Mandatory climate-related financial reporting

A guide for boards: ESG governance and reporting

by Jillian Button, Hannah Biggins, Victoria Costa, Tiana Macleod and Alexander Batsis · 25 September 2024

Boards should be taking steps now to understand the implications of the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 (Cth) (the Act) for their organisations, which was recently passed by the Federal Parliament on 9 September 2024 and received royal assent on 17 September 2024.

The new legislation represents a significant shift in corporate reporting. For many companies, mandatory climate-related financial reporting will mean navigating new and unfamiliar territory. As recently remarked by ASIC Chair Joseph Longo, 'the growing interest in ESG issues is driving the biggest changes to financial reporting and disclosure standards in a generation'.¹ Boards will play an essential role in responding to these changes and overseeing management to ensure their organisations respond appropriately and adequately to climate-related risks and opportunities.

The new climate-related financial disclosure regime

The Act implements standardised, internationally aligned, mandatory climate-related financial disclosure requirements for large listed and unlisted entities. Such disclosures are intended to provide comparable, transparent and decision-useful information to stakeholders.

This information assists stakeholders to understand and assess:

the climate-related financial risks and opportunities of reporting entities; and
how entities manage, plan for and adapt to these risks and opportunities (see our recently published Insight for further details on the new regime).

Reporting entities are now required to provide relevant disclosures in a new 'sustainability report'. The sustainability report will form part of an entity's annual reporting obligations.

The new regime will be implemented principally under the Corporations Act 2001 (Cth). Similar to the directors' declaration currently provided as part of the company's financial report, directors will be required to make a declaration regarding the sustainability report.

Under the Act, directors will be required to declare that (among other things), in their opinion, the substantive provisions in the sustainability report are in accordance with the Corporations Act (eg that they are compliant with the sustainability standards etc). However, a lower threshold will apply for declarations in respect of financial years commencing before 1 January 2028, with directors required to declare that, in their opinion, the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Corporations Act. As is the case with other financial reporting, directors must exercise their duty of care and diligence when reviewing and approving the sustainability report.

Given the interaction of these requirements and duties with the new regime, and with the first cohort of reporting entities to commence reporting for annual reporting periods commencing on or after 1 January 2025, boards should be taking steps now to understand the implications of the new regime for their organisations.

We recommend that boards:

seek information and training, whether from management or external advisers, regarding the proposed regime, including to understand what will be required of directors and judgement calls that will need to be made regarding certain disclosures;
ensure material climate-related matters are embedded in the company's broader strategy and that there are effective risk and governance frameworks in place to monitor, assess and manage climate-related risks and to prepare for compliance (including appropriate verification and sign-off procedures for climate-related financial disclosures);
test and challenge management, including seeking information regarding the company's roadmap towards release of the first sustainability report and any potential hurdles to meeting proposed timeframes;
set and articulate clear roles, responsibilities and accountabilities for management in relation to climate;
support management to develop understanding, build internal capacity and capabilities, including to seek external advice or services where required (such as legal advice or early engagement with auditors on evolving assurance requirements);
seek regular reports from management as to progress in line with the company's strategy; and
consider what level of support the board will require prior to signing the directors' declaration for the first sustainability report and align with management on that process.

Boards should also consider how the regime will interface with other relevant laws and obligations, including prohibitions on false or misleading statements and misleading or deceptive conduct, and other regulatory requirements.

Failure to comply with the new regime may attract civil penalties under the Corporations Act. Additionally, ASIC can issue infringement notices for non-compliance.

When making climate-related financial disclosures, boards should be aware of the heightened risk of greenwashing claims. Both ASIC and the ACCC have announced greenwashing as an enforcement priority for FY24, and civil penalty proceedings have already commenced against several companies for alleged greenwashing. Importantly, ASIC has specifically warned that its future cases may move beyond claims of misleading or deceptive conduct, including by potentially pursuing claims relating to a breach of directors' duties in connection with a company's greenwashing-related conduct.

For directors in particular, there may also be concerns about the proposed requirement that directors provide a declaration in respect of all statements in the sustainability report, in the absence of full assurance of climate disclosures, and potential legal liability risks if such disclosures are later found to be incorrect.

The new regime may also present wider business risks, including:

operational risk that may arise from inadequate internal processes to comply with the regime.
strategic risk that may arise from disclosures unearthing inadequate management of climate-related risks and opportunities.
reputational damage that may arise from disclosures revealing net zero targets or strategies that are out of step with peers.

As noted above, directors should focus on discharging their duties regarding climate-related risks and opportunities, including their duty of care and diligence, when reviewing and approving climate-related financial disclosures and relatedly, when signing their directors' declaration regarding the sustainability report.

Have we undertaken a gap analysis to identify differences between current reporting practices and likely disclosures under the new regime? Do we understand the reporting boundaries, including how many companies within our group are captured by the new regime?
Are our existing climate-related risk and governance structures and practices appropriate to comply with the new regime?
Have we engaged with external providers where necessary, eg to understand and comply with external assurance requirements in relation to our climate-related financial disclosures?
What judgement calls will need to be made in determining the nature and scope of disclosures, and what governance arrangements are in place for those judgement calls?

Footnotes

Speech delivered by Joseph Longo on 13 June 2023 at the Committee for Economic Development of Australia State of the Nation conference (Click here to read the speech).