Manufacturers Face Pending Californian Legislation Over Climate Risks
The California Climate-Related Financial Risk Act (SB 261) is a new law that mandates any U.S. corporation or business entity with annual global revenue exceeding $500 million to prepare and file a climate-related financial risk report every two years. This report must detail the physical and transition risks posed by climate change to the company, along with the measures taken to mitigate and adapt to those risks.
The law applies broadly to companies meeting the revenue threshold that operate within the state. While the exact legal definition can be nuanced, SB 261 targets companies with significant commercial presence or operations in California irrespective of incorporation state, emphasizing material business activity rather than minimal or incidental contacts.
The roadmap for compliance consists of five steps:
- Assess Climate Risks and Opportunities: Companies should gather and assess data on their current and potential risks and opportunities, consider both upstream and downstream value chain, and geographic footprint, and leverage external data and research.
- Conduct Materiality Assessment: In this step, companies should assess each risk and opportunity's potential financial impact and likelihood, and prioritize issues that have material financial impact.
- Execute Scenario Analysis: Companies should analyze the impact of future climate scenarios on their business's strategy and resilience, using at least two climate scenarios in their modeling, including one with a high-emissions scenario.
- Begin to Operationalize Your Strategy: When operationalizing the strategy, companies should integrate the strategy into financial-planning and enterprise risk management processes, ensure appropriate governance and incentives, and determine the necessary metrics and targets to assess and manage climate-related risks and opportunities.
- Build Out Disclosures Consistent with the TCFD and Publish Your Report: In the final step, companies should develop disclosures aligned with the TCFD's four pillars and publish their report by January 1, 2026, on their website.
The first reporting deadline for SB 261 is January 1, 2026, and it's recommended to start preparing now. The process could take three to six months and requires cross-functional collaboration across legal, finance, procurement, and sustainability teams.
Companies that comprehensively assess their risk exposure and make adequate adaptation investments can anticipate a positive return, ranging from $2 to $19 for every dollar invested, according to the World Economic Forum's 2024 Annual Report. The report is an opportunity not just to comply with the new law, but to build credibility and trust with various stakeholders, and it should be transparent and compelling.
Noncompliance or inaccurate reporting can result in penalties up to $50,000 per year. Insurance companies are explicitly exempted from these requirements. The bill is designed to safeguard investors and consumers by increasing transparency around financial risks linked to climate change, including risks from disruptions to supply chains, workforce challenges, infrastructure vulnerabilities, and transitions to low-carbon economies.
Opportunities for manufacturers include developing low-carbon or recyclable products, cost savings from waste reduction and circular processes, and onsite renewables that provide energy independence. Manufacturers face climate-related risks from multiple angles, including weather-related disruptions, extreme heat, droughts or water rationing, energy usage and efficiency, supply chain challenges and disruptions, stranded assets, and rising insurance rates.
Companies should embed accountability into existing performance management systems (e.g., KPIs, company-wide or executive level goals) to ensure follow-through and foster cross-department support. Companies should also consider both physical and transition risks when assessing climate risks and opportunities.
[1] California Legislative Information. (2021). SB 261. Retrieved from https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220SB261
[2] California Governor's Office. (2021). News Release: Governor Newsom Signs SB 261, Requiring Climate Risk Disclosures for Larger Businesses. Retrieved from https://www.gov.ca.gov/2021/09/30/governor-newsom-signs-sb-261-requiring-climate-risk-disclosures-for-larger-businesses/
[3] World Economic Forum. (2022). The Future of Financial Services: A Strategic Imperative for the Private Sector. Retrieved from https://www.weforum.org/reports/the-future-of-financial-services-a-strategic-imperative-for-the-private-sector
- The new California Climate-Related Financial Risk Act (SB 261) targets not only companies based in California, but also those with significant commercial presence or operations in the state, regardless of their incorporation state, focusing on material business activity.
- In order to comply with SB 261, companies should follow a roadmap consisting of five steps: Assessing climate risks and opportunities, conducting a materiality assessment, executing scenario analysis, integrating the strategy into financial-planning and enterprise risk management processes, and building disclosures aligned with the TCFD's four pillars.
- Manufacturers can benefit from the SB 261 reporting process by developing low-carbon or recyclable products, achieving cost savings from waste reduction and circular processes, and gain energy independence through onsite renewables. However, manufacturers face climate-related risks from disruptions to supply chains, extreme weather, energy usage efficiency, and rising insurance rates.
