SB 261 and Climate Risk Reporting

Your Guide to SB 261 and TCFD Reporting Requirements

Overview: SB 261 in California’s Climate Disclosure Package

SB 261 requires large companies to assess and disclose their climate-related financial risks in alignment with the Task Force on Climate-related Financial Disclosures (TCFD) framework. This applies to companies with over $500 million in annual revenue doing business in California.

Key points:

• Disclosures must be made every two years (starting in 2026, with updates in 2028 and beyond).
• Disclosures must align with the TCFD’s four pillars:
  1. Governance
  2. Strategy
  3. Risk Management
  4. Metrics & Targets
• Companies must also describe the measures taken to address identified climate-related risks.
• California allows flexibility: companies can use ISSB standards to meet SB 261 requirements.

About the TCFD Framework

The TCFD was created in 2015 by the Financial Stability Board to help organizations disclose their climate-related risks and opportunities. It has become the backbone of global climate-related financial disclosure, influencing regulations like the EU’s CSRD and the SEC’s proposed rule in the U.S.

TCFD’s Four Pillars & 11 Recommendations

1. Governance

Purpose: Explain how your company’s leadership oversees climate-related issues.

You should address:

• Board oversight:
  • How often the board is informed about climate issues
  • How climate factors into strategic and risk decisions
  • How the board monitors progress against climate targets
• Management’s role:
  • Whether climate responsibilities are assigned to individuals or teams
  • How management is informed about and monitors climate issues

Example:
Ayala’s TCFD report includes a visual chart showing how climate risk oversight is shared between the board and management, with clear descriptions of roles.

2. Strategy

Purpose: Describe the actual or potential impacts of climate risks and opportunities on your business, strategy, and financial planning.

You should cover:

• Risks & Opportunities:
  Identify short-, medium-, and long-term climate-related risks and opportunities.
• Business Impact:
  Describe how these risks/opportunities affect products, services, operations, investments, and your supply chain.
• Resilience & Scenario Analysis:
  Disclose how your company tests its strategy’s resilience under various climate scenarios (e.g., a 2°C warming world).

Best Practices:

• Start where you are, even with qualitative analysis.
• Use existing business risk processes and apply a climate lens.
• As your internal capacity grows, move toward quantitative analysis and more sophisticated scenario modeling.

Examples:

• Mercury Energy (New Zealand): Used a qualitative approach to describe risk likelihood and impact, without quantifying financial implications.
• Chemical company: Developed a robust, quantitative scenario analysis comparing risks under 1.5°C and 3.2°C warming pathways.

3. Risk Management

Purpose: Explain how your organization identifies, assesses, and manages climate-related risks.

You should cover:

• How your company evaluates climate risks compared to other business risks
• Whether regulatory changes (e.g., emissions laws) are considered transition risks
• How risk mitigation decisions are made (e.g., reduce, transfer, adapt, accept)
• How climate risks are prioritized and integrated into your overall risk management framework

Examples:

• Cement company: Described a process from risk identification to mitigation, with oversight from management and the board. They referenced ISO standards to support their process.
• AstraZeneca: Included narrative disclosures showing how physical and transition risks are managed across their operations.

4. Metrics & Targets

Purpose: Disclose metrics used to evaluate climate risks/opportunities and track progress against goals.

You should disclose:

• Performance metrics related to climate, such as:
  • Internal carbon price
  • Low-carbon revenue
  • Waste or energy efficiency targets
• GHG Emissions:
  • Scope 1, 2, and, if applicable, Scope 3 emissions
• Targets:
  • Climate goals (e.g., net-zero)
  • Interim milestones
  • Progress against these targets, ideally tracked biennially

Example:

• AXA (insurance sector): Included a detailed year-over-year table of Scope 1, 2, and 3 emissions, carbon intensity, targets, and progress updates.

Global Alignment: Why ISSB Matters

SB 261 allows companies to align their disclosures with ISSB (International Sustainability Standards Board) standards, which:

• Build on the TCFD framework (the TCFD has now been folded into the ISSB)
• Are being adopted in jurisdictions like the UK, Singapore, Japan, and Canada
• Help businesses future-proof disclosures and harmonize reporting globally

If you're reporting to CDP or preparing for CSRD, adopting ISSB can streamline your reporting process.

Final Thoughts: Start Where You Are

Reporting under SB 261 is a journey, not a one-time task.

• Begin with qualitative assessments and enhance over time.
• Use your existing governance and risk management processes as a foundation.
• Learn from public examples. The TCFD has been live for years and best practices are widely available.

As Emma from Persefoni puts it:

“This is an exercise in creating narratives that describe the processes your business already has in place to manage climate risk and opportunity.”