 targets firms with revenues over $500 million, although its enforcement has been temporarily halted by court orders.
CARB was tasked with formulating specific regulations and standards for this reporting. After extensive public input and hearings, CARB approved the final proposal on February 26. Below are key details of the new requirements:
Scope 1 and Scope 2 Reporting to Begin in 2026
The new regulation initially focuses on Scope 1, which covers direct emissions from company operations, and Scope 2, which accounts for indirect emissions from purchased energy. Reporting for these scopes is intended to limit the initial burden on companies, allowing a phased approach. Scope 3 emissions, involving the entire supply chain, will require reporting from 2027, although this aspect may face legal scrutiny.
Application to Large Revenue Companies
SB 253 applies to businesses with over $1 billion in annual revenue, while SB 261 sets a lower threshold of $500 million. The rules align the definition of “Revenue” with “Gross Receipts” as per California Revenue and Taxation Code Code § 25120(f)(2). With SB 261’s enforcement paused and Scope 3 reporting deferred, the immediate impact will primarily affect larger corporations.
Criteria for Doing Business in California
Both Senate bills target firms “doing business in California,” defined by California Revenue and Taxation Code § 23101. This includes companies organized in California or those with sales exceeding a threshold set by the Franchise Tax Board, which is $735,019 for 2024. Exemptions exist for certain entities such as nonprofits and government-owned companies.
Reporting Deadline Established
CARB has set August 10, 2026, as the initial reporting deadline. Companies with fiscal years ending before February 1, 2026, will report for FY 2025-26, while those with fiscal years ending on or after that date will report for FY 2024-25.
No Immediate Penalties for Data Collection
Recognizing the time needed for data collection, CARB announced in December 2024 that it will use discretion in enforcing first-year submissions. Companies must make a good faith effort to report based on existing data collection practices but are not required to backfill uncollected data. This approach is expected to continue into 2027 as some companies have already started their reporting process.
As the state moves forward with these regulations, legal challenges remain a significant hurdle. It is possible that federal courts may delay the enforcement of SB 253, similar to the situation with SB 261. Nevertheless, as of now, large companies are gearing up to meet the new reporting standards by the August 2026 deadline.
Original Story at www.forbes.com