Climate-related financial disclosure: key features and guidance to prepare
The long-awaited Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth) (the Bill), which introduces the framework for Australia's first climate-related financial disclosure regime, was passed by Parliament on 9 September 2024.
This pivotal legislation marks a significant shift in the way businesses prepare their annual reporting suite, and establishes Australia as a global leader in mandatory climate reporting against ISSB-aligned standards.
In this Insight, we explain key elements of the Bill, and offer guidance on how in-house counsel can assist their businesses to prepare for the new regime starting 1 January 2025.
Key takeaways
- The passage of the Bill positions Australia as a global leader in mandatory climate reporting as one of the world's early movers in imposing ISSB-aligned requirements on reporting entities, in line with international best practice standards.
- Australia has adopted a comprehensive and nuanced approach to defining which entities are subject to the regime, with those entities captured facing increased annual reporting obligations, with the preparation of a new Sustainability Report.
- Group 1 entities will need to start reporting for financial years commencing on or after 1 January 2025 – meaning preparations for entities subject to the regime are already well underway.
- In-house counsel have a critical role to play as businesses prepare for mandatory climate reporting, including considering reporting boundaries, assisting with compliance roadmaps, implementing any required uplift in governance and verification practices and considering implications for contractual arrangements.
Background
As recently remarked by Australian Securities and Investments Commission (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
The passage of the Bill establishes the legislative foundation for this change to proceed. The Australian Accounting Standards Board (the AASB) is set to reconvene this month, and is expected to finalise the Exposure Draft ED SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information (the ASRS) shortly thereafter.
It is anticipated that the Auditing and Assurance Standards Board (the AUASB) will release related assurance standards after the ASRS are finalised, and not before December 2024. These standards will complete Australia's mandatory climate disclosure framework.
The passing of the Bill comes after a series of domestic sustainability-related developments, including:
- the release of Australia's Sustainable Finance Roadmap in June 2024; and
- the first round of public consultation on Australia's Sustainable Finance Taxonomy (see our Insight on deciphering the taxonomy).
The introduction of the regime marks Australia as a global leader in climate reporting, as one of the early movers in imposing rigorous International Financial Reporting Standards (IFRS)-aligned requirements on reporting entities. Based on current trends in this rapidly evolving space, we expect to see a convergence around IFRS reporting, with jurisdictions such as Brazil, Japan, Hong Kong, Canada and the United Kingdom signalling an intention to adopt similar standards in the near term.
Reporting thresholds and phased implementation
When will entities be subject to the regime
While jurisdictions such as the European Union and Japan have focused on listed entities only, the Bill provides for both listed and unlisted entities to trigger reporting, with larger entities being required to commence reporting earlier.
The below table gives a snapshot of the thresholds for coverage under the regime and the phased timing for when those relevant entities must commence mandatory disclosure.
Entities which are required to prepare a financial report under Chapter 2M of the Corporations Act, and meet the below criteria:
| Meet at least two of three criteria:* | National Greenhouse and Energy Reporting (NGER) Reporters | |
|
OR |
Registered corporations under NGER Act who meet threshold in s 13(1)(a) of NGER Act (and are not a registered scheme, registrable super entity or retail Corporate Collective Investment Vehicle (CCIV)). |
*Note: Each of these three criteria include the entity and any entities it controls. These three criteria do not apply to registered schemes, registrable super entities and retail CCIVs in Group 1.
Entities which are required to prepare a financial report under Chapter 2M of the Corporations Act, and meet the below criteria:
| Meet at least two of three criteria:* | National Greenhouse and Energy Reporting (NGER) Reporters | Registered scheme, registrable superannuation entity or retail CCIV where: | ||
|
OR |
All other registered corporations, or corporations required to be registered, under NGER Act |
OR |
EOFY value of assets of the entity and entities it controls are $5 billion, or the entity otherwise meets at least two of the three criteria pertaining to consolidated revenue, consolidated gross assets and employee count in the left-hand column |
*Note: Each of these three criteria include the entity and any entities it controls.
Entities which are required to prepare a financial report under Chapter 2M of the Corporations Act, and meet the below criteria:
| Meet at least two of three criteria:* |
Note: Registered schemes, registrable superannuation entities, and retail CCIVs will also be considered Group 3 entities if they meet at least two of these criteria. |
*Note: Each of these three criteria include the entity and any entities it controls.
As seen from the above table, the regime will apply where an entity meets one (or more) of the following three categories:
- (Large entities) Entities that meet at least two of the following three criteria:
- the consolidated revenue for the financial year of the entity and the entities it controls (if any) meets the relevant dollar threshold;
- the value of the consolidated gross assets at the end of the financial year of the entity and the entities it controls (if any) meets the relevant dollar threshold; and
- the number of employees for the entity and the entities it controls (if any) meets the relevant threshold at the end of the financial year.
The Bill requires that the value of consolidated revenue, consolidated gross assets and the question of whether an entity controls another entity, be determined in accordance with accounting standards in force at the time.
Additionally, when counting employees, part-time employees are counted as an appropriate fraction of a full-time employee. Companies limited by guarantee with an annual revenue (or, if part of a consolidated entity, annual consolidated revenue) of $1 million or more that meet the above Group 1 threshold criteria will also be captured by the regime.
- (NGER reporters) Entities with annual emissions reporting obligations under the National Greenhouse and Energy Reporting Act 2007 (Cth) (the NGER Act), being entities that are either a registered corporation under the NGER Act or required to make an application to be registered under s 12(1) of the NGER Act.
- (Asset owners) Registered schemes, registrable superannuation entities or retail CCIV where the end of financial year value of the assets of the entity—and entities it controls—is $5 billion or more, or the reporting thresholds are otherwise triggered. These entities are expressly carved out of Group 1, so even very large super funds and registered schemes will only commence reporting as part of Group 2.
Entities that are exempt entirely from lodging financial reports under Chapter 2M of the Corporations Act 2001 (Cth) are not required to prepare sustainability reports.
This includes small and medium-sized businesses and asset owners that fall below all of the size thresholds, and that are not NGER reporters, which will not be subject to the regime.
This also includes entities that are exempt in full from Chapter 2M financial reporting due to an ASIC class order or individual entity exemption. ASIC is currently reviewing existing class orders, and other forms of relief relevant to financial reporting, to determine applicability to climate-related financial reporting and whether any updates are required.
Furthermore, charities registered with the Australian Charities and Not-for-profits Commission and public authorities exempt under s 9 of the Corporations Act are also excluded from reporting under the regime.
In addition, the reporting requirements are to be streamlined for consolidated entities. The Act provides that:
- where the accounting standards require the parent entity of a consolidated group to prepare financial statements in relation to the consolidated entity; and
- the parent entity elects to prepare a sustainability report for the consolidated entity (ie a sustainability report prepared in accordance with the Corporations Act, based on the ASRS),
then all other entities within that consolidated group are not required to prepare a sustainability report (ie they can rely on the report prepared by the parent entity).
From a phasing perspective, the Act mandates that the regime will apply to an entity for its first financial year commencing on or after the relevant date.
- Group 1 entities will be required to start reporting for financial years commencing on or after 1 January 2025. This will mean:
- Entities with a 31 December financial year end will be the first to commence reporting under the regime, in respect of their financial year commencing 1 January 2025 and ending 31 December 2025.
- Entities with a 31 March financial year end will report in respect of their financial year commencing 1 April 2025 and ending 31 March 2026.
- Entities with a 30 June financial year end will report in respect of their financial year commencing 1 July 2025 and ending 30 June 2026.
- Entities with a 30 September financial year end will report in respect of their financial year commencing 1 October 2025 and ending 30 September 2026.
- Group 2 entities will be required to start reporting for financial years commencing on or after 1 July 2026.
- Group 3 entities will be required to start reporting for financial years commencing on or after 1 July 2027.
The NGER Act will continue to operate alongside the regime, and will serve a very different purpose. That is, whereas mandatory climate reporting is designed to inform financial stakeholders of the impact of climate risks and opportunities on entities, the NGER Act informs government policy on greenhouse gas (GHG) emissions and assists Australia to meet its international emissions reporting obligations.
The ASRS will measure GHG emissions in alignment with the IFRS S2 hierarchy, which allows reporting entities to adopt different methodologies from those in the GHG Protocol if required by local authorities or listing exchanges. This represents a change from the initial version of the ASRS from October 2023, which required entities to prioritise relevant methodologies for calculating GHG emissions in accordance with NGER methodologies.
Form of reporting, location and cross-referencing to foreign parent disclosures
The climate-related financial disclosures will be located in a new 'sustainability report'. The Explanatory Memorandum to the Act notes that the sustainability report will likely be contained in an entity's annual report to be lodged with ASIC as part of the entity's annual reporting obligations. Importantly, the timing of lodgement of the sustainability report is to be consistent with the timing of lodgement of the remainder of the annual report.
The draft ASRS (the final form of which the climate statements must comply with) states that material information can be included in an entity's climate-related financial disclosures by cross-reference. Unlike cross-referencing in a directors' report or financial report, which is provided for under ASIC Corporations (Directors' Report Relief) Instrument 2016/188, based on the draft ASRS, it appears that cross-referencing for the purposes of climate-related financial disclosure may be made to 'another report published by the entity' or to a document that 'accompanies' the directors' report and financial report (eg within the operating and financial review section of an annual report). The draft ASRS requires cross-referenced information to meet specific criteria to be included in an entity's disclosures. These requirements ensure that the cross-referenced information is available on the same terms and at the same time as the climate-related financial disclosures, does not compromise understandability, includes a precise reference to the specified part of the report, and explains how to access the cross-referenced report.
The sustainability report will require a climate statement, any notes to the climate statement, any statements prescribed by regulation and a directors' declaration.
Climate statement
The climate statement will comprise the disclosures required by the ASRS. These are expected to include:
- material climate-related financial risks and opportunities faced by the entity (if any);
- Scope 1, 2 and 3 GHG emissions and any associated reduction targets;
- any information about governance of, strategy of or risk management by the entity in relation to these risks, opportunities, metrics and targets; and
- an assessment of the entity's resilience to climate-related changes using scenario analysis.
For many businesses, making these disclosures will be challenging where value chain emissions data is unavailable, lacking or unreliable. Recognising these difficulties, the ASRS requires entities preparing sustainability reports to only utilise all reasonable and supportable information available to them as of the reporting date, provided it can be obtained without undue cost or effort. Accordingly, when reporting Scope 3 GHG emissions, entities are not expected to provide exact data or detailed information that is unduly difficult or costly to obtain from other entities along its supply chain. Despite the difficulties in reporting, the requirement to account for Scope 3 emissions aligns with the approach taken by the majority of reporting jurisdictions globally. Entities are required to begin disclosing Scope 3 emissions in their second reporting year.
Scenario analysis will also be required to be carried out and reported against, for at least the following two scenarios:
- the increase in the global average temperature well exceeds the increase referred to in s 3(a)(i) of the Climate Change Act 2022 (Cth) (Climate Change Act) (being an increase well below 2°C above pre‑industrial levels). According to the to the explanatory materials, a 2.5°C or greater scenario would satisfy this requirement; and
- the increase in the global average temperature is limited to the increase referred to in s 3(a)(ii) of the Climate Change Act (being an increase of 1.5°C above pre‑industrial levels).
According to the draft ASRS, entities are not required to disclose commercially sensitive information about climate-related opportunities, ensuring they can protect economic interests. However, reliance on these exemptions requires the entity to disclose this and periodically reassess at each reporting date to determine whether the information continues to qualify for the exemption.
Climate statement notes
The notes accompanying a climate statement are required to be comprehensive and include:
- any disclosure required by the regulations concerning the preparation or content of the climate statement;
- any notes required by the ASRS that relate to the preparation or content of the climate statement, or other matters concerning environment sustainability; and
- any notes containing other information necessary to ensure that the climate statement and notes together meet the relevant requirements of the Act.
Although the relevant regulations have not yet been drafted, and the draft ASRS do not provide any detail as to the content of climate statement notes, we anticipate that entities will likely use the notes to disclose the assumptions and limitations that apply to their climate statements, particularly those applicable to metrics and targets.
Directors' declaration
The Act introduces a transition period for directors' declarations for the first three years under the regime. During this period, directors are required to make a qualified declaration that, 'in their opinion, the entity has taken reasonable steps to ensure the substantive provisions2 of the sustainability report are in accordance with the Corporations Act'.
However, for financial years commencing on and from 1 January 2028, directors will face a higher standard, requiring a more definitive declaration that, 'in their opinion, the substantive provisions in the sustainability report are in accordance with the Corporations Act' (removing the 'reasonable steps' qualification).
For listed entities, the directors' declaration regarding the sustainability report is not required to be supported by any CEO and CFO declaration regarding the sustainability report (unlike a directors' declaration in relation to an entity's financial statements under s 295A of the Corporations Act).
Entities and boards have expressed concern about directors being required to provide a declaration in the period before 'full' assurance and auditor sign-off on all climate disclosures is mandated in the Act (which is from an entity's fourth Sustainability report, onwards). Given this gap, it may be that some entities voluntarily seek 'top up' assurance before doing so becomes mandatory, to provide practical support to the board in making the directors' declaration.
Potential future inclusion of non-climate sustainability disclosures
The Act grants the Minister the authority to expand the sustainability report to include statements and accompanying notes relating to other 'environmental sustainability' matters that are not currently defined by the sustainability standards. This power is consistent with the Government's proposal in the second Consultation Paper for the regime to be adaptable to potential future reporting, such as nature-related financial disclosures—you can read our Insight on the Taskforce on Nature-related Financial Disclosures' recommendations, which remain voluntary, here.
Three-year modified liability regime
Liability under the regime will be similar to liability that applies to an entity's financial and directors' reports.
Subject to the exceptions discussed below, a modified liability regime will provide reporting entities with immunity from civil claims by private litigants regarding disclosures made in sustainability reports, and auditors' reports for financial years commencing during the period from 1 January 2025 to 31 December 2027, about:
- scope 3 GHG emissions (including financed emissions);
- scenario analysis (within the meaning given by the ASRS); and
- transition plans (within the meaning given by the ASRS).
Additionally, the same modified liability protection extends to representations as to future matters generally made in sustainability reports or auditors' reports for financial years commencing during the period from 1 January 2025 to 31 December 2025.
These are collectively described as 'protected statements' in the Bill.
In addition to disclosures in the sustainability report and auditor's report, the immunity also applies to statements made by the entity under Commonwealth law (eg s 674 of the Corporations Act regarding continuous disclosure obligations and s 1012C of the Corporations Act regarding product disclosure statements) that are identical to a protected statement or differ only so far as to make an update or a correction to a protected statement.
Importantly, immunity under the modified liability settings will not extend to any action, suit or proceeding brought against a person or entity that is either a criminal action, or brought by ASIC.
The duration of coverage under the modified liability settings for any given entity will depend on when that entity is phased into the regime. Ordinary liability settings will apply to disclosures made in sustainability reports for financial years commencing after 31 December 2027. Accordingly, some Group 3 entities (ie those that begin their first reporting year after 31 December 2027) will not benefit from any immunity under the modified liability regime. Likewise, the one-year modified liability for forward-looking statements will only benefit Group 1 entities.
The Explanatory Memorandum clarifies that the transitional periods described above are designed for ASIC to take an educational role, focusing on promoting compliance, and deterring poor behaviours and reporting practices that undermine the objectives of the new reporting regime.
What are the audit and assurance requirements?
Sustainability reports will be subject to external audit processes (conducted against the AASB's ASRS) to enhance the accuracy and credibility of disclosures, consistent with other Chapter 2M reports. The AUASB has already begun developing an assurance standard which is anticipated to be finalised and issued in December 2024, in line with and following the release of the International Auditing and Assurance Standards Board final standard, which is projected to occur in September 2024.
The AUASB will set a pathway for phasing in assurance requirements over time, using the start and end points provided by the Bill—1 January 2025 to 30 June 2030—as the parameters. These standards will increase the level and extent of required assurance over time. It is anticipated that a full audit will be required for an entity's fourth Sustainability Report onwards.
Getting prepared–the legal aspects
With 1 January 2025 quickly approaching, preparations for regulated entities (particularly Group 1 entities) are underway. Many entities have kicked off the process by undertaking a gap analysis between current voluntary reporting and incoming mandatory reporting requirements under the ASRS, but preparations will need to ramp up significantly in the near term.
We believe in-house counsel have a critical role to play, including:
- Reporting boundary considerations: assisting the business to determine its reporting boundaries, including whether multiple Sustainability Reports need to be prepared and how the 'consolidated group' exemption applies, and advising the business on whether any steps could be considered to streamline reporting: eg by seeking ASIC relief or even restructuring portions of the business and balancing the pros and cons of doing so.
- Bringing key individuals together: using relationships across the business to bring together a core cross-functional team who will have responsibility for coordinating the preparation of the Sustainability Report.
- Compliance roadmap: assisting the business to develop a time-bound compliance roadmap towards release of the company's first Sustainability Report, and providing support to the business in communicating the compliance strategy to the board in a timely way.
- Implementing 'step changes': working with the business to identify and implement, well in advance of the first disclosures, any desirable 'step changes' to climate targets and strategy, policy, climate governance or risk management arrangements, so that these can be implemented in an orderly way well in advance of the first reporting season.
- Support content drafters: Assisting the preparers of sustainability content transition their content preparation style from voluntary to mandatory disclosures, for example by educating drafting teams on the Corporations Act regulatory environment, and identifying suitable language and topics for mandatory content preparation.
- Verification procedures: assisting the business to develop disclosure verification procedures, to ensure that reasonable steps have been put in place to ensure disclosures meet the requirements of the Corporations Act, and are not otherwise misleading or deceptive, and aligning the content drafters and the board on these processes early;
- Additional risk-attenuating disclosures: assisting the business to develop well-crafted additional disclosures to accompany the climate statement, such as disclaimers, and disclosures with respect to assumptions, dependencies, definitions, judgement calls and methodological considerations.
- Regulatory interfaces: identifying and ensuring the business is proactively managing the interface between climate disclosures and other duties, such as directors' and officers' duties, continuous disclosure obligations, and duties imposed under sector-specific legislation, regulations and guidance, such as the Banking Act 1959 (Cth), the Superannuation Industry (Supervision) Act 1993 (Cth) and APRA CPS230.
- Contractual considerations: uplifting template contracts, and if necessary seeking amendments to existing material contracts, to assist the business to obtain information required to disclose reasonable and supportable scope 3 data without undue cost and effort, secure access to data necessary for scenario analysis disclosures, assist the company to meet its own climate related targets and commitments, and (if relevant) establish arrangements in the entity's value chain to manage climate related risks and opportunities.
Footnotes
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Speech delivered by Joseph Longo on 13 June 2023 at the Committee for Economic Development of Australia State of the Nation conference (link to speech).
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The 'substantive provisions' include everything required under subsection 296A(1) (except the director's declaration itself), s296C (compliance with sustainability standards etc), and s296D (climate statement disclosures) of the Corporations Act.