In line with the government's previously stated commitment to introduce internationally aligned, standardised, mandatory climate disclosure requirements in Australia, Treasury has released a consultation paper seeking initial views on the design and implementation of the reforms ahead of undertaking further consultation on more detailed proposals in 2023.
Why introduce new climate-reporting requirements?
Announcing the consultation, the government made clear that it considers the reforms necessary to ensure that disclosure by Australian companies meets market expectations. This is vital, in the government's view to 'ensur[ing] Australia can grasp the economic opportunities from more investment in cleaner, cheaper and more reliable energy, and manage the financial risks that climate change presents'.
Expanding on this, the consultation paper underlines that:
'market expectations for certainty may not be met without government action and without efforts by businesses to continue to improve the quality of their disclosures. This could be costly for the economy if it affects the ability of firms to raise capital. To ensure Australia remains aligned with major international capital markets, disclosure obligations need to be credible and comparable to other prominent jurisdictions. They need to provide investors with decision-useful information about the financial risks that firms face from climate change and provide regulators with information to identify and manage systemic risks'.
In light of this, the focus of the consultation is not on whether new climate disclosure requirements should be introduced - Australian listed companies and financial institutions are already obliged to report on material risks to their business - but on how and when they should be implemented and which entities should fall within the initial scope of the regime.
Starting point for the consultation: Six guiding principles
The consultation states that the design and implementation of the reforms, and the government's approach to considering feedback received during the consultation, will be guided by the following six principles.
- 'Climate disclosure reforms should assist with: Australia’s transition to net zero emissions by 2050; adaptation to a changing climate; and broader efforts and initiatives to promote a sustainable financial system in Australia and internationally'.
- 'Reforms should deliver clear improvements in the quantity, quality, and comparability of disclosures, which will help regulators to assess and manage systemic risks and other risks to investors, strengthen transparency and improve the flow of useful information to investors (including what actions are being taken to mitigate risks)'
- 'Businesses, investors, regulators and the public should have a clear and common understanding about obligations for entities to disclose climate-related financial risks. This will require prescription of whom they apply to, how and when they should be made, and clarifying details on content of disclosures'.
- 'New requirements should, as far as possible, be aligned with international reporting practices, to minimise compliance costs for Australian businesses that operate internationally, and to ensure Australia’s regime is viewed with credibility by international markets'.
- 'New requirements should, where possible, build on the existing financial reporting system, and be scalable and flexible to accommodate future developments in the global baseline for climate and sustainability reporting, to minimise the expected compliance costs and potential for unintended consequences'.
- 'Climate disclosure requirements should be proportional to the risks they seek to address, particularly regarding whom they apply to, what costs those entities will incur, what data or capability they will require and what liability they may enliven'.
Key proposals/questions for feedback
A high level overview of the key questions on which the government seeks feedback is below. Broadly, the consultation questions can be divided into those dealing with the design, content, implementation and scope of the proposed regime.
The remainder concern the governance and oversight of the regime.
You can find a list of the 19 questions on which the government has sought feedback at p21 of the consultation paper.
1. Design, content, implementation and scope of the reporting regime
Implementation: A phased approach to implementation, starting with larger entities
The consultation paper seeks feedback on whether Australia should follow other jurisdictions in adopting a phased approach to the introduction of mandatory disclosure requirements, starting with larger entities.
For clarity, it's proposed that the new disclosure requirements would initially apply to both:
- large listed entities covered by the Corporations Act 2001 (Cth) (Corporations Act); and
- large financial institutions (ie banks, insurers, credit unions and superannuation funds)
The consultation paper seeks views on the appropriate thresholds to determine the initial application of the new requirements.
In terms of timing, it's proposed that larger listed entities could potentially be required to report against the new requirements from financial year 2024/25.
The consultation paper also seeks feedback on:
- whether there are other types of entities aside from large listed entities and financial institutions that should be included in the initial phase; and
- what considerations should apply to determining 'the cohorts covered in subsequent phases of mandatory disclosure and the timing of future phases'.
Alignment with international reporting frameworks
The International Sustainability Standards Board (ISSB) is currently developing global sustainability standards that build on the existing Taskforce on Climate-related Financial Disclosure (TCFD) framework.
The consultation paper seeks feedback on:
- whether the climate disclosure obligations should initially be aligned with the approach in the TCFD framework (on which the ISSB standards are based) given that that the ISSB standards are not yet finalised.
- assuming Australian requirements should be aligned with TCFD/ISSB standards, whether there are 'particular considerations that should apply in the Australian context'
- whether Australia should consider aligning new disclosure requirements with other reporting standards/frameworks.
The regulatory framework for the new requirements
The consultation paper seeks views on how the 'overarching' and more high level obligations for climate disclosure – climate governance, strategy, risk management, targets and metrics – as set out in the draft ISSB standard, should be incorporated into the in the Australian regulatory framework.
The consultation paper suggests that one option would be to incorporate these obligations into legislation (ie the Corporations Act and Regulations), with the specific requirements set out in separate climate standards and guidance.
Alternately, it's suggested that the new requirements could be built onto existing requirements to disclose any material risks as part of an operating and financial review. For example, rather than ASIC regulatory guidance recommending TCFD as a framework for climate disclosures, the guidance could instead direct 'affected entities to apply the proposed ISSB standard setting out the overarching requirements for sustainability disclosures.
The consultation paper seeks feedback on what 'key considerations…should inform the design of a new regulatory framework, in particular when setting overarching climate disclosure obligations (strategy, governance, risk management and targets'.
Where entities should be required to report
The consultation paper seeks views on where reporting entities should be required to report – ie whether the new requirements should continue to be included in an operating and financial review, or in an alternative separate report included as part of the annual report.
The consultation paper seeks views on how 'materiality' should be determined – what the reference point for materiality should be - in the context of climate reporting noting that:
- the TCFD recommends using financial materiality principles when making climate disclosures (but suggests that Scope 1 and 2 emissions should be disclosed regardless of materiality);
- the ISSB appears set to use the same definition of materiality as in the IFRS accounting standards, with potential for additional sustainability related guidance.
The consultation paper seeks feedback on what considerations should apply to introducing requirements for entities to report Scope 1,2 and 3 emissions.
In addition, the consultation seeks feedback on the following issues.
- Scope 1 and 2 emissions: Views are sought on 'how to ensure consistency and minimise duplication' of Scope 1 and 2 reporting requirements for entities that also report through existing national emissions reporting frameworks such as the National Greenhouse and Energy Reporting (NGER) framework, Corporate Emission Reporting Transparency Initiative (CERT) and Climate Active’s Carbon Neutral Standards.
- Scope 3 emissions: The consultation paper envisages that the new reporting requirements will include 'some requirements to disclose Scope 3 emissions' in alignment with the draft ISSB standard, the US Securities and Exchange Commission’s draft climate disclosure rules and the EU’s draft European Sustainability Reporting Standards. The consultation paper seeks feedback on:
- key considerations that should be applied to requirements to report material Scope 3 emissions'.
- views on whether Scope 3 emissions disclosure requirements (and potentially other specific disclosures) should have a separately phased timeline from other new commitments.
- Other metrics: The consultation paper seeks feedback on whether the new Australian requirements should define industry-specific metrics or economy wide metrics for disclosures (in the interests of consistency) – ie define a 'common baseline' for these disclosures - noting that the ISSB draft climate standard includes a proposed appendix of industry-specific metrics, based on the Sustainability Accounting Standards Board’s standards.
Disclosure of transition plans, the use of offsets
The consultation paper seeks feedback on:
'What considerations should apply to ensure covered entities provide transparent information about how they are managing climate related risks, including what transition plans they have in place and any use of greenhouse gas emissions offsets to meet their published targets'.
Assurance of climate risk
Noting the increased global demand for assurance of climate disclosures consultation paper seeks feedback on:
- whether and what level of assurance should be required
- who should be required to provide assurance
- whether assurance providers should be subject to independence and quality management standards
- whether (assuming assurance requirements are introduced) they should commence in different phases.
Governance of supporting information for disclosures
Noting that TCFD and/or ISSB aligned disclosures necessarily draw on supporting information not produced by the reporting entity itself, and not included in the by the TCFD or ISSB framework/standards eg climate scenarios, the consultation paper seeks views on whether a particular entity/entities or authority should be given responsibility for providing information for use by disclosing entities.
It's suggested for example, that a 'standard-setter or a scientific body could provide agreed scenarios to be used in scenario analysis'.
The consultation paper seeks feedback on whether there are any 'specific capability or data challenges in the Australian context that should be considered when implementing the new requirements' and if so, how they should be addressed.
The consultation paper seeks views on whether ASIC’s existing advice for forward-looking statements – ie that they must be made on ‘reasonable grounds’ (with reference to s769C and s728(2) of the Corporations Act) – is 'suitable' in the context of climate disclosures. That is, the extent to which existing 'reasonable grounds' requirements 'ensure liability is proportionate to inherent uncertainty within some required climate disclosures'.
Views are also sought on whether there are 'other mechanisms to address the balance between incentivising disclosure and penalising misconduct'. For example, the consultation paper notes that the US SEC has proposed a specific safe harbour regime for Scope 3 emissions (in addition to their general provisions for safe harbour for forward-looking statements).
Interaction of the proposed new climate disclosure requirements with other reporting requirements
The consultation paper also seeks views on whether there are 'particular considerations for how other reporting obligations (including continuous disclosure and fundraising documents) would interact with new climate reporting requirements and how should these interactions be addressed'.
Broader sustainability reporting
Given the growing international focus on broader sustainability reporting and the likelihood that the ISSB's global baseline standards will eventually include social and governance disclosures (eg labour standards, tax transparency, diversity, relations with First Nations stakeholders), the consultation paper seeks views on 'the level of prioritisation', that should be given ensuring the new requirements are 'adaptable enough to accommodate future global developments in nature and other sustainability reporting'.
The consultation paper also seeks feedback on whether digital reporting which allows for the machine readability of documents without the need for manual data extraction, to be mandated for sustainability risk reporting and what the costs and benefits of this are.
2. Governance and oversight of the new climate disclosure requirements: three proposed options
The consultation paper sets out three potential options (outlined below) for the oversight of the new climate disclosure requirements and seeks feedback on which would 'best improve the effectiveness and efficiency of the financial reporting system, including to support introduction of climate related risk reporting'.
Option 1: AASB would be responsible for developing and monitoring the new standards, overseen by the FRC
Under this option the Australian Accounting Standards Board (AASB) would be confirmed as the entity responsible for developing, making and monitoring climate and sustainability related risk disclosure standards, overseen by the Financial Reporting Council (FRC).
The AUASB would have responsibility for developing and maintaining any assurance requirements applicable to climate and sustainability related reporting.
The consultation paper comments that this would 'leverage the AASB’s existing experience' as a standard setter, the AASB's relationships with international standard setting bodies, the work that has been completed by the AASB to date in preparation for the introduction of climate disclosure standards in Australia and its 'industry credibility'.
Option 2: Establish a new separate sustainability standards board
Under Option 2, a separate sustainability standards board (proposed board), similar to the AASB and AUASB, would be established. This proposed board would have powers to develop, make and monitor climate and sustainability related risk disclosure standards, overseen by the FRC.
Consistent with the proposed approach in Option 1, the AUASB would have responsibility for developing and maintaining any assurance requirements applicable to climate and sustainability related reporting.
The consultation paper comments that more clearly demarcating the role of the proposed board could 'assist in ensuring it is 'equipped with the appropriate expertise and resources' to carry out its specific responsibilities and also ensure that the AASB is positioned to maintain its focus on 'traditional accounting standards'.
The consultation paper further observes that having a distinct board would reflect the creation of the ISSB with the advantage that 'the parallels to the international structure would be readily understandable by domestic and international stakeholders'
The consultation paper acknowledges that this option could take time to implement (given the legislative and other changes involved), which could potentially delay implementation of the new disclosure regime. However, the paper suggests that this risk could be mitigated because the proposed board could rely on the preparatory work already undertaken by the FRC, AASB and AUASB towards the development of Australian climate-related reporting standards. The consultation paper also points to the fact that the AASB and AUASB 'have effectively ringfenced some resources for sustainability and climate related reporting, including dedicated climate and sustainability reporting experts, and these could be "spun off" into a new body once established'.
On the negative side, the consultation paper suggests that this option 'would further fragment the Australian financial reporting framework' and could potentially 'exacerbate' resourcing and administrative inefficiencies (though again the consultation paper suggests that these inefficiencies could to some extent be mitigated).
Option 3: Consolidate the FRC, AASB and AUASB into a single entity
Under the third option, the FRC, AASB and AUASB would effectively be consolidated into a single new entity responsible for setting accounting and audit standards, making climate and sustainability risk disclosure standards, providing advice to government and financial reporting system oversight.
It's envisaged that this new body would operate like the New Zealand External Reporting Board (XRB).
It would be independently resourced and comprise a government-appointed governing board, with powers to establish and delegate functions to sub-committees of technical experts.
The consultation paper suggests that this option would
'establish a new body with greater independence and flexibility to respond to current and future financial reporting developments, and so improve the responsiveness and resilience of the financial reporting system. The new body would also seek to remove or minimise the operational inefficiencies in the current system'.
Though the consultation paper acknowledges that the scope of the proposed changes 'may give rise to some uncertainty for stakeholders and could impact the timely implementation of climate related risk disclosure in Australia', it suggests that these risks could be 'mitigated by ensuring consultation with relevant stakeholders on design elements of any new financial reporting body and establishing clear transitional arrangements which would facilitate progress on climate related risk reporting'.
Investor groups have welcomed the consultation
In a statement welcoming the consultation, the Investor Group on Climate Change (IGCC) said mandatory, standardised disclosure of climate-related financial risk is 'central' to unlocking investment in green projects/companies. In addition, the IGCC considers that the new regime will: a) assist Australian companies 'stay attractive in global capital markets'; b) support investors, regulators and stakeholders in forming a 'reliable understanding of the economy's overall climate risks and opportunities'; c) reduce the reporting burden for companies that need to disclose in multiple jurisdictions; and d) help to protect against greenwashing (as financial statements help protect against fraud).
Similarly the Australian Council of Superannuation Investors has welcomed the consultation, as a 'welcome step forward to support markets that operate in the best financial interests of long-term asset owners investing on behalf of millions of superannuation fund members'.
What are the implications for Australian entities?
Even in the absence of the proposed mandatory, standardised and internationally aligned disclosure regime foreshadowed in the consultation, it would be imprudent for entities to assume that they currently have no obligation to consider and disclose material climate and sustainability-related risks and the impact of these risks on their financial prospects, position and performance.
This consultation adds to the many reasons why companies should lean into the questions of how they can improve their reporting capability in order to keep pace with investor and regulatory expectations. The direction of travel is clear – even if the detail of the requirements is yet to be finalised.
MinterEllison's Climate & Sustainability Risk Governance team have prepared key principles that reporting entities should apply, now, in considering their obligations to disclose climate related impacts in their annual reports:
- Reporting entities should assess the extent to which climate change (and other sustainability-related issues such as biodiversity loss or fresh water availability) may present material risks to their financial prospects. In the face of uncertainty, stress-testing and scenario analysis should be conducted across a plausible range of climate futures.
- Consideration should be given to what information should be disclosed as material. This should be based not only on quantitative outcomes, but by reference to the information reasonable investors consider to be decision-useful. For narrative disclosures on risks to financial prospects in the Operating & Financial Review or directors' report, reference should be had to ASIC Regulatory Guidance 247, ASX CGP Recommendation 7.4 and the Recommendations of the Taskforce on Climate-related Financial Disclosures.
- Reporting entities should consider the extent to which sustainability-related risks to financial prospects may impact on variables applied in calculating accounting estimates in its statement of financial position (balance sheet). This is particularly relevant for assets and liabilities stated at fair value, and / or for which significant management judgement is required. This consideration may include variables such as (for example) asset useful lives, impairments, provisions for losses or onerous contracts etc. Reference should be had to the AASB/AuASB Joint Guidance Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB/IASB Practice Statement 2 (April 2019).
- Consideration should be given to the narrative disclosures that may need to be made in the notes to the financial statements in order to ensure that a true and fair view is presented.
- Consideration should be given to alignment between sustainability strategies and targets and financial statement accounting estimates. For example to what extent have asset valuations, capex and opex taken emissions reduction plans into account?
[Source: Treasury Consultation:Climate-related financial disclosure12 December 2022 - 17 February 2023]
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