In 2023, California passed the Climate-Related Financial Risk Act (SB 261), a law which requires any public and private U.S.-based corporations operating in California with annual revenue over $500 million to provide climate-related financial risk reports disclosing the physical and transition threats they face because of climate change, as well as the measures they’re taking to mitigate and adapt to those risks. Covered entities are required to report their climate-related financial risks by FY 2025 (filed in 2026), with biennial reporting after that.
The bill aims to enhance transparency and accountability, standardize climate disclosures and provide stakeholders and consumers with clear and credible climate information. However, with the rule still in flux, the lack of final guidance—particularly around the “good faith effort” provision—creates uncertainty and many organizations are unsure how to prepare for alignment. Without a clear regulatory framework, providing definitive alignment recommendations is difficult, but one thing is clear: organizations that take a risk-based, strategic approach now will be better positioned to meet future requirements with confidence.
Tailoring your approach to risk appetite
Given the current ambiguity, our sustainability advisory experts recommend that organizations align their strategies with their risk appetite—balancing the need for flexibility with the potential for future regulatory scrutiny.
High risk appetite: maximizing flexibility under “good faith effort”
For organizations comfortable with greater regulatory risk, focusing on demonstrating intent through high-level planning may be sufficient. This approach provides flexibility while still signaling efforts toward alignment.
Key actions:
Develop alignment
Develop a high-level alignment plan that outlines intent and identifies areas for future refinement.
Document initiatives
Document ongoing climate risk initiatives as evidence of proactive engagement.
Prioritize flexibility
Prioritize flexibility, knowing further action may be needed when the ruling is finalized.
Medium risk appetite: balancing alignment with practicality
Organizations with a moderate risk tolerance may prefer a phased approach—starting with screening-level assessments and scenario planning without committing to full-scale implementation. This balances early action with adaptability.
Key actions:
Perform screening
Perform an initial climate risk screening to identify key vulnerabilities.
Develop analysis plan
Develop a scenario analysis plan (methodology, scope and data needs), but defer full implementation until the regulatory landscape becomes clearer.
Maintain flexibility
Maintain flexibility to expand analysis if stricter guidelines emerge.
Low risk appetite: full alignment & risk mitigation
For organizations prioritizing comprehensive alignment and risk mitigation, a robust, data-driven approach is recommended. This ensures consistency with current industry best practices (e.g., TCFD, EU CSRD) and minimizes future regulatory risks.
Key actions:
Conduct analysis
Conduct a full scenario analysis covering both acute and chronic physical risks, transition risks and financial impacts.
Perform financial quantification
Perform financial quantification of material risks to demonstrate analytical rigor.
Align reporting
Align reporting with TCFD-aligned disclosure frameworks to exceed minimum alignment requirements and future-proof reporting.
Positioning for broader climate disclosure trends
Regardless of risk appetite, proactive organizations recognize that alignment with CA SB 261 is part of a larger trend toward more comprehensive climate risk disclosure.
- Companies already preparing for EU CSRD, IFRS S2, or TCFD-aligned reporting will benefit from building CA SB 261 alignment into their existing climate disclosure frameworks.
- Investing in scenario analysis, governance structures and financial risk assessments now will strengthen overall resilience and streamline future alignment efforts.
At Arcadis, we partner with organizations to navigate evolving climate regulations with tailored, risk-based strategies. Whether you’re seeking a high-level alignment framework or a full-scale scenario analysis, our experts can help you assess material risks, quantify financial impacts and align with leading disclosure standards.
Let’s work together to turn CA SB 261 alignment into an opportunity for smarter, more resilient climate risk management.
About our author
Kaylee Shalett is a climate resilience strategist with over a decade of experience helping companies turn climate risk into opportunity. As Global Technical Director for Climate Risk Assessments & Reporting, she has led 60+ cross-sector projects, supporting clients in embedding climate into enterprise risk management, creating decarbonization strategies that reduce risk and enhance cash flows, and aligning with IFRS S2 and emerging regulations. With a foundation in climate science and a focus on practical outcomes, Kaylee delivers data-driven, actionable strategies that build resilience and unlock long-term value.
