This client alert summarizes recent developments related to implementation of California’s climate disclosure laws, the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261). These key developments underscore the necessity of preparing for compliance by the operative deadlines: January 1, 2026 for SB 261 and later in 2026 for SB 253.
- On August 13, 2025 a federal District Court judge issued an order in the litigation challenging the laws. The judge denied plaintiffs’ request for a preliminary injunction, allowing both laws to continue in effect.
- On July 9, 2025 the California Air Resources Board (“CARB”) released a Frequently Asked Questions document with updates on CARB’s implementation of the climate disclosure laws. The laws’ compliance dates remain unchanged.
Litigation Update
In 2024, business groups challenged SB 253 and SB 261, alleging, among other claims, that the laws violate the First Amendment because they compel speech by requiring companies to make certain climate-related disclosures. The other claims were dismissed in February 2025, leaving only the First Amendment challenge.
On August 13, the U.S. District Court for the Central District of California denied plaintiffs’ request for a preliminary injunction, which would have paused enforcement of both laws until the court could hold a trial. As a result of the order, the laws will continue in effect while the claims are further litigated.
In the order, the court held that the plaintiffs have not shown that their First Amendment challenge is likely to succeed for several reasons. First, while the court held that SB 253 and 261 regulate commercial speech, the court found that SB 253’s required reporting of Scope 1, 2, and 3 emissions requires only “factual and uncontroversial” speech and is reasonably supported by the state’s substantial interests in providing investors with reliable information with which to make investment decisions and in reducing greenhouse gas (GHG) emissions.
Second, the court held that SB 261’s climate-related financial risk disclosure requirements are subject to intermediate scrutiny because they require more than merely factual information; the court noted, for example, that an assessment about the effect of current and future events on a company cannot be merely factual. However, the court held that SB 261 likely survives this heightened scrutiny because it also furthers the state’s substantial interest in providing reliable information to investors. The court rejected California’s additional arguments that the laws support the state’s interests in providing reliable information to consumers and curbing companies’ misleading speech; however, this did not change the overall outcome.
Orders granting or denying a preliminary injunction are immediately appealable, so the plaintiffs may appeal the District Court’s ruling to the United States Court of Appeals for the Ninth Circuit. The case is set for a trial in the District Court beginning on October 20, 2026. Covington will be closely monitoring any appeal and other developments in the litigation.
Implementation Updates
On July 9, CARB released an FAQ document containing updates on the agency’s implementation of SB 253 and SB 261 and initial concepts for how key terms such as “total annual revenue” and “doing business in California” may be defined in CARB’s forthcoming regulations. The document follows CARB’s May 29 public workshop and provides additional information about deadlines, reporting periods, and other considerations to help companies prepare their initial reports.
Regulatory Development
CARB states that it is in the “informal, information-gathering stage” for implementing SB 253 and SB 261 but that it is committed to developing regulations (presumably draft regulations) by the end of 2025. The agency also provides the following information about its implementation process:
- Whether companies will be subject to both laws or only one depends on the definitions of “revenue,” “doing business in California,” and “parent” and “subsidiary” companies. In the FAQs and during the May 29 workshop CARB suggested initial concepts for defining these terms and is currently seeking feedback on its proposed definitions. (See our May 29 blog post for details on these initial concepts).
- CARB is also seeking input on whether it should consider exemptions for certain conditions and what rationale it should use to consider any such exemptions.
Enforcement Discretion for Initial Reports
In the FAQ document, CARB refers to its December 2024 Enforcement Notice for SB 253 and reiterates that it will exercise “enforcement discretion” such that for the first report due in 2026 (month TBD), reporting entities may submit Scope 1 and 2 emissions data from the prior fiscal year that can be determined from information the reporting entity already possesses or was already collecting at the time the Enforcement Notice was issued. And during the first reporting cycle, CARB “will not take enforcement action for incomplete reporting against entities, as long as the companies make a good faith effort to retain all data relevant to emissions reporting for the entity’s prior fiscal year.” CARB also says that it welcomes feedback on how to further streamline the reporting program, where possible.
For SB 261, CARB emphasizes that covered entities must prepare and publish their first climate-related financial risk report by January 1, 2026. On December 1, 2025, CARB will post a public docket for covered entities to post a public link to their first climate-related financial risk report. In response to a question about how covered entities should determine what needs to be included in these reports, CARB cites the statute’s definition of “climate-related financial risk” and indicates that entities will have some flexibility in choosing a climate-related financial risk reporting framework, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the International Financial Reporting Standards (IFRS). CARB states that initial reports submitted by January 1, 2026 may cover fiscal years 2023/2024 or 2024/2025, depending on the organization’s data collection process.
For all the issues on which CARB seeks feedback related to its implementation of SB 253 and SB 261, including definitions, reporting frameworks, and potential exemptions, feedback can be sent to climatedisclosure@arb.ca.gov. Feedback sent to this email will be posted on the public docket. CARB will host a second virtual, public workshop on Thursday, August 21, 2025.
Conclusion
Together, the federal litigation and California regulatory updates underscore the need for covered entities to prepare for compliance. Initial climate-related financial risk disclosure reports pursuant to SB 261 are due by January 1, 2026. Scope 1 and 2 GHG emissions disclosure are due in 2026 (month TBD) and Scope 3 emissions in 2027, with details forthcoming in CARB’s anticipated regulations.
Covington’s Carbon Management and Climate Mitigation practice has extensive experience and capabilities advising on climate and GHG reporting and disclosure frameworks, and is ready to assist entities in navigating this complex and evolving landscape.
If you have any questions concerning the material discussed in this client alert, please contact the members of our environmental practice.
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