What is SB-261?
SB-261, also known as the Climate-Related Financial Risk Act (CRFRA), introduces a new climate disclosure regime that will impact many large, sponsor-backed portfolio companies. This California law requires in-scope companies to report on climate-related financial risks, as well as their plans for risk mitigation. Covered entities must publish their first report by or before January 1st, 2026, with ongoing reporting required every two years thereafter.
Reporting must be aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) framework or an equivalent standard. In addition, reports must be submitted to the California State Air Resources Board (CARB) and published publicly to companies’ websites.
CARB may impose administrative penalties of up to $50K per reporting year for companies that fail to comply. Factors impacting the penalty include whether a company took good faith measures to comply and a company’s historical and present compliance status.
Who is subjected to SB-261?
SB-261 applies to public and private companies that 1) are formed under U.S. federal, state, or D.C. law (i.e., U.S.-based companies or U.S.-based subsidiaries of non-U.S.-based parent companies), 2) have total annual, global revenue exceeding $500M, and 3) “do business in California.”
While SB-261 does not currently define what it means to “do business in California,” this will be clarified through CARB implementing regulations expected July 2025 at the earliest. In the meantime, the California Franchise Tax Board (CFTB) definition for “doing business in California” is widely used as a proxy for SB-261; this definition includes companies meeting any of the following criteria[1]:
- Engaged in any transaction for the purpose of financial gain within California.
- Organized or commercially domiciled in California.
- California sales, property, or payroll exceed the following amounts:
- California sales: $735,019
- California real and tangible personal property: $73,502
- California payroll compensation: $73,502
Importantly, if a subsidiary independently qualifies as a covered entity under SB-261, it does not need to file a separate report if its parent company files a consolidated disclosure that appropriately addresses the subsidiary’s climate-related financial risks.
[1]Criteria listed reflect CFTB thresholds for 2024; these are subject to annual inflation adjustments.
How can companies produce SB-261 compliant reports?
As discussed above, SB-261 requires companies to report climate-related risk in alignment with the TCFD framework or an equivalent standard. For companies reporting on these risks for the first time, Malk recommends using TCFD as opposed to an equivalent standard like the International Sustainability Standards Board (ISSB) IFRS S2, as TCFD is the least complicated and most practical starting place for this type of reporting.
For context, TCFD is a globally recognized climate disclosure framework. It is designed to enhance transparency and help companies, investors, and other stakeholders better understand the financial implications of climate change. TCFD sets out 11 disclosures that consider climate physical and transition risks and opportunities across four key pillars (governance, strategy, risk management, and metrics and targets). TCFD implementation guidance also provides both generalized and sector-specific instructions for reporting against these disclosures.
How does SB-261 fit within other California climate laws?
SB-261 complements another major California climate law, SB-253, also known as the Climate Corporate Data Accountability Act (CCDAA). SB-253 requires companies doing business in California with more than $1B in annual revenue to disclose Scope 1, 2, and 3 greenhouse gas (GHG) emissions verified through third-party assurance.
SB-261 and SB-253 work in tandem to give regulators, investors, and the public a more complete picture of a company’s impact on the climate (vis-à-vis emissions) and vulnerability to climate-related financial risks. Together, these laws signal California’s intent to push for climate responsibility and readiness in the private sector.
Notably, both SB-261 and SB-253 were amended by SB-219 in 2024 to harmonize their implementation and clarify reporting requirements. Relevant updates specific to SB-261 have been incorporated throughout this document.
Does SB-261 face any pushback that could affect its implementation?
Litigation. In January 2024, the U.S. Chamber of Commerce and the California Chamber of Commerce filed a lawsuit challenging the constitutionality of SB-261 and SB-253. While the court has already dismissed several key claims underlying this lawsuit, a ruling on a motion for a preliminary injunction is pending and expected within the next month. If the court grants an injunction, this could pause enforcement and delay compliance deadlines for the laws; if the injunction is denied, the laws would remain in force, strengthening CARB’s position as the case proceeds to trial. A final resolution to this lawsuit is anticipated in late 2025 or early 2026, with the possibility of further appeals.
Executive Order. Additionally, on April 9, 2025, President Trump issued an executive order (EO) titled Protecting American Energy from State Overreach. This EO directs the U.S. Attorney General to identify and take action against state or local regulations that may conflict with federal energy objectives, including climate disclosure laws. While the EO introduces longer-term political and legal uncertainty, it does not currently affect SB-261 and SB-253 compliance obligations which can only be overturned through the courts. As of now, both laws remain valid and enforceable.
How should PE firms navigate SB-261?
SB-261 has material implications for large, sponsor-backed portfolio companies with commercial activity in California. Given this broad scope, GPs should take the following proactive steps to assess portfolio exposure to SB-261, implement related value creation or pre-reporting initiatives, and prepare companies for disclosure obligations.
- Screen portfolio companies for SB-261 exposure. Identify which portfolio companies are in-scope for SB-261 to determine their compliance obligations.
- Conduct TCFD readiness assessment. Complete gap assessments comparing each company’s climate programming to TCFD disclosures.
- Close gaps in TCFD readiness. Support companies in implementing the necessary processes needed to produce substantive, decision-useful, and regulation-ready disclosures. This may involve conducting climate risk assessments.
- Complete TCFD-aligned reporting. Support the drafting of climate-related financial disclosures consistent with TCFD guidance.
- Monitor regulatory, legal, and policy developments relevant to SB-261. Stay up to date on CARB implementing regulations that may clarify definitions and requirements, as well as ongoing litigation and political developments that may impact SB-261 enforcement and relevant timelines.
By planning early and embedding climate governance and disclosure readiness across the portfolio, GPs can stay ahead of regulatory risk and turn SB-261 compliance into a lever for long-term value creation. While the law introduces new obligations, it also presents a strategic opportunity for sponsor-backed companies to strengthen climate risk management, enhance transparency, and demonstrate climate competency to LPs and other stakeholders. Proactively aligning with the TCFD framework positions companies to lead in an increasingly climate-conscious market and improve positioning for future exits.
How can ESG advisors help portfolio companies prepare for SB-261?
While GPs set the strategic direction for SB-261 compliance across their portfolios, ESG advisors can play a critical role in helping portfolio companies execute the technical and operational work required. Advisors can interpret evolving regulatory requirements, lead physical and transition risk assessments, and conduct scenario analyses aligned with TCFD guidance. They can also support the drafting of decision-useful climate disclosures that resonate with LPs and other stakeholders, as well as help implement scalable systems for climate risk tracking and biennial reporting. This hands-on support enables portfolio companies to meet compliance obligations efficiently while building long-term climate resilience.
What’s next? Click here to download Malk’s ‘SB-261 Readiness Checklist’ to assess SB-261 exposure and disclosure readiness and chart a path forward.
Malk Partners does not make any express or implied representation or warranty on any future realization, outcome or risk associated with the content contained in this material. All recommendations contained herein are made as of the date of circulation and based on current ESG standards. Malk is an ESG advisory firm, and nothing in this material should be construed as, nor a substitute for, legal, technical, scientific, risk management, accounting, financial, or any other type of business advice, as the case may be.