Why are the shop shelves empty?  ‍

Back in November 2021, an “atmospheric river” over the Pacific Northwest brought truly unprecedented rainfall to British Columbia. Major highways, bridges, and railroads that connect Vancouver to the rest of Canada were washed out due to the intensity of the precipitation, leaving the metropolitan area a virtual island. The Vancouver-based company I worked for at the time relied on regular rail and truck deliveries from the Port of Toronto. With no way to replenish our inventory of manufacturing supplies, and no ability to get our product out of Vancouver and into shops, shelves became bare in stores across North America. This regional flood event impacted infrastructure in our metro area but led to lost sales across the continent for weeks while we waited for inventories to replenish. 

Encourages companies to know where risks lie

California’s SB 261, the Climate-Related Financial Risk Act, represents a turning point for businesses to address the financial risks and opportunities associated with a changing climate. Signed into law in 2023, it requires large businesses operating in California to disclose their climate-related financial risks and mitigation strategies. While some may view this as just another regulatory hurdle, SB 261 offers a unique opportunity for businesses to enhance resilience, gain competitive advantage, and lead the way in climate adaptation.

Noncompliance comes with penalties of up to $50,000 annually, but the real stakes go far beyond fines. Transparency about climate risks is now critical for maintaining trust with stakeholders, including investors, customers, and employees.

Listen in: Climate lawyer David C. Smith explains the implications of California’s climate disclosure laws, SB 253 and SB 261, and why companies should prepare now

What does SB 261 require?

SB 261 applies to businesses with annual revenues over $500 million and doing business in California. These companies must publish a climate-related financial risk report by January 1, 2026, and every two years thereafter. The report must align with the globally recognized Task Force on Climate-Related Financial Disclosures (TCFD) framework and include:

• Climate-Related Financial Risks: Identification of physical and transition risks posed by climate change, over short, medium, and long time horizons
• Mitigation Strategies: Actions the company takes to manage and reduce these risks, and the governance processes in place around them
• Climate Scenario Analysis: Assessment of climate-related financial risks and opportunities in a future climate scenario, including one above and one below 2 degrees C of warming
• Metrics and Targets: Disclosure of corporate carbon footprint results and carbon reduction goals that have been formally adopted

Read more: Your top questions about California's Climate Accountability Package, answered

What are transition risks and physical risks? 

Climate-related financial risks are generally categorized into two main types: 

• Transition risks: These are business risks that arise from the shift to a low-carbon economy due to new policies, regulations, market changes, and societal expectations. They can impact a company's operations, costs, and profitability as industries adapt to new environmental standards. For example, a shifting consumer preference toward energy-efficient appliances could create a loss of sales for companies that don’t invest in innovation toward energy efficiency. 

• Physical risks: These are direct risks that stem from climate change hazards and infrastructure vulnerabilities, leading to damage from extreme weather events and long-term environmental changes. These risks can lead to property loss, operational disruptions, and supply chain breakdowns. For example, agricultural crops that are exposed to ongoing drought and without access to irrigation may present a financial risk for both farmers and retailers. 

Why SB 261 matters

Climate risks are not hypothetical future events. According to NOAA, the United States experienced a $1 billion weather disaster an average of every 16 days between 2019 and 2024. These events pose real and growing threats to businesses and their value chains, from extreme weather events disrupting operations to supply chain vulnerabilities. SB 261 recognizes these risks as potentially material financial risks. If you’re a stakeholder — whether an investor, supplier, or community member — you deserve access to information about how companies are actively managing climate-related financial risks and opportunities.

The regulation also reflects broader trends. Globally, TCFD-aligned reporting is becoming a standard, with major markets like the EU and UK adopting similar requirements. For businesses, compliance with SB 261 is not just relevant to California; it’s about building awareness of and resilience to climate risks while staying in step with the global shift toward climate accountability.

A strategic opportunity

SB 261 requires companies to disclose their approach, so let's start with how you determine your climate risks and opportunities, and develop your strategy. For example, identifying physical risks might reveal that key facilities are vulnerable to flooding. Mitigating this risk could involve relocating operations, investing in infrastructure upgrades, or diversifying supply chains. 

An example of a transition opportunity would be proactively responding to changing consumer needs. If you're an HVAC manufacturer, diversifying your product set to include efficient heat pumps could help meet evolving needs and reduce your downstream scope 3 carbon footprint. 

Or, if you're a company that sells body care and bath products, consider that in a warmer world, consumers might take more cool showers than hot baths, and steer your product innovation toward shower products. By examining and understanding the climate risks your company could face, you can meet them head on.

How SB 261 links to broader social issues

While we often categorize “climate” into an environmental category, consider thinking about it as a social issue based on the cascade of impacts to people, communities, and public health after a major weather event. These social impacts tend to be disproportionately felt by vulnerable communities, who often have the least responsibility for contributing to climate change. 

As companies map the climate risks throughout their value chains and identify measures to build resilience, the opportunity is wide open to center the well-being of your stakeholders. 

A recent example that comes to mind is a company that identified the risk of drought in its agricultural supply chain for a key ingredient. They’re beginning the effort to work with smallholder farmers to improve soil quality by adding compost, which allows the soil to hold more moisture, for longer. The intended result is that during dry periods, these farmers are less likely to lose their crops and their income, and experience greater economic stability, while the company also benefits from a less volatile supply chain.

How to get started

1. Assess risks: Begin with an inventory of physical and transition risks. Consider not just facilities but also employees, suppliers, and customers.
   
   
2. Engage stakeholders: Collaboration with internal and external stakeholders will provide a comprehensive view of potential impacts.
   
   
3. Align with frameworks: Familiarize yourself with TCFD’s eleven recommended disclosures and other reporting standards to ensure compliance and consistency.
   
   
4. Focus on resilience: Use risk assessments to identify opportunities for innovation and adaptation. Resilience isn’t about survival; it’s about thriving in a changing world.

The bigger picture

SB 261 isn’t just about California or even just about compliance. It’s about preparing businesses and society for the future by assessing the risks and opportunities posed by climate change. Building climate resilience into your business model is no longer optional; it’s essential for companies to thrive. And by taking this seriously, businesses can lead the way in creating a sustainable and equitable world.

Need help getting started on climate risk and SB 261 compliance? Reach out to Sheila Ongie, our Head of Sustainability Strategy. 

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