The “Climate-Related Financial Risk Act” or SB 261.

SB 261 (at Cal. Health & Safety Code § 38533 et seq.) generally requires companies with annual revenues exceeding $500 million that do business in California to disclose on their websites their climate-related financial risks and the measures they have adopted to reduce and adapt to those risks, including disclosure of their governance, strategy, risk management, and targets.

Courts generally apply intermediate scrutiny to laws compelling commercial speech, upholding the law if it directly advances a substantial government interest and is not more extensive than necessary. Courts apply a lower standard if the compelled speech is purely factual and uncontroversial information, requiring only that it be reasonably related to a substantial government interest and not unjustified or unduly burdensome. By contrast, laws compelling non-commercial speech are subject to strict scrutiny, and are upheld only if narrowly tailored to serve a compelling government interest using the least restrictive means.

In a unanimous decision, the Court found the law impermissibly requires a business to assess and disclose predictive and normative judgments about future economic conditions and climate change. Because the Court found the law regulated non-commercial speech, it applied strict scrutiny and concluded that the law was not narrowly tailored and that less restrictive means were available to accomplish the state’s goals, such as disseminating existing voluntary climate-related financial risk disclosures to the public or incentivizing voluntary disclosure by companies.

The “Climate Corporate Data Accountability Act” or SB 253.

SB 253 (at Cal. Health & Safety Code § 38532 et seq.) generally requires companies with annual revenues exceeding $1 billion that do business in California to provide an annual report regarding their greenhouse gas emissions, divided into three scopes. Scope 1 emissions are from sources directly owned or controlled by the company. Scope 2 emissions are those caused by the generation of the energy purchased by the company. Scope 3 emissions are emitted by other entities across a company’s value chain, including those from its suppliers and customers.

In a 2-1 decision, the Court found the law as applied to Scope 1 and 2 emissions permissibly required disclosure of factual information on emissions generated through the company’s own operations and how they bear on its capital transactions. Because the Court found the law regulated commercial speech, it applied intermediate scrutiny and found the law sufficiently tailored to advance California’s substantial interests, and that other factors also favored the state. Judge Mark J. Bennett dissented in part, arguing that both laws should have been blocked entirely. He warned that the majority’s reasoning could open the door to compelled disclosures targeting individuals. However, the Court unanimously found the requirement to disclose Scope 3 emissions impermissibly compelled non-commercial speech because it concerned diffuse third-party conduct in the value chain that was insufficiently tethered to the company’s own operations and capital transactions. The Court found the provision failed the strict scrutiny test and was likely unconstitutional.

The Court remanded the case to the district court for further proceedings, including a determination of whether the Scope 3 provision is severable from the rest of SB 253. The California Attorney General’s Office said it is “pleased that reporting under SB 253 will move forward” and is “evaluating next steps.”

This decision follows the Ninth Circuit’s decision in National Association of Wheat Growers v. Bonta, 85 F.4th 1263 (9th Cir. 2023), where the Court applied intermediate scrutiny to hold that the state could not require carcinogen warnings under Proposition 65 for exposures to glyphosate products (such as Roundup). The Court found the “probably carcinogenic” classification by the International Agency for Research on Cancer (IARC) was controversial and not supported by the consensus of the scientific community or other regulatory agencies such as the U.S. Environmental Protection Agency. This decision and the Chamber of Commerce decision refuse to treat contested or predictive statements as "purely factual and uncontroversial" disclosures.

What this means for your business

For businesses covered by SB 261, the preliminary injunction prevents enforcement of that law pending further proceedings in the district court, and for businesses covered by SB 253, it likewise prevents enforcement of the Scope 3 reporting requirement. However, the requirement to report Scope 1 and 2 emissions remains in effect. As noted in our prior Client Alert, the first reports were due November 10, 2026 under CARB’s extended deadline. Companies that have not yet submitted their required report should act promptly to avoid the risk of enforcement actions.

Because this ruling addresses only a preliminary injunction, it does not preclude a different outcome in a final judgment on the merits. However, the reasoning of the decision will be difficult for the state to overcome. The Attorney General’s Office and California Air Resources Board may propose changes to these laws in response to the Court’s ruling, and had earlier suggested that some modifications to the Scope 3 reporting requirements were under consideration. We will continue to monitor these developments and provide updates as they occur.