Preparing for mandatory climate-related financial disclosures in Australia

On 27 March 2024, Treasury released the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Bill).¹ Schedule 4 of the Bill introduces a proposed new mandatory climate-related financial disclosure regime.² The Bill is primarily consistent with the exposure draft legislation released in January,³ with key changes including the proposed reporting commencement date for Group 1 entities (see Table 1 below) beginning on or after 1 January 2025 (and not 1 July 2024 as originally proposed). The Bill has been referred to the Senate Economics Legislation Committee for reporting by 30 April 2024.

The following key elements of the Bill are summarised below, assuming there are no material amendments made to the existing Bill as it passes through the Houses of Parliament.

Key matters:

• Schedule 4 of the Bill proposes amendments to the Corporation Act 2001 (Cth) (Corporations Act) and Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) and introduces standardised climate-related risks and opportunities disclosure requirements for heavy emitters, large entities (listed and unlisted) and asset owners such as registered managed investment schemes and superannuation entities.
• The Bill proposes to introduce the reporting obligations in three groups, over a four-year period based on revenue, assets, number of employees and whether the entity has existing climate reporting obligations. The first phase for large entities is planned to start from 1 January 2025 (see Table 1 below).
• Specific reporting content will be provided for in new accounting standards in the Australia Sustainability Reporting Standards (ASRS) set by the Australian Accounting Standards Board (AASB) and new assurance standards will be adopted and maintained by the Australian Auditing and Assurance Standards Board (AUASB).
• Some of the new mandatory reporting content will include the provision of a sustainability report by the reporting entity. This sustainability report will include information about the entity’s governance, strategy, risk management, metrics and targets, and will require climate statements, sustainability standards and a directors’ declaration.

Who is covered by the reporting regime?

• In summary, the Bill covers entities that:
  • lodge financial reports under Chapter 2M of the Corporations Act; and
  • meet certain minimum size thresholds including revenue, gross assets and EOFY employees of a consolidated group (with a requirement to meet at least two of the three aforementioned criteria); or
  • have emissions reporting obligations under the National Greenhouse and Energy Reporting (NGER) scheme.

• This includes both listed and unlisted companies, such as:
  • NGER reporters;
  • financial institutions;
  • registrable superannuation entities; and
  • registered managed investment schemes.

• Notably, smaller entities and charities that are not covered by the reporting thresholds below in Table 1 such as Australian Charities and Not-for-profits Commission registered charities and most small-to-medium enterprises are excluded from the regime. The Bill also clarifies that entities which are currently exempt from lodging financial reports under the Corporations Act (including entities relying on class order relief instruments such as wholly-owned companies’ relief) will be exempt from making their own climate-related financial disclosures and instead, can rely on the sustainability report prepared for the consolidated group by the parent entity.

Table 1: Reporting Thresholds – Phased Implementation Plan

What is required to be reported?

Under the Bill, the proposed reporting requirements are to form a new part of the existing annual financial reporting obligations under Chapter 2M of the Corporations Act and be contained in the entity’s annual financial report. The reporting entity would need to disclose an annual sustainability report which includes:

• a ‘climate statement’ to be prepared in accordance with the ASRS covering four key areas:

1. governance: governance processes, controls and procedures to monitor and manage climate-related risks and opportunities;
2. strategy: information about an entity’s strategy for managing climate-related risks and opportunities, including information about the entity’s transition plans (if any) and climate resilience and scenario analysis;
3. risk management: information about how climate-related risks and opportunities are identified, assessed, prioritised and monitored, and whether and how these processes are integrated into its overall risk management framework; and
4. metrics and targets: including Scope 1, Scope 2 and Scope 3 greenhouse gas emissions (with Scope 3 emissions reporting exempt in year one) and climate-related targets set with supporting information on approach, scope and progress;

• any notes to the ‘climate statement’;
• any additional statements required by a legislative instrument prescribed by the Minister concerning environmental sustainability matters; and
• a ‘directors’ declaration’ about the climate statement and any notes which would declare the directors’ opinion on whether the statements are compliant with the Corporations Act and any relevant sustainability standards.

How will directors manage the disclosure (with their financial advisers) and their risk of liability?

Modified Liability Framework

The Bill includes an interim modified liability framework which provides limited immunity for ‘protected statements’ in sustainability reports (or auditor’s reports) prepared for a period of three years under section 1707D of the Bill.⁴ During this period, only ASIC will be able to bring proceedings based on a ‘protected statement’ which is a statement concerning Scope 3 greenhouse gas emissions (including financed emissions), a scenario analysis made in the sustainability reports or a transition plan.⁵ Notably, this exemption does not prevent criminal proceedings brought by ASIC.

Preparing for the proposed requirements

Boards can take a number of steps to stay prepared ahead of the proposed climate reporting regime by:

• determining which Group (if any) (see Table 1 above) that the entity falls into;
• keeping on top of the timeline for implementation of the new reporting/assurance system within the organisation;
• recognising the type of information the organisation will be required to disclose by understanding the Bill;
• considering whether the organisational structure supports the reporting requirements and if not, whether any changes within the organisational structure need to be made, including evaluating current corporate governance, risk management and data governance frameworks to pinpoint responsibility and obligations;
• assessing current strategies, transition plans, and sustainability disclosures to find any gaps with the proposed climate reporting regime;
• creating a timetable, roadmap and detailed action plan to rectify these gaps (including delegating responsibilities for execution/supervision) while at the same time as implementing enhanced governance, risk management and data governance frameworks; and
• keeping the board updated on the evolution of the regime and ensuring appropriate advice is made available to board members to understand their responsibilities (e.g. signing off on the directors’ declaration).

¹ Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 ('Bill').
² Ibid sch 4.
³ Treasury Laws Amendment Bill 2024: Climate-related financial disclosure.
⁴ Bill n(1) s 1707D.
⁵ Bill n(1) s 1707D (3).