Over the last several months, the California Air Resources Board (CARB) has issued updates and guidance to help companies prepare for the state’s mandatory climate reporting requirements SB 253 and SB 261 for companies who do business in California.
SB 253 requires U.S. companies with total annual revenues greater than $1 billion to disclose their Scope 1, 2, and 3 emissions and obtain independent third-party assurance of their data. Initial disclosure requirements, which cover Scope 1 and 2 reporting, begin in 2026.
SB 261 requires U.S. companies with total annual revenues greater than $500 million to publish a climate-related financial risk report every two years. Although first reports were initially due by January 1, 2026, a federal appeals court issued an injunction on November 18, 2025, that temporarily paused enforcement of SB 261 pending the outcome of an appeal scheduled for early 2026. The injunction does not extend to SB 253 compliance.
On the same day as the federal court’s injunction, CARB held a public workshop where it introduced several revisions to proposed definitions and compliance requirements for SB 253 and SB 261. Details on these developments, as well as updates on CARB’s rulemaking timeline and ongoing litigation related to California’s climate reporting rules, are included below.
Proposed Definitions
CARB has provided updates on the proposed definitions for “doing business in California” and “revenue,” both factors that determine whether companies must comply with SB 253 and SB 261.
The proposed definitions are based on California state tax law, and a company’s California Franchise Tax Board (FTB) filings are now being used to determine whether a company is doing business in California and meets the laws’ revenue thresholds. This is a departure from proposals in August that referenced information from the California Secretary of State and proprietary datasets, which were outdated and incomplete.
Doing Business in California
CARB’s proposed definition for “doing business in California” aligns partially with California Revenue and Taxation Code (RTC) Section 23101, citing the law’s definition for “doing business” and conditions for being commercially domiciled or satisfying thresholds for sales in the state of California (RTC Section 23101(a) and (b)(1)–(2)).
However, the proposed definition excludes the tax code’s references to property holdings and payroll (RTC Section 23101 (b)(3)–(4)), which CARB determined may not demonstrate a sufficient economic connection to the state to require compliance with SB 253 and SB 261.
Under the proposal, a company would be considered to be “doing business in California” if (1) it is actively engaging in any transaction for the purpose of financial or pecuniary gain or profit, and (2) it fulfills either of the following conditions during any part of a reporting year:
- The company is organized or commercially domiciled in California.
- The company’s sales in California, as defined in RTC Section 25120 (e) or (f), exceed the 2024 inflation-adjusted threshold of $735,019. This total includes sales by a company’s agent or independent contractor. California apportioned sales should be determined per RTC Sections 25135 and 25136, as modified by 25137, which establish criteria for assessing whether a sale takes place in California. Sales within the state are reported on Schedule R-1 of a company’s FTB filing.
Revenue
CARB’s proposed definition of “revenue” is based on the “gross receipts” definition in RTC Section 25120(f)(2). To account for annual fluctuations, applicability is determined by the lesser of the company’s two previous fiscal years of revenue. Revenue considers total gross receipts, regardless of whether the revenue was generated within California.
CARB’s proposed definition of “revenue” is as follows: The gross amounts realized (the sum of money and the fair market value of other property or services received) on the sale or exchange of property, the performance of services, or the use of property or capital (including rents, royalties, interest, and dividends) in a transaction that produces business income, in which the income, gain, or loss is recognized (or would be recognized if the transaction were in the United States) under the Internal Revenue Code. Amounts realized on the sale or exchange of property shall not be reduced by the cost of goods sold or the basis of property sold.
Amounts are verifiable in company tax filings with the FTB, as outlined below in the references provided by CARB.
| Entity Type | Tax Form | Total Revenue (Gross Receipts) | California Sales (Doing Business) |
|---|---|---|---|
| Corporation | Form 100 | Schedule F, Line 1a | Schedule R-1, Col(b) |
| S-Corporation | Form 100S | Schedule F, Line 1a | Schedule R-1, Col(b) |
| Partnership | Form 565 | Line 1a | Schedule R-1, Col(b) |
| LLC | Form 568 | Schedule B, Line 1a | Schedule R-1, Col(b) |
Parent and Subsidiary Reporting
Both subsidiaries and parent companies must independently assess their compliance obligations under SB 253 and SB 261. Parent companies may choose to file a consolidated report on behalf of the covered entities to relieve each of their in-scope subsidiaries from separate reporting requirements.
CARB proposed defining “subsidiary” as a business entity that another business entity has ownership interest in or control of by direct corporate association, as defined by Title 17, California Code of Regulations Section 95833. Ownership or control is determined by any of the following:
- Greater than 50% of ownership of any class of listed shares, the right to acquire such shares, or any option to purchase such shares of the other entity.
- Greater than 50% of common owners, directors, or officers of the other entity.
- Greater than 50% of the voting power of the other entity.
- In the case of a partnership other than a limited partnership, greater than 50% of the interests of the partnership.
- In the case of a limited partnership, greater than 50% of control over the general partner or greater than 50% of the voting rights to select the general partner.
- In the case of a limited liability corporation, greater than 50% of ownership in the other entity regardless of how the interest is held.
Exemptions
CARB is proposing to exempt the following entities from compliance with SB 253 and SB 261:
- Nonprofits that are tax-exempt under the Internal Revenue Code.
- Federal, state, and local government entities, and companies that are majority-owned by government entities.
- Insurance companies (proposed to be exempt from SB 253, already exempt from SB 261).
- Companies that only have a presence in the state via remote employees.
SB 253 Reporting Deadline and Assurance Updates
Companies subject to SB 253 will be required to report and obtain assurance over their Scope 1, 2, and 3 greenhouse gas (GHG) emissions on a phased-in compliance schedule.
During its November workshop, CARB announced that it would propose a compliance deadline of August 10, 2026, for the first reporting deadline that covers Scope 1 and 2 data.
CARB also outlined enforcement discretion available to companies during the first year of SB 253 compliance. These are based on a SB 253 enforcement notice CARB issued in December 2024, stating that it will not issue penalties in the first reporting year to companies acting in good faith.
According to the November workshop and related FAQ document, companies that were not collecting data or were not planning to collect data at the time the enforcement notice was issued are not required to submit Scope 1 and 2 data for the first reporting cycle. Instead, these companies should provide a statement to CARB indicating they did not submit a report because they were not collecting data or planning to collect data at the time of the enforcement notice. These statements should be uploaded to a public docket that CARB will launch prior to the initial 253 reporting deadline. Furthermore, limited assurance is not required for 2026 reporting — another aspect of CARB’s discretion related to the enforcement notice.
CARB has released a draft Scope 1 and 2 emissions reporting template designed to streamline reporting, especially for entities disclosing GHG emissions for the first time. Use of the template will be optional during the 2026 reporting cycle.
To establish requirements for SB 253 compliance in 2027 and beyond, including reporting due dates and other details, CARB plans to launch a subsequent rulemaking process in 2026.
| SB 253 Compliance: Initial 2026 Reporting | |
|---|---|
| Proposed Due Date | August 10, 2026 |
| Contents of Report | Scope 1 & 2 GHG data, if collecting or planning to collect at time of CARB enforcement notice published on December 5, 2024. |
| Reporting Period | For the first compliance deadline, the reporting period will be determined by the company’s fiscal year end:
|
| Assurance | Not required for Scope 1 & 2 GHG data submission |
| SB 253 Compliance: 2027 and Beyond1 | |
|---|---|
| Contents of Report and Due Date | Annual reporting of Scope 1, 2 & 3 GHG data beginning in 2027 on a date to be determined by CARB. |
| Reporting Period | Previous fiscal year. |
| Assurance |
|
| 1Obligations and details to be further defined by CARB through a subsequent rulemaking process in 2026. | |
SB 261 Guidance on Minimum Reporting Requirements
Companies subject to SB 261 must post a climate-related financial risk report to their company website every two years. Although the first compliance deadline was scheduled for January 1, 2026, the U.S. Court of Appeals for the Ninth Circuit recently issued an injunction pausing enforcement of SB 261 pending the outcome of an appeal scheduled to begin on January 9, 2026. This means the January 1, 2026, deadline for filing climate risk reports under SB 261 is now on hold. As always, we recommend companies continue to seek the advice of their legal counsel on how to proceed.
As part of recent changes, CARB provided further guidance on the minimum requirements for climate-related financial risk reports. Disclosures should reflect a company’s approach to assessing and communicating climate-related risks by describing the processes — such as governance, strategy, and risk management — used to identify, evaluate, and address these risks.
Companies in early stages of evaluating climate-related risks may disclose how risks may be relevant, even if no material risks have been identified. CARB encourages companies to describe any gaps, limitations, and assumptions made as part of their climate risk assessments.
General
Reports should contain a statement that:
- Specifies which reporting framework or standard is being applied. Companies may prepare reports using the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) or IFRS S2. Companies should follow any applicable industry-specific guidance, if available within their chosen reporting approach.
- Discusses which recommendations and disclosures have been compiled and which have not.
- Provides a short summary of reasons why recommendations or disclosures have not been included and discusses any plans for future disclosures.
Governance
Reports should describe a company’s governance structure for identifying, assessing, and managing climate-related financial risks, including details on:
- Management oversight of climate-related risks and opportunities.
- A description relating to the Board of Directors’ oversight of those climate-related risks and opportunities (if the reporting entity has a Board).
Strategy
Reports should describe the actual and potential impacts of climate-related risks and opportunities on the company’s operations, strategy, and financial planning (where material), including:
- The climate-related risks and opportunities the company has identified over the short, medium, and long term.
- The resilience of the company’s strategy, taking into consideration the future impacts of climate change under various climate scenarios (may be qualitative in nature).
Risk Management
Reports should describe how the company identifies, assesses, and manages climate-related risks including a description of:
- The process the company uses for identifying, managing, and assessing climate-related risks, and how those considerations and processes are integrated into the company’s overall risk management.
Metrics & Targets
Reports should disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.
The guidance states that companies should refer to TCFD (issue date June 2017) for a discussion of material relevance or, if using a different framework, that framework’s guidance.
Consistent with SB 253, CARB will accept a good faith effort from companies in their first year of reporting under SB 261. Companies should use the most recent and reliable data available to comply.
Next Steps
CARB plans to issue the publication of its initial rulemaking notice package that, following a 45-day public comment window, will be considered in a board meeting during Q1 2026. Later in 2026, the regulator also plans to launch a subsequent rulemaking process to establish additional details for reporting in 2027 and beyond.
Given the complexity of these requirements and the recent court injunction pausing enforcement of SB 261 pending outcome of the appeal, it’s important that impacted companies seek advice from their legal counsel to determine applicability of the California climate laws and how to proceed.
BDO can help companies prepare for California’s climate disclosure rules and leverage reporting insights to build more resilient and efficient organizations. Contact us to learn more.