Sacramento California outside the capital building
getty
On February 26, the California Air Resources Board adopted the final language, enacting corporate greenhouse gas reporting and climate-related financial risk disclosure requirements starting in August 2026. With the vote, California becomes the first U.S. state to enact sustainability reporting requirements. While historic, this early step to require climate change reporting by businesses is limited and continues to face legal challenges.
In 2023, California approved the Climate Accountability Package, a pair of bills aimed at creating sustainability reporting requirements. Senate Bill 253 required companies that do business in California and have an excess of $1 billion in revenue, defined as “reporting entities”, to submit an annual report for Scope 1 and Scope 2 starting in 2026. Scope 3 reporting will begin in 2027. A companion bill, SB 261, targeted companies with revenue over $500 million. However, enforcement of SB 261 has been paused by the Courts.
The responsibility of drafting specific regulations and implementing the reporting standards was delegated to the California Air Resources Board. Following months of public comment and hearings to address important definitions, scope, and enforcement, the full board of CARB voted to approve the staff proposal on February 26.
Here are 5 key takeaways from the new regulation:
1. Only Scope 1 and Scope 2 reporting will be mandatory for 2026.
The international development of sustainability reporting has divided GHG emissions and other impacts into three categories identified as scopes. Generally, Scope 1 focuses on the direct GHG emissions of the company and Scope 2 reports GHG emissions of the energy providers used by the company. Scope 3 focuses on GHG emissions along the supply chain, including those of private companies who sell to publicly traded companies, and by the end consumer.
As set in SB 253, first-year reporting is limited to Scope 1 and Scope 2. This drastically minimizes the impact to those companies that must file reports and eliminates the need to gather significant information from smaller companies that do business with reporting entities. For opponents, the down the line impact of Scope 3 reporting is a significant burden on small and medium sized companies. Proponents believe that capturing Scope 3 emissions is the only way to accurately report the impacts of a company’s activities.
The Scope 3 reprieve is limited to the first year, as the legislation requires reporting to start in 2027. However, watch for the court to intervene, finding it is beyond the jurisdiction of California to regulate.
2. Limited to companies with $1 billion in annual revenue.
The reporting requirement in SB 253 states the company must have annual revenues in excess of $1 billion. SB 261 has a lower threshold of $500 million. It was unclear what should be considered in calculating revenue to determine a reporting requirement. The new rule aligns definition of “Revenue” with existing definition of “Gross Receipts” as defined by California Revenue and Taxation
Code § 25120(f)(2). With SB261 paused, and Scope 3 not being reported until 2027, the first-year will be limited to very large companies.
3. Limited to companies doing business in California
Both SB 253 and SB 261 are limited to companies that “do business in California.” To clarify what constitutes meeting this requirement, CARB looked to California Revenue and Taxation Code § 23101. A company is doing business in California if:(1) Organized or commercially domiciled in California; or (2) sales exceeds amount set by Franchise Tax Board ($735,019 in 2024). A exemption was carved out for wholesale sales of electricity, non-profit and charitable organizations, government entities, companies majority owned by a government entities, companies that process employee compensation or payroll expenses, and insurance companies.
4. Reporting deadline set for August 10.
CARB was delegated the responsibility of setting the annual reporting deadline. They settled on August 10, 2026 for the initial reporting date. For companies with a fiscal year cutoff prior to February 1, 2026, they will report data from FY 25 – 26. If a company has a FY ending on or after February 1, 2026, then they will report for FY 24 – 25.
5. No penalties if not collecting climate change data before December 2024.
Throughout the process, CARB was made aware that it takes time to compile the necessary data. Conservative estimates place the ramp up time for reporting at 6 months. However, the data must be collected in real time. A regulation requiring reporting of data not already being collected by the company is unreasonable and not realistic.
In December 2024, CARB clarified in an Enforcement Notice that CARB will exercise its enforcement discretion for good-faith first-year submissions. Reporting for 2026 is based on data collected by companies, based on the company’s internal collecting standards in place at the time of the letter. Company’s must make a good faith effort to report, but are not expected to back fill information they were not collecting at the time. Expect a similar standard to be in place for 2027 as the reporting timeframe for some companies has already started.
The debate over climate change related reporting is far from over. Legal challenges continue to work their way through the federal court system. There is a strong possibility that a federal court may decide to delay the implementation of SB 253, as it did with SB 261. For now, large companies will be subject to greenhouse gas reporting and climate-related financial risk disclosure requirements starting August 10.