- The Australian government is progressing plans to phase in a new, internationally aligned, mandatory climate disclosure reporting regime for heavy emitters, large listed companies, large private companies and superannuation funds/asset managers, with the release of a draft Bill for consultation. If enacted, the draft Bill would establish the framework for the proposed new disclosure regime. The due date for submissions on the draft Bill is 9 February 2024.
- The new climate disclosure (and assurance) requirements are planned (subject to the passage of the legislation) to be phased in, starting with certain large entities from 1 July 2024 (though the government has called for feedback on whether this should be deferred to 1 January 2025).
- Interaction with the AASB and AUASB standards:
- The specific content of the new disclosure requirements will be set out in new accounting standards, currently under development by Australian Accounting Standards Board (AASB). The AASB consultation on three initial draft standards, based on the ISSB standards: IFRS S1 and IFRS S2 is due to close on 1 March 2024 (read: Another step closer towards implementing mandatory climate disclosure in Australia).
- New assurance standards, planned to be phased in from 1 July 2024, will be made and maintained by the Australian Auditing and Assurance Standards Board (AUASB).
Draft Bill released for consultation
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.
Following two rounds of consultation (read: Moving closer to introducing internationally-aligned climate reporting requirements in Australia: Initial consultation launched; and Introduction of mandatory climate reporting in Australia: Second round of consultation launched - Technical update - MinterEllison) the government has released draft legislation for consultation which, if enacted in its proposed form, would establish the framework for the new disclosure regime.
The due date for submissions is 9 February 2024.
Here's what's in the draft Bill.
Who will need to report when?
The Bill would require:
'entities that lodge financial reports under Chapter 2M of the Corporations Act, meet certain minimum size thresholds, and/or have emissions reporting obligations under the NGER scheme, to make disclosures relating to climate in accordance with sustainability standards made by the AASB'.
This includes listed and unlisted companies, NGER reporters and financial institutions as well as registrable superannuation entities and registered investment schemes.
The government proposes that the new mandatory disclosure requirements would be phased in over the 1 July 2024 to 30 June 2027 period, starting with certain large entities.
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 three thresholds below, would be required to report against new climate-disclosure requirements (the specifics of which will be set out in Australian Sustainability Reporting Standards (ASRS)) from 1 July 2024:
- 'the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $500 million;
- the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $1 billion;
- the entity (and the entities it controls) have at the end of the financial year, 500 or more employees'
In addition, it's proposed that all entities required to report under Chapter 2M of the Corporations Act that are registered corporations 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 1 July 2024.
From a timing perspective the government has said it
'welcomes stakeholder feedback on whether amending legislation to require a 1 Jan 2025 commencement date for Group 1 entities would improve the quality of reporting during the transition year'.
Group 2 entities
From 1 July 2026, 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:
- 'the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $200 million;
- the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $500 million;
- the entity (and the entities it controls) have at the end of the financial year, 250 or more employees'
In addition, it's proposed that the requirements would apply to NGER reporters not captured in Group 1 and to asset owners where the value of assets at the end of the financial year (including the entities it controls) is equal to $5 billion or more.
Other in-scope entities
From 1 July 2027, the requirements are proposed to extend to other entities required to report under Chapter 2M of the Corporations Act that fulfill two of the three thresholds below:
- 'the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $50 million;
- the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $25 million;
- the entity (and the entities it controls) have at the end of the financial year, 100 or more employees'.
Notably, it's proposed (in section 296B(1) of the Draft Bill) that entities in this third cohort only, that assess (in line with the AASB sustainability standards once finalised) that their business is not exposed to 'material' climate-related risks/opportunities during the financial reporting period, would only be required to disclose a statement to this effect (as opposed to having to disclose a full annual sustainability report).
Smaller entities and charities
The draft explanatory memorandum states that:
'where an entity is not covered by the criteria above (eg not generally required to report under Chapter 2M, or does not meet the above tests), they are not required to prepare a sustainability report for a financial year'.
For clarity, this means that ACNC registered charities and (most) SMEs are currently excluded.
What information is likely to be required to be reported initially?
The new requirements are intended to closely align with the requirements in IFRS S2 and are proposed to form a new part of existing annual financial reporting obligations and be contained in an entity's annual report.
From commencement, it's proposed that entities would need to disclose an annual sustainability report for the financial year consisting of:
- a 'climate statement' to be prepared in accordance with the relevant (and not-yet-finalised) AASB standard. This is expected to include (among other things): 'material' climate-related financial risks/opportunities facing the entity; any metrics/targets including Scope 1 and 2 greenhouse gas (GHG) emissions targets; and details of any governance/risk management processes, controls and procedures related to these matters. It's envisioned that disclosure of Scope 3 (value chain) emissions would not be required for the first year an entity is required to prepare a climate statement, but that this information would be required from the second year of reporting.
- notes to the climate statement (if any);
- any statements required a legislative instrument by the Minister relating to matters concerning environmental sustainability; and
- a 'directors’ declaration' about the statements and notes. This would be a
'declaration by the directors of their opinion on whether the statements are in accordance with the Corporations Act, including in compliance with the relevant sustainability standards (i.e. whether the climate statement is in compliance with the sustainability standards that relate to climate)'.
The declarations would need to be made with a resolution of the directors, dated, and signed.
New assurance requirements
It's proposed that climate disclosures would be subject to similar assurance requirements to those that apply to financial reports. It's envisioned that assurance requirements would be phased in over time commencing with the largest (Group 1) entities.
The draft explanatory memorandum makes clear that the precise
'extent and level of assurance required is proposed to be set out in Australian assurance standards for climate disclosures, developed by the AUASB'.
Notably, it's proposed that only 'limited assurance' of Scope 1 and 2 emissions would be required for sustainability reports prepared between 1 July 2024 and 30 June 2030.
The explanatory memorandum states that:
'The AUASB will also set out a pathway for phasing in requirements over time, which would commence with assurance of Scope 1 and 2 emissions disclosures [included in new Sustainability Reports] from 1 July 2024 onwards and end with assurance of all climate disclosures made from 1 July 2030 onwards'.
Liability: Proposed 'interim modified liability framework'
In order to alleviate concerns 'in relation to the most uncertain parts of a climate statement' [ie statements concerning scope 3 greenhouse gas emissions, and scenario analysis], it is proposed that an 'interim modified liability framework' would apply. These elements of mandatory disclosure would be afforded protection from claims for three years (sustainability reports prepared for financial years commencing between 1 July 2024 and 30 June 2027) (see: s1705B of the Draft Bill).
Broadly, it's proposed that for sustainability reports issued during this period, only the Australian Securities and Investments Commission (ASIC) would be able to bring civil proceedings (eg actions brought under the misleading and deceptive conduct provisions) in relation to statements concerning Scope 3 (value chain) emissions and/or scenario analysis. ASIC would also be limited in the remedies it could seek - the only remedy that could be sought would be an injunction or declaration.
This means that, companies and officers would be temporarily shielded from civil actions (eg misleading or deceptive conduct claims) brought by private litigants.
It's proposed that after 30 June 2027, existing liability arrangements would apply.
To be clear, it is not proposed that:
- Entities/officers would be shielded from criminal actions;
- Any changes would be made to existing continuous disclosure requirements.
The draft explanatory memorandum states that the rationale for this approach is to 'ensure that reporting entities are allowed time to develop experience and practice to report to the required standards'.
Statutory Review
It's proposed that a Statutory Review of the operation of the reforms would be conducted 'as soon as practicable after 1 July 2028' with a copy of the Review's report to be tabled in each House (within 15 sitting days after the report is delivered to the Minister).
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 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 requirements (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:
- understanding when the new reporting/assurance regime is proposed to apply to your organisation
- understanding what information your organisation is likely to be required to disclose
- reviewing existing governance structures to identify responsibility and accountability
- reviewing existing strategy, transition plans, and sustainability disclosures to identify gaps in alignment with the proposed new requirements
- 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: exposure draft legislation 12 January 2024 - 09 February 2024]
Interested in this (and similar) topics?
Subscribe to alerts and our weekly wrap up of key financial services, risk, regulatory and ESG developments.
