Landmark Bill introduced

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), and separate consultation on draft legislation the government has introduced a Bill into the House of Representatives - Schedule 4 to the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 – which will (if enacted) establish the framework for the new disclosure regime. Here's what's in the Bill.

Who will need to report when?

Consistent with the consultation draft:

'Schedule 4 to the Bill generally requires entities that lodge financial reports under Chapter 2M of the Corporations Act and meet certain minimum size thresholds, or have emissions reporting obligations under the NGER scheme, to make disclosures relating to climate in accordance with relevant 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.

Timing wise, the new mandatory disclosure requirements are planned to be phased in from 1 January 2025 (not 1 July 2024 as originally proposed), starting with certain large entities (Group 1 entities).

Larger companies (Group 1) would report from 2025/26 onwards

The thresholds for Group 1 entities are unchanged from the consultation draft. However, the timing has been pushed back – Group 1 entities will be required to report from the first financial year that commences after 1 January 2025.

That is to say, 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 the new climate-disclosure requirements (the specifics of which will be set out in Australian Sustainability Reporting Standards (ASRS)):

• 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' (including part time 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.

The Explanatory Memorandum clarifies that:

'even if it meets the criteria, an entity which is a registered scheme, registrable superannuation entity, or retail CCIV is not a Group 1 entity'.

Group 2 entities 

From 1 July 2026 (assuming a 1 January 2025 start date for the regime) it's proposed (consistent with the consultation draft) that 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 to 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' (including part time employees)

In addition, the requirements would apply to NGER reporters not captured in Group 1 and to asset owners (registered scheme, registrable superannuation entity, or retail CCIV) where the value of assets at the end of the financial year (including the entities it controls) is equal to $5 billion or more.

All other in-scope entities

From 1 July 2027 (assuming a 1 January 2025 start date for the regime) the requirements would extend to all other in-scope entities. That is, to entities that are 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' (including part time employees)

Notably, entities in this third cohort, 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). This would only apply to Group 3 entities.

Smaller entities and charities?

ACNC registered charities and (most) SMEs are excluded from the proposed new regime.

The Explanatory Memorandum states that where an entity is not covered by the above criteria (e.g.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.

Specifically the Explanatory Memorandum states that:

• 'entities that for a financial year, are already exempt from lodging financial reports under Chapter 2M of the Corporations Act, are exempt from preparing annual sustainability reports for that financial year. This includes where:
  • an entity has been provided with relief or is exempt from financial reporting by way of an ASIC class order or individual entity relief and
  • an entity is registered with the Australian Charities and Not-for-profits Commission.
• small and medium size businesses, below the relevant size thresholds are exempt'.

Having said this, the Australian Securities and Investments Commission (ASIC) has cautioned that even if entities are not directly in scope of the new requirements, they may still be impacted indirectly. ASIC states:

'This means that those businesses [ie businesses that are not directly in scope of the new requirements] are not expected to have any direct reporting requirements in the immediate future. However, many small businesses form part of the supply chain of larger businesses, which means they may need to engage with climate reporting considerations over time, even if they do not have any direct climate reporting obligations. This is because the 'scope 3' emissions of a large business with reporting obligations may include the emissions of its small business suppliers. Scope 3 emissions are those emissions that occur up or down a company's supply chain.'

ASIC has flagged that once the new requirements are in effect, it expects to

'work with small business representatives to develop practical guidance for small businesses in relation to the requirements of the new laws and how the new laws may impact them.'

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:

• 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. Disclosure of Scope 3 emissions (ie value chain emissions, including financed emissions) is not expected to be required for the first year an entity is required to prepare a climate statement (For more on AASB's draft standard see: Another step closer towards implementing mandatory climate disclosure in Australia)
• a 'directors’ declaration' about the statements and notes. This would be a

'a declaration by the directors as to whether, in the directors’ opinion, the substantive provisions of the sustainability report are in accordance with this Act, including:
(a) section 296C (compliance with sustainability standards etc.); and
(b) section 296D (climate statement disclosures)'.

The declarations would need to be made with a resolution of the directors, dated, and signed.

Notably, and in a departure from the consultation draft, for first three years of the new regime, directors will only need to give an opinion on whether in the

'entity had taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Act' (see: 1707C)

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 Explanatory Memorandum makes clear that the precise:

'extent and level of assurance required will be set out in Australian auditing standards for sustainability reports, developed by the Auditing and Assurance Standards Board (AUASB)'.

The AUASB has yet not finalised its proposal around its approach to phasing in assurance requirements. The AUASB has called for feedback on a potential model that would see only 'limited assurance' Scope 1 and 2 emissions required for sustainability reports prepared for the first year (see: Attachment 1 to the AUASB consultation paper).

Liability: Strengthened protections

In order to alleviate concerns 'in relation to the most uncertain parts of a climate statement' [defined in the Bill as 'protected statements'] an interim 'modified liability' framework is proposed to apply.

In essence, only ASIC would be able to take action for misleading and deceptive conduct in relation to 'protected statements' included in sustainability reports issued during the first three years of the regime (or in auditor's reports).

The Bill defines 'protected statements' to include: statements about Scope 3 emissions (ie value chain emissions, including financed emissions), scenario analysis; and transition plans included in sustainability reports). In a departure from the draft Bill:

'modified liability would extend to cover all forward-looking statements related to climate and made for the purpose of complying with sustainability standards, if they are made in sustainability reports for financial years commencing within the first 12 months starting on the start date'.

This would also apply to forward looking disclosures of this kind included in auditor's reports.

The effect of this is that companies and officers would be temporarily shielded from civil actions (eg misleading or deceptive conduct claims) brought by private litigants.

After the first year, only 'protected statements' as defined in the Bill would be covered, and then only for a further two years – after this period 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 explanatory memorandum states that the policy intent is to:

'ensure that during the transitional period ASIC can undertake a role that promotes education about compliance with the new reporting regime and deter poor behaviours and reporting practices that are contrary to the objectives of the new reporting regime'.

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 Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024]

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