Oct 19, 2023

What is California SB 261? What enterprises need to know about the new climate risk regulation

Risk | by Nicole Engels, Chief Growth Officer | 3 Minutes

California SB 261, recently signed into law by California Gov.overnor Gavin Newsom, requires large companies to release climate-related financial risk data reports in line with internationally recognized recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD). The new state regulation aligns with a trend towards greater accountability around climate risk management: The SEC has proposed mandatory climate risk disclosures from businesses, and international standards organization ASTM is working on its own guide pertaining to climate risk to property.

“California frequently leads the charge for new regulations that the rest of the U.S. follows. It’s not surprising that SB 261 is ahead of the game,” says ClimateCheck CEO Cal Inman. “Many enterprises and financial institutions are already reporting climate-related risks per TCFD recommendations, so there is good precedent here.”

The first climate financial risk reports required by SB 261 are due in 2026, and businesses covered by this regulation need trustworthy sources of climate risk data and analysis. ClimateCheck uses historical data and an array of leading climate models to assess the risk of wildfires, flooding, storms, and extreme heat through 2050 that companies need to comply with the new law. Regulations put pressure on companies to adapt, but SB 261 also presents an opportunity for firms to protect their interests and be proactive around communicating climate-related financial risks and loss mitigation strategies to investors.

What is California SB 261?

The Climate-Related Financial Risk Act, or SB 261, requires companies with annual revenue greater than $500 million to publicly report climate-related financial risks every two years.  More than 10,000 companies are expected to be covered by the law. Businesses that don’t properly comply with SB 261 could face administrative fines of up to $50,000 per reporting year.

“California is the largest sub-national economy in the world, and there are a lot of companies covered by this bill that aren’t yet addressing climate-related risks to their business,” says Inman. “We have been working across industries for the last five years to help groups identify their physical climate risk so they may  adapt their properties and portfolios and mitigate those risks.”

Authored by Democratic Sen. Henry Stern, SB 261 was signed into law alongside a partner bill, the Climate Corporate Data Accountability Act (SB 253), which regulates public and private companies that are US-based, do business in California, and bring in $1 billion or more in revenue. Covered firms are required to release reports on their greenhouse gas emissions, including scope 3 emissions. Scope 3 emissions, also called value chain emissions, are not produced by a company or any assets it controls, but by downstream activities such as transportation, processing, use, and disposal of products.

The two laws were signed amid a record-breaking year for billion-dollar climate disasters in the U.S. and record-breaking high temperatures around the globe.

How does SB 261 relate to climate risk?

SB 261 was created to help protect investors and individuals from financial losses due to climate change. The bill defines climate-related financial risk as “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.”

“Much of the press coverage around climate risk is transition risk, or the costs associated with moving to a low-carbon economy,” says Inman. “Climate-related financial risk also includes physical risk — how our built environment is vulnerable to the changing risk profile of natural hazards.”

One dimension of material risk posed by climate change is risk to property. For enterprises and financial institutions, this can include corporate headquarters, industrial facilities, warehouses or other storage facilities, retail locations, or investment properties.

ClimateCheck’s climate risk data analysis solutions empower businesses to assess physical climate risk to their properties or whole property portfolio, in line with TCFD and SB 261. Our methodology covers risks including multiple forms of flooding, extreme precipitation, fire, storms, wind, and extreme heat.

Stay on top of climate risk disclosure requirements by working with a reliable climate risk data provider. ClimateCheck’s well-rounded team of climate science and real estate experts use the latest data to produce clear and complete risk assessments across multiple hazards. Our deliverables include portfolio risk reports, individual property risk reports, raw data, and more. You can learn more about our team and climate risk data and assessments here.

Looking to incorporate climate into your risk assessments?