Australia is following many other jurisdictions in progressing the introduction of ISSB-aligned mandatory sustainability disclosure standards, with a focus initially on climate-related disclosure.
An initial round of consultation (read, Moving closer to introducing internationally-aligned climate reporting requirements in Australia: Initial consultation launched) on the proposed approach to developing the standards closed in February 2023. On 27 June, Treasury released a second consultation paper seeking feedback on a number of proposals around implementation. The due date for submissions is 21 July 2023.
Our key takeaways are below.
Who will need to report when?
The government proposes a three stage approach to implementation, starting with a certain large entities from 2024/25 and expanding to cover all other (proposed) groups from the 2027-28 reporting year onwards.
Essentially, it's proposed that all companies will (over time) fall within the scope of the new requirements – including private companies.
Larger companies (Group 1) would report from 2024/5 onwards
- It's proposed that all entities required to report under Chapter 2M of the Corporations Act 2001 (Cth) (Corporations Act) that meet two of the thresholds below, would be required to report against the new climate-disclosure requirements from 2024/25.
- 'Has over 500 employees;
- The value of consolidated gross assets at the end of the financial year of the company and any entities it controls is $1 billion or more;
- The consolidated revenue for the financial year of the company and any entities it controls is $500 million or more'.
- In addition, it's proposed that all entities required to report under Chapter 2M of the Corporations Act that are registered as a 'Controlling Corporation' reporting under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) and that meet the NGER publication threshold, would also need to report against the new requirements from 2024/25.
Groups 2 and 3
- From 2026-27 onwards (Group 2), it's proposed the requirements would extend to entities required to report under Chapter 2M of the Corporations Act that fulfill two of the three thresholds below:
- 'Has over 250 employees;
- The value of consolidated gross assets at the end of the financial year of the company and any entities it controls is $500 million or more;
- The consolidated revenue for the financial year of the company and any entities it controls is $200 million or more'.
- From 2027-28 onwards (Group 3), the requirements are proposed to extend to entities required to report under Chapter 2M of the Corporations Act that fulfill two of the three thresholds below:
- 'Has over 100 employees;
- The value of consolidated gross assets at the end of the financial year of the company and any entities it controls is $25 million or more;
- The consolidated revenue for the financial year of the company and any entities it controls is $50 million or more'.
- In addition, this group is also proposed to include entities required to report under Chapter 2M that are a 'Controlling Corporation' under the NGER Act.
Proposed to be a part of the annual report
It's proposed that the new climate disclosure requirements would be published as part of, and at the same time as, companies' annual financial reports ie as part of both the directors' report and the financial report.
What information is likely to be required to be reported initially?
The new requirements will closely align with the requirements in IFRS S2.
From commencement, the consultation paper suggests companies would need to disclose:
- 'material' climate-related risks and opportunities to their business, as well as how the entity identifies, assesses and manages risk and opportunities.
[Note: In terms of what would be 'material' the consultation paper proposes, in line with existing definitions of financial materiality in the Australian and international standards, in in line with the approach in the ISSB standards that information would be considered material if:
'omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial reports (existing and potential investors, lenders and other creditors) make on the basis of the reports'.]
- information about the 'governance processes, controls and procedures used to monitor and manage climate-related financial risks and opportunities'
- information about the company's climate strategy and decision making including disclosure of the company's transition plans. This would be expected to include information about use of offsets, target setting and mitigation strategies.
- climate resilience assessments against at least two possible future states, one of which would need to be consistent with the global temperature goal set out in the Climate Change Act 2022 (Cth) which is to contribute to 'holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels’.
- information about their climate-related targets (eg whether the target is ‘science-based’ or has been validated by a third party) and plan for achieving them (expected operational changes and use of offsets) and progress to date.
- Gross Scope 1 and 2 emissions
- Qualitative scenario analysis
Additional disclosures (likely) to be required over the following two years
Companies would have longer to comply with additional reporting requirements, in line with the proposed staged approach to implementation outlined above.
- Scope 3 emissions: Disclosure of material Scope 3 emissions is proposed to be required for all reporting entities from their second reporting year onwards.
- Quantitative scenario analysis: Companies would be expected to move to quantitative scenario analysis by 2027-28.
- Industry based metrics: Companies would be 'required to have regard to disclosing industry-based metrics, where there are well-established and understood metrics available for the reporting entity' by 2027/28.
New assurance requirements
It's proposed that new assurance requirements would also be phased in, commencing with the largest entities. Assurance would need to be provided by a provider that is independent from the entity being audited.
Proposed phased approach
- Group 1 entities
- From 2024: It's proposed that 'limited assurance' of Scope 1 and 2 emissions and 'reasonable assurance' over governance disclosures would be required
- From 2025-26: It's proposed that 'limited assurance' of Scope 3 emissions, scenario analysis and transition plans would be required
- From 2026-27: It's proposed that 'limited assurance of scope 3 emissions, scenario analysis and transition plans (full quantitative assurance)' would be required
- From 2027-28: 'Reasonable assurance' over all climate disclosures is proposed to be required.
- Group 2 entities: It's proposed that no assurance over climate-related disclosure would be required until 2026-27 for this group when 'limited assurance' of Scope 1 and 2 emissions and 'reasonable assurance' over governance disclosures would commence. Additional requirements would then be phased in, moving toward the expectation of 'reasonable assurance over all climate disclosures' by 2029-30
- Group 3 entities: It's proposed assurance requirements over climate-related disclosure would not commence for this group until 2026-27 and would be phased in, moving toward 'reasonable assurance over all climate disclosures by 2030/2031.
The consultation paper includes a more detailed proposed timeline for the roll out of assurance requirements at page 25.
[Note: The consultation paper notes that the International Auditing and Assurance Standards Board (IAASB) is currently developing an overarching standard for assurance on sustainability reporting, which is expected to address both limited and reasonable assurance. An exposure draft is expected to be released in July/August 2023 with a view to finalising the standard by late 2024.]
Liability: Proposed 'interim modified liability framework'
In response to stakeholder concerns around the need for additional protections from liability for companies/company officers, especially around forward-looking statements, the consultation paper proposes what it terms an 'interim modified liability framework'. For clarity, this is not the same as a 'safe harbour'.
The consultation paper proposes that:
- Climate-related financial disclosure requirements would be drafted as civil penalty provisions in the Corporations Act.
- The application of misleading and deceptive conduct provisions to Scope 3 reporting and forward looking statements (eg scenario analysis and transition planning) would be limited to regulator only actions for the first three years. That is, companies and officers would be temporarily shielded from misleading or deceptive conduct claims brought by private litigants for the first three years.
- It's not proposed that any changes would be made to existing continuous disclosure requirements.
The proposed approach is aimed at countering the risk that
'entities would provide overly cautious disclosures that do not meet the needs and expectations of the market or investors' without additional protection.
A step change in reporting
Even without the introduction of legislated (mandatory) requirements, companies are already under considerable pressure to manage and disclose how they are managing their climate-related financial risk and increasingly their broader sustainability-related risks. The release of the ISSB's newly-minted initial sustainability standards (the first of what is expected to be a suite of standards) will reinforce, particularise and extend the existing requirements.
We expect the new Australian standards (once legislated) to be a floor, rather than a ceiling, when it comes to meeting market expectations in this space.
There are a number of steps all boards can take now to prepare for the introduction of new ISSB-aligned requirements. These include:
- reviewing existing governance structures to identify responsibility and accountability
- reviewing existing strategy, transition plans, and sustainability disclosures to identify gaps in alignment with the expectations in the new ISSB standards/Treasury consultation paper
- understanding from management what the gaps are between current and future resourcing, data and disclosure needs
- formulating a time-bound plan to address these gaps (including assigning responsibility for delivery/oversight)
[Source: Treasury Consultation: Climate-related financial disclosure: Second consultation 27 June 2023 - 21 July 2023]
- The first two ISSB standards were released on 26 June 2023. You can find our article on the immediate implications here.
- Ahead of the introduction of new mandatory ISSB-aligned sustainability reporting requirements in Australia, the AICD, in conjunction with Deloitte and MinterEllison released a guide to support boards to prepare for the ISSB standards
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