Companies in California Given Guidance for Initial Reports Regarding Climate Risk Under New Disclosure Legislation

The California Air Resources Board (CARB) has released a new publication titled "Climate Related Financial Risk Disclosures: Draft Checklist," providing guidance for U.S. companies with operations in California and annual revenues exceeding $500 million. This regulation, known as SB 261, aims to enhance transparency around climate-related risks and opportunities.

Companies falling under the scope of the regulation are required to publish their first reports on climate risks and opportunities by January 1, 2026, with reports every other year following. The reports will cover four key areas: Governance, Strategy, Risk Management, and Metrics and Targets.

Under Governance, companies must describe their structure for identifying, assessing, and managing climate-related financial risks. In Strategy, they are expected to outline identified climate-related risks and opportunities over short, medium, and long terms, their impact on operations, strategy, and financial planning, and the resilience of the company's strategy under climate change scenarios.

The Risk Management section requires a description of the process used for identifying, managing, and assessing climate-related risks, and their integration into the overall risk management. The Metrics and Targets section requires the disclosure of metrics and targets used to assess and manage relevant climate-related risks and opportunities.

It's important to note that conducting scenario analysis as a detailed quantitative exercise is not mandatory, and it can be qualitative in nature. The disclosed information should be material to the company's climate-related risks and opportunities.

Subsidiary companies do not need to break out their own information separately if their parent company issues a report on their behalf. Scope 1, 2, and 3 emissions reporting will not be required for companies' initial reports due to feasibility concerns and potential duplication with another regulation, SB 253.

Insurance companies are not included in the scope of the regulation. The publication's checklist serves as a starting point for reporting entities to comply with the new regulation's requirements. Companies can meet the disclosure requirements through the use of various reporting frameworks, including the 2017 recommendations of the TCFD, the IFRS Foundation's IFRS S2 climate reporting standard, and frameworks provided by a regulated exchange or national government.

This new regulation is a significant step towards enhancing transparency and fostering sustainability among businesses operating in California. By providing comprehensive information about climate-related risks and opportunities, companies can demonstrate their commitment to long-term sustainability and resilience, benefiting both the environment and their shareholders.