A handful of new climate laws are making their way across state legislatures in the United States. From financial accountability to plastic reductions and extended producer responsibilities, these new regulations encourage companies to uncover more environmentally and fiscally responsible ways of conducting business.
Chief among these is California's Climate-Related Financial Risk Act, commonly referred to as SB 261.
SB 261: What You Need to Know
SB 261 compels companies with over $500 million in annual revenue doing business in California to publicly disclose their climate-related financial risks.
The definition of “doing business in California,” according to the State of CA Franchise Tax Board, includes any company with any of the following conditions:
- Engages in any transaction for financial gain within the state
- Is organized or commercially domiciled in California
- Has sales, property, or payroll in California exceeding certain thresholds.
At present count, about 10,000 U.S. companies have revenues above $500 million, according to the NAICS Association, and may have to disclose. And they’ll need to consider both physical and transition risks, such as new or changing regulations, facility and technology upgrades, shifting consumer demand and reputational risks.
At its core, SB 261 is a push for greater transparency for investors and other stakeholders, asking essentially what steps a company is taking to prepare for both climate risks and opportunities across the entire value chain. This includes corporate operations, supply chains, employee health and safety, capital and financial investments, shareholder value and consumers’ shifting demands.
While new, SB 261 does feature some components that will be familiar to corporate financial teams. For example, disclosures must be done in accordance with the Task Force on Climate-Related Financial Disclosures (TCFD) framework. This framework, which was originally developed by the international Financial Stability Board to ensure the stability of the financial markets, is used by investors, lenders and insurance underwriters to assess and price climate change-related risks. Likewise, the framework’s four pillars—governance, strategy, risk management, metrics and targets—reflect standard business practices.
While the first reporting deadline isn’t until January 1, 2026, it’s recommended to start preparing now to ensure timeliness and avoid a possible $50,000 fine. We estimate the process could take three to six months, requiring cross-functional collaboration across a number of organizational teams, such as legal, finance, procurement and sustainability. Once complete, reports must be posted on the manufacturer’s website.
Climate-Related Risks and Opportunities in Manufacturing
With asset portfolios that include warehouses, factories and other facilities; supply chains that stretch across the country, if not the world; and an often transportation-heavy business model, manufacturers face climate-related risks from multiple angles.
And while some extreme-weather impacts may seem obvious, others may be less so. Here’s a quick rundown of the impacts and associated costs you might consider as you work through your financial materiality:
Weather-related disruptions from floods, hurricanes and wildfires and their accompanying problems: facilities damage, road closures, power outages and displaced workers (think mandatory evacuations or worse, loss of home).
Extreme heat and its potential impact on high-tech machinery, HVAC systems and employees, potentially reducing productivity and output.
Droughts or city-imposed water rationing. For companies heavily reliant on water in their manufacturing processes, the consequences could be significant.
Energy usage & efficiency. Whether transitioning to low-carbon sources through facility upgrades, investing in new equipment or machinery or facing rising utility costs, understanding the financial implications here is imperative.
Supply chain challenges and disruptions.
Stranded assets. Fossil-fuel dependent operations may become increasingly uncompetitive. Customers looking to reduce their own carbon footprint may demand low-carbon production. Equipment or even entire facilities may be rendered prematurely obsolete by evolving regulations (i.e. carbon pricing or renewable-energy mandates).
Rising insurance rates. A recent report from the Institute for Energy Economics and Financial Analysis notes that "The escalating cost of insurance is not just a financial burden, but a warning for businesses and economies. Companies that do not adapt to changing conditions may face higher costs and potential losses from inadequate coverage."
However, in every risk lies an opportunity. Manufacturers can create value through innovation, such as developing low-carbon or recyclable products, cost savings from waste reduction and circular processes and onsite renewables that provide energy independence.
But to be clear: SB 261 isn’t just an act of compliance. It's a chance for businesses to take stock of the current landscape and identify where, when and how best to bolster operations and the bottom line in the face of a changing environment.
The World Economic Forum, in its 2024 Annual Report, notes that companies that “comprehensively assess their risk exposure and make adequate adaptation investments…report a very positive anticipated payback, ranging from $2 to $19 for every dollar invested.”
How to Prepare: a Roadmap for Compliance
Ready to get started? Our five-step roadmap walks you through everything you need to know to disclose with confidence:
Assess Climate Risks and Opportunities
- Gather and assess data on your company’s current and potential climate risks and opportunities (R&O’s).
- Consider both your upstream and downstream value chain and geographic footprint.
- Leverage external data and research, including sector trends, investor expectations and evolving regulation in both the U.S. and abroad (i.e., new climate legislation in Europe).
Tip: When considering physical property and footprint, keep in mind that increasingly, there are no climate havens. Recent weather-related catastrophes in Asheville, North Carolina, and Montpelier, Vermont, bear this out. Plan accordingly.
Conduct Materiality Assessment
- Assess each R&O’s potential financial impact and likelihood, and consider risk levels at various time horizons (short-, medium- and long-term).
- Prioritize issues that have material financial impact.
Tip: “Financial materiality” should be consistent with SEC filings; generally, companies develop a materiality matrix, plotting likelihood vs. financial impact, which can be done manually or through various SaaS platforms.
Execute Scenario Analysis
- Analyze the impact of future climate scenarios on your business’s strategy and resilience.
- Use at least two climate scenarios in your modeling, including one with a high-emissions scenario.
Tip: The Scenario Analysis can be done qualitatively or quantitatively. You can incorporate data from publicly available climate scenarios from standard sources.
Begin to Operationalize Your Strategy
Begin the integration of your strategy into financial-planning and enterprise risk management processes.
Ensure appropriate governance and incentives to build internal awareness and organizational accountability.
Determine the necessary metrics and targets to assess and manage climate-related risks and opportunities (i.e. greenhouse gas emissions, energy use and efficiency, water use, assets exposed to climate risk, etc.).
Tip: 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.
Build Out Disclosures Consistent with the TCFD and Publish Your Report
Develop disclosures aligned with the TCFD’s four pillars
By January 1, 2026, your report should be made publicly available on your website
Tip: The report is an opportunity not just to comply with the new law, but to build credibility and trust with various stakeholders. Ensure it is transparent and compelling.
