Introduction

Many large Australian businesses will have to prepare annual statutory sustainability reports containing climate-related financial disclosures in respect of financial periods from 1 January 2025. Refer to our Mandatory climate reporting in Australia: Newly updated guide, for more information.

ASIC has released a draft Regulatory Guide on mandatory Sustainability reporting (Draft RG). The content of the Draft RG is far from revolutionary, or even revelatory – it is largely a helpful summary of the new law and accounting standards, covering topics including:

• Preparing the sustainability report
• Specific issues about the content of the sustainability report
• Sustainability-related financial disclosures outside the sustainability report
• ASIC’s administration of the sustainability reporting requirements, including relief and direction powers

Comments are due by 19 December 2024 and ASIC expects to release the final Regulatory Guide in the first quarter of 2025.

ASIC Commissioner, Kate O’Rourke has said:

“Our focus for this regulatory guide is to assist preparers of sustainability reports to comply with their obligations so that users are provided with high-quality, decision-useful, climate-related financial disclosures that comply with the law and the sustainability standards”

Directors, as well as reporting and sustainability teams, should take note of the Draft RG as it provides a useful summary of key aspects of the new climate reporting regime and the application of Directors' duties to it. From a practical standpoint, the Draft RG offers some clues about the answer to some questions about climate reporting, such as:

• Is the mandatory climate statement best done as a separate dedicated report, part of a broader ESG report, or within other parts of the annual report? (Answer: Separate report)
• What information from a mandatory climate statement can be used elsewhere, for example in annual results presentations or advertising? (Answer: Not protected statements if you want your modified liability protection)
• Will ASIC give us relief from aspects of mandatory reporting because it is hard, because we don't have the data or because we lack resources? (Spoiler alert: No)

We would be happy to assist with advice on the implications of the Draft RG and submissions to ASIC's consultation.

There are, beyond summary, some interesting issues raised by the Draft RG. We note three of those issues below.

ASIC's new directions power

The Draft RG suggests ASIC will take a "proportionate and pragmatic approach to the supervision and enforcement" and Commissioner O'Rourke has said that:

“We recognise that there will be a period of transition whilst entities build their capability, as reflected in the phasing in of requirements and modified liability provisions.”

One of the new tools that ASIC has been given during this transition period is a 'directions power'. The Draft RG says that:

If we consider that a statement in a sustainability report is incorrect, incomplete or misleading, we may direct the entity that has prepared the sustainability report to:

1. confirm that the statement is correct or complete;
2. explain the statement;
3. provide information or documents that substantiate or support the statement;
4. correct, complete or amend the statement; and/or
5. publish the corrected, completed or amended statement, or give the statement to specified persons, in accordance with the direction.

This is novel, in the context of financial reporting, and the Draft RG helpfully explains the process that ASIC will apply to decide whether or not to make a direction – it is basically an administrative 'hearing' involving evidence and submissions. Failure to comply with an ASIC direction is a strict liability offence.

The exercise of the proposed directions power perhaps has some analogy to what the Takeovers Panel does in public takeover matters, where ASIC (or another interested party) can apply to the Takeovers Panel alleging disclosure deficiencies in parties’ takeover-related public disclosure documents and the Takeovers Panel then adjudicates and may give orders to correct any disclosure deficiencies.

Modified liability settings

Under the 'modified liability settings', no legal action (other than criminal action or action by ASIC) can be brought in relation to ‘protected statements’ made in the sustainability report. 'Protected statements' include all forward-looking statements (in the first year) and disclosures related to scope 3 GHG, scenario analysis and transition plans (for the first three years).

The Draft RG usefully clarifies the practical consequence of the fact that the modified liability settings do not extend to statements voluntarily made outside a sustainability report (such as in investor presentation), unless required by law.

"For example, where a protected statement is reproduced, quoted, or summarised in an investor presentation or in promotional material, it will not be covered by the modified liability settings, unless its disclosure is required under a Commonwealth law such as [in respect of continuous disclosure]"

This guidance highlights the foreseeable challenge for CEOs and CFOs (and the General Counsel advising them) declining to comment in investor presentations on key aspects of sustainability reporting for fear of losing the protection of modified liability. That will surely be an awkward silence! And it applies even to mere exact and precise repetition of a 'protected statement' in a climate statement, not just to selective use or reproduction of the statement "in a manner that distorts the balance, tenor or prominence of the information disclosed".

The Draft RG raises also the spectre of tricky legal questions about whether or not a statement is required to be made under Commonwealth law in various different contexts where qualitative judgment is called for as to whether disclosure is legally required – for example the Draft RG notes that s1013D of the Corporations Act may require a 'protected statement' to be included in a PDS where it is relevant to the environmental considerations taken into account in the selection, retention or realisation of an investment. The requirement to include the protected statement doesn't follow automatically but rather requires a judgment as to the relevance of the information.

Labelling

Importantly, ASIC proposes that a statutory sustainability report should be "presented separately" and "clearly distinguished" from other information in the annual report.

The Draft RG points out that that the terms ‘sustainability report’ and ‘climate statement’ have statutory meanings in the Corporations Act and suggests that those terms should be used only to refer to statutory information required by the climate reporting regime. Further, those labels should be clearly differentiated from other reports or statements that have been historically been called, say, a ‘sustainability report’.

The (not very) catchy terms ‘voluntary sustainability statement’ and ‘voluntary climate statement’ are recommended by ASIC as labels for use in respect of statements containing sustainability-related information that are not required to be included in the statutory climate statements/statutory sustainability reports.

Next steps

MinterEllison would be pleased to assist with advice on the implications of the Draft RG or in respect of submissions to ASIC's consultation.