Summary: California Climate Regulations - Discerning Fact from Fiction

Third Economy hosted a webinar on August 14, 2025, detailing California’s impending climate legislation and how companies can translate the state’s rulemaking guidance into reporting. Our discussion centered on interpreting the California Air Resources Board (CARB)’s recent climate disclosure FAQs and creating a compliance strategy for this year and beyond.

Our summary on how to address the legislative details and create a long-term reporting strategy is listed below:

SB 253 and 261 - Regulatory Status

• CARB continues to host workshops around the development of “California Climate Disclosure Laws” and the regulatory process to implement the legislation.
  • CA SB 253: The Climate Corporate Data Accountability Act
  • CA SB 261: Climate-Related Financial Risk Disclosure
• CARB communications have focused to date on threshold questions rather than specific reporting requirements and formats.
• CARB plans to follow aspects of the California Franchise Tax Board definition for "doing business in California" (capturing most companies with any California operations who meet the revenue thresholds).
• Ongoing litigation may affect final regulations.

Practical Implementation Guidance

To help companies begin to draft their initial submissions, our experts discussed the biggest areas of focus and details to consider.

Framework Alignment

• For SB 253, companies will need to report against the GHG Protocol for Scope 1 and 2 emissions (2026) and Scope 3 emissions (2027).
• For SB 261, we recommend aligning reporting with the TCFD (or IFRS S2) framework to best address the rule’s emphasis on governance, strategy, and risk management.
  • Most companies are expected to align with TCFD for initial reporting

"Good Faith Efforts" – A Comply or Explain Strategy

• Companies need not check every box immediately - an explanation of gaps and future compliance roadmap should meet the spirit of CARB’s rulemaking for initial submissions.
• NOTE: Public portal nature will require same rigor as other public disclosures and companies should consider their competitive positioning, beyond regulatory compliance.
• Expectations will vary by company size, industry, and climate risk profile and should be considered during drafting.
• Higher-risk companies will likely face greater scrutiny than those with limited exposure.

Creating a Formal Compliance Strategy

For companies who are completing climate risk reporting for the first time, our recommendation is to set a broader strategy before diving into the reporting details.

Here are a few ideas to get companies started:

Conduct a Stakeholder Analysis

Consider the various stakeholders that will be privy to your disclosures and how this information will affect your long-term value.

• Key Stakeholders: These could include regulators, investors, suppliers, vendors, downstream clients.
• Peer Analysis: Consider what competitors and industry peers are reporting.
• Regional Differences: Account for stakeholders with different geographical perspectives.
• Value Chain Impact: Assess short-term and long-term impacts across the entire value chain.
  

Work with your risk and strategy functions to clarify areas susceptible to climate risk. These can include:

• Physical Risks: Tangible risks like flooding, wildfires, hurricanes
• Transition Risks: Regulatory changes, carbon pricing impacts, reputational risks, supply chain disruptions and consumer/client demands

Stress-test your existing risk management processes and identify gaps.

• Incorporate climate risks into existing ERM processes
• Address gaps in current risk assessment frameworks
• Include operational, supply chain, employee, and capital investment impacts

Recommended Actions

Immediate Steps:

• Risk Assessment Integration: Incorporate climate risks into existing ERM processes with cross-functional participation, standardized timeframes, and materiality thresholds.
• Carbon Footprint Baseline: Identify all emission sources and complete Scope 1 and 2 calculations, as well as Scope 3 screening across your value chain to assess transition risks.
• Data Management: Develop collection and management plan for regular reporting with quality verification capabilities. Invest in data collection and management technology that supports long-term reporting requirements, not just immediate compliance.

Documentation and Other Reporting Cadence Tips:

• Document risk identification processes to demonstrate systematic approach for "comply or explain" disclosures.
• Align with existing enterprise risk reporting frequency rather than standalone assessments long-term.

Long-term Perspective:

These regulations represent the beginning of a "new operating reality" with increasing regulatory requirements expected over 3-4 years. Building robust, scalable systems is ultimately more critical than initial compliance.

Suggested Next Steps for Companies:

1. Assess whether regulations apply to your organization

2. Begin climate risk assessment and ERM integration

3. Start carbon footprint baseline development

4. Develop data collection and management systems

5. Create compliance roadmap with legal and technical support

6. Monitor CARB guidance updates and regulatory developments

Disclaimer: The summary provided does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available are for general informational purposes only.