On September 2, the California Air Resources Board (CARB) released draft guidance for the Climate-Related Financial Risk Act (SB 261/Health & Safety Code Section 38533). This law requires large companies doing business in California to publish their first biennial climate-related financial risk report by January 1, 2026.

The draft guidance is structured around the Task Force on Climate-related Financial Disclosures (TCFD) framework, emphasizing governance, strategy, risk management, and metrics/targets. Importantly, CARB stresses that the guidance is not legally binding—it is intended as a practical checklist and cannot add new requirements beyond the statute.

Key Takeaways from the Draft Guidance

1. Reporting Framework
Companies must state which framework they are using (e.g., TCFD or IFRS S2) and disclose which recommendations they followed, which they did not, and why. Plans for future disclosures should also be outlined.

2. Governance
At minimum, companies must describe how climate-related risks are governed, including board oversight and management responsibilities.

3. Strategy
Reports must describe climate-related risks and opportunities across short-, medium-, and long-term horizons, their potential financial and operational impacts, and strategy resilience. Scenario analysis is encouraged but not required for the first reporting cycle.

4. Risk Management
Companies must explain how they identify, assess, and manage climate-related risks, and how these processes are integrated into broader enterprise risk management.

5. Metrics and Targets
Unlike California’s separate emissions reporting law (SB 253), Scope 1–3 emissions disclosure is not required for SB 261 in the first reporting year. Instead, companies should disclose material metrics and targets used to monitor and manage climate-related risks.

Other Useful Clarifications

• Calendar vs. Fiscal Year: Companies may use the most recent and best available data, regardless of whether it is fiscal or calendar year.

• Consolidated Reports: Parent companies may submit one consolidated report covering subsidiaries.

• Public Posting: Reports must be published on the company’s website and linked to CARB’s public docket.

Why It Matters

CARB’s draft guidance underscores that decision-usefulness for investors and stakeholders should be the guiding principle for SB 261 reports. While minimum requirements are relatively light in the first cycle, companies should view this as a starting point. Over time, CARB is expected to align disclosures more closely with IFRS S2 and TCFD best practices, potentially raising the bar for scenario analysis, quantitative metrics, and integration with SB 253 emissions reporting.