Jul 08, 2025
It’s not just a buzzword: Whether you’re headquartered in California or simply do business there, new ESG regulations coming into effect in the state are poised to reshape how your company reports emissions and climate risks. While “ESG” (Environmental, Social, and Governance) was once considered optional or even aspirational, it will now be a mandatory part of compliance for any large company doing business in California.
Need a refresher on ESG basics? Check out our blog series titled: Unveiling the ESG Acronym
What are SB 253 and SB 261?
In 2023, California made history by passing the first climate-related disclosure laws of their kind in the U.S. These laws require any large company doing business in California to publicly disclose both greenhouse gas (GHG) emissions and climate-related financial risks. Why does this matter? Penalties for noncompliance can reach up to $500,000 a year in addition to potential reputational damage with investors and regulators.
SB 253 – Greenhouse Gas Emissions Reporting
Starting in 2026, companies with over $1 billion in annual gross revenue globally must report their annual GHG emissions to the California Air Resources Board (CARB), covering:
- Scope 1: Direct emissions from sources owned or controlled by the company (e.g., fuel combustion on-site, chemical processes).
- Scope 2: Indirect emissions from purchased electricity, steam, heating, and cooling.
- Scope 3: All other indirect emissions (e.g., supply chain, transportation, product use, employee commuting). Scope 3 reporting begins in 2027.
For example, imagine a logistics firm with a fleet of delivery trucks. Under SB 253, their fuel usage (Scope 1), electricity for sorting facilities (Scope 2), and even emissions from third-party shippers (Scope 3) all must be reported. That’s a tall order without the right systems in place.
The law also requires third-party assurance to verify the numbers that your business reports are accurate:
- Limited assurance (basic verification of reported figures) starts in 2026.
- Reasonable assurance (deeper validation of assumptions and methodologies) becomes mandatory for all three scopes of emissions by 2030.
SB 261 – Climate Risk Disclosures
Climate risk data has become an essential part of due diligence for investors. SB 261 seeks to standardize reporting by requiring companies with over $500 million in annual revenue to submit a biennial public report starting in 2026. The reports will align with the Task Force on Climate-related Financial Disclosures (TCFD) framework and disclose:
- Physical risks: How climate change directly impacts your operations (extreme weather, sea level rise, temperature changes)
- Transition risks: Business impacts from shifting to a low-carbon economy (policy changes, technology disruption, market shifts)
- Mitigation strategies: Your concrete plans to address those identified risks
Who's Impacted?
These laws apply more broadly than many companies expect. These requirements apply to any company that:
- Earns over $500 million (SB 261) or $1 billion (SB 253) in global annual revenue
- Does business in California, regardless of headquarters location
Many companies will be subject to both laws simultaneously, which will increase the need for a coordinated compliance strategy.
Although SB 253 and SB 261 technically take effect in July 2025, CARB is still in the process of developing guidelines and reporting infrastructure. So, while companies will still be required to submit their first reports in 2026, those that demonstrate good faith efforts to comply are unlikely to face any penalties in the first reporting cycle.
Looking Ahead
California is taking the lead—but it’s not alone. States like New York (Senate Bill S3456) are actively developing similar climate disclosure legislation. Internationally, the European Union’s Corporate Sustainability Reporting Directive (CSRD) is already reshaping reporting standards for globally active companies. Policy discussions aside, one thing is clear: ESG reporting is here to stay.
What You Should Be Doing
Although compliance deadlines may seem distant, the infrastructure and cross-functional processes needed to meet these requirements will take time to develop. By focusing on the key implementation areas below, you can reduce risk while staying ahead of the curve:
Data Collection and Management: Establishing robust systems to track emissions data across all three scopes requires complex workflows and transparency. Many companies discover that their current data collection processes are insufficient for building a GHG inventory needed to stay in compliance with regulations.
Climate Risk Assessment: Companies need to assess physical risks to specific facilities and operations, as well as transition risks that could affect their entire business model. SB 261's risk disclosure requirements demand both qualitative and quantitative analysis.
Cross-Functional Coordination: Successful compliance requires breaking down silos between sustainability, finance, operations, and legal teams. Many organizations find that establishing clear governance structures and reporting lines is as important as the technical aspects of data collection.
Align with Global Frameworks: Harmonizing requirements across jurisdictions lowers compliance costs and legal risk for global businesses. Amid shifting regulations, developing and maintaining a global strategy for compliance is key for businesses to stay ahead of the curve and minimize disruption.
Let's Talk
Learn how you can simplify requirements and have peace of mind while encountering this new regulatory landscape for the first time. Whether you’re preparing for SB 253 or SB 261, EU CSRD, or other frameworks, BBJ Group can provide you with the tools you need to tackle these laws with ease.
Visit our ESG Practice page or contact us today to discuss how BBJ Group can save you the hassle of compliance—in California and beyond.
