This is our first insight piece on Australia’s recent climate related mandatory reporting legislation, which was issued as a draft Bill in April 2024 called the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024. 

In our previous article we highlighted the key elements of the new regime. The draft Bill recently received unanimous endorsement of the Senate Economics Legislative Committee and while some dissenting comments were made by Coalition Senators and Green Senators, including concerns for the implications and costs for small business, those comments did not stipulate any amendments to the Bill as a condition to the passing of the legislation.

Accordingly, we consider that the draft Bill will likely be passed as law in the near future with a commencement date of 1 January 2025 and the first group of reporters (Group 1) reporting at the end of FY26 (i.e. at the end of 30 June 2026).

The implications for this new mandatory climate-related financial disclosure regime are far-reaching. 

This new regime requires large companies¹ (from the commencement date for their relevant group) in Australia to prepare sustainability reports with mandatorily required climate-related disclosures and data, including (amongst other things) a climate strategy, information about their climate risks and opportunities and disclosures of their Scope 1, 2 and 3 emissions. If all of these Australian reporting organisations are required legally to disclose their strategy for managing climate risks and opportunities at a time when the Australian Government (along with more than 140 countries globally) have committed to net zero emissions targets by 2050, it appears that over time each organisation’s strategy with respect to climate risks should have a net zero target (and plan) for 2050. 

If, as is estimated,² most organisations’ GHG emissions are their Scope 3 emissions (i.e. the emissions of the entities in their value chain), then it appears the only way a reporting entity will be able to maintain and deliver a credible net zero plan itself will be to understand and analyse the net zero plans of the organisations in its value chain which have substantive GHG emissions. The interdependencies between reporting entities and non-reporting entities are therefore inextricable.

In this insight piece, we explore what Australia’s new climate-related reporting regime means practically for in-scope reporting entities but also for entities in the value chain. The draft Bill is not yet passed as law and the draft standards ASRS 1 'General Requirements for Disclosure of Climate-related Financial Information' (ASRS 1) and ASRS 2 'Climate-related Financial Disclosures' (ASRS 2) are not yet finalised, so any comments we make about the proposed legislation and standards are subject to their finally approved and legislated form.

How does the proposed Australian climate-related reporting regime compare to TCFD?

While the proposed Australian climate-related reporting regime is based on the TCFD disclosure principles (and four pillars of governance, strategy, risk management and emissions metrics and targets), there are significant prescriptive requirements proposed in the draft sustainability standards ASRS 1 and ASRS 2 (based on IFRS S1 and IFRS S2) which mean that organisations currently reporting under TCFD have a detailed gap analysis to undertake to uplift their reporting in line with these proposed standards. 

For organisations that are caught by the regime (see our previous article which categorises the in-scope entities), this gap analysis needs to start now, whether the organisation is in:

1. Group 1 – i.e. reporting from FY26
2. Group 2 – i.e. reporting for FY27; or
3. Group 3 – i.e. reporting for FY28.

ASIC has stated it considers there are 6,000 entities in scope and is encouraging all in-scope entities to “start preparing now”.³ 

If you consider how fast time has travelled since COVID-19 appeared in 2020 to 2024, the next four years are going to travel just as quickly. 

ASIC has described the changes required from this new mandatory climate-related financial disclosure regime as an “ambitious new once-in a generation change”.⁴ ASFA describes the net zero transition (as supported by the new reporting requirements) as “one of the greatest collective challenges humankind has faced”.⁵

How does the Australian regime fit within the global regulatory landscape?

Australia is one of many countries now adopting a legislative approach to TCFD-aligned reporting requirements, such as UK, Germany, France, Italy, New Zealand, Japan, Canada, EU, Thailand, US (California), Switzerland, Spain, India, Nigeria, China, South Korea and Brazil. 

New Zealand is ahead of us and commenced its mandatory climate-related reporting requirements for large companies and fund managers this year in 2024, so we will likely be learning from their experience along with those European companies that are ahead of us in the UK, Germany and France. 

It is important to note however that each regime is different and nuanced – some regimes are applicable to listed entities only, some applicable to listed and non-listed entities above certain thresholds and some are applicable to investment managers. Also, some regimes are based on the 12 disclosure principles in the TCFD with a comply or explain approach while some regimes have followed the more prescriptive IFRS S1 and S2 standards. Additionally, in most regimes there are phased approaches for compliance with different exemption periods or different liability periods for Scope 3 emissions data, transition planning and climate scenario analysis reporting. 

So, while there is global alignment on a TCFD-aligned approach to climate reporting, the detail of the requirements in the implementation of climate-reporting varies across the globe. These differences can create challenges for global companies seeking to meet minimum standards. And while it seems evident and inevitable that an internationally aligned regime under IFRS S1 and S2 should develop over the next 20-30 years, this is many years ahead.

What is the uplift in our Australian companies required?

As stated above, ASIC has identified 6,000 entities are in-scope. It appears from a high level analysis, there may be up to 1,000 entities listed on ASX which are in scope and the rest will be large unlisted companies, unlisted NGER reporters and asset managers of registered managed investment schemes and superannuation schemes with at least AU$5 billion under management in the relevant scheme.

A couple of recent reports which provide statistics and information about our Australian corporates’ climate change disclosures are:

1. the Australian Accounting Standards Board (AASB) and Auditing and Assurance Standards Board’s research report 'Trends in climate-related disclosures and assurance in the Annual Reports of ASX-listed entities' dated November 2023; and
2. the Australian Council of Superannuation Investors (ACSI)’s report 'Promises, pathways & performance – Climate change disclosure in the ASX200' dated August 2023.

This research tells us, in 2023:

1. 75% of ASX200 companies evidence a commitment to, or are already reporting against, the TCFD framework (up from 66% in 2022);
2. 61% of ASX200 companies (or 121 companies) have made net zero commitments compared to 48% in 2022;
3. 118 companies out of 200 (59%) conducted climate scenario analysis (up from 88 companies in 2022);
4. however, emissions targets and Scope 3 targets of the ASX200 companies are under-represented, with only 25% of companies reporting science based targets and only 22% of companies setting some form of Scope 3 target.

Further, it is reported that of all ASX listed companies, only 211 out of 2004 companies (10.5%) have any reporting referencing TCFD disclosures.

There appears to be a significant gap with respect to in-scope reporting listed entities which are not currently engaged in any form of climate-related reporting. It is unknown what is the gap in respect of large unlisted companies.

So where do Australian in-scope reporting companies start?

In Macquarie Bank’s recent 2024 Annual Report,⁶ reference is made to the current ‘energy trilemma of availability, affordability and emissions’. It is a well discussed conundrum that with this impending prescriptive technical climate-reporting regime requiring Australian companies to (amongst other things) prepare a climate strategy, provide disclosures on their net zero transition plans, disclose their climate scenario analysis at 1.5 degrees and a warmer scenario and measure and report on their Scope 1, 2 and 3 emissions, Australia does not have enough climate experts to fulfil the expertise gap to meet these requirements.

Universities⁷ do not yet offer degrees on how to be a climate expert with expertise to analyse, assess and report on climate data in accordance with sustainability standards in the same way we have courses to study and become an expert in accounting standards or an accountant. And it is certainly not mainstream for organisations to have a CSO (Chief Sustainability Officer) and sustainability data controllers in the same way they have a CFO (Chief Financial Officer) and financial controllers.

And while many ASX200 companies now have a sustainability committee (41%), it is unknown what the remaining 5,000+ in-scope reporting Australian companies have structured for their climate governance obligations (as will now be required under ASRS 1 and ASRS 2).

A significant upskilling is required and fast.

In our commentary below, we highlight the scope of work which needs to start now and some of the key considerations for the new Australian mandatory climate-related reporting regime.  

1. Governance

The first area for in-scope reporting companies to focus on is their climate governance structures and arrangements. A recent report from the Australian Institute of Company Directors (AICD) based on research from Herbert Smith Freehills stated that 41% of ASX companies have a sustainability committee (as at January 2024).⁸ The same AICD report stated only ten ASX 50 companies mention climate risk in their Board Charters, up from 4 companies in 2021 and across the broader ASX200, only 16% of board charters include climate risk.
It is a key requirement under ASRS 1 and ASRS 2 that an organisation is able to describe its climate governance framework for (i) developing its climate strategy; (ii) climate related risk management and risk identification and disclosures; and (iii) implementing systems, processes and controls for collating, assessing and verifying climate related data.

Organisations will also need to show significant investment in experts and staff who can understand and assess climate related factors, risks and data.

2. ASRS specific requirements – Compliance obligations statements and gap analysis

As we highlighted above, all in-scope reporting organisations should be undertaking a gap analysis now of their current climate-related reporting compared to how they will need to comply with the prescriptive ASRS 1 and ASRS 2 standards⁹. While these draft standards are not yet in final form (since being issued in draft in 2023 for consultation), it is our view that the draft standards will likely be adopted with minimal changes due to the fact that the draft standards proposed by the AASB include many modifications compared to IFRS S1 and S2 to cater for Australian nuances.

The compliance requirements articulated in ASRS 1 and ASRS 2 should be set out in a matrix and each in-scope reporting organisation should be assessing what it is currently doing against this matrix. It may be the organisation is doing some of the requisite things, e.g. in respect of governance, strategy and risk management, but not reporting any of the required disclosures. Or it may be that the organisation is reporting certain information without having the foundational governance, strategy or risk management processes in place as contemplated under the standards.

3. Climate Strategy 

One of the requirements in the draft standards, as stated in ASRS 1, is that an in-scope reporting organisation must disclose ‘the effects of those climate-related risks and opportunities on the entity’s strategy and decision-making, including information about its climate-related transition plan’ which is inclusive of ‘information about how the entity has responded to, and plans to respond to, climate-related risks and opportunities in its strategy and decision-making, including how the entity plans to achieve any climate-related targets it has set and any targets it is required to meet by law or regulation’.

As noted above, the Australian Government implemented the Climate Change Act 2022, by which it set targets in 2023 for net zero emissions by 2050 in accordance with the Paris Climate Agreement.¹⁰

With Australia being one of more than 140 countries globally now which has set net zero targets by 2050, Australian companies under the new mandatory climate-reporting requirements will be required to disclose their strategy with respect to climate risks and opportunities in this context.

This means, in our view, that the organisation should have a strategy for managing climate risks associated with its Scope 1, Scope 2 and Scope 3 emissions and it follows, that where these GHG emissions are substantial, a net zero transition plan.

4. Climate scenario analysis

One of the biggest gaps in reporting identified in the ACSI Report of the ASX 200 companies (referred to above)¹¹ was disclosures on climate scenario analysis.

Under ASRS 1 and ASRS 2, in-scope reporting entities will be required to disclose their climate resilience assessments against meeting the 1.5 degrees temperature goal (ie no more than 1.5 degree increase to 2100 compared to 1850 temperatures) in the Paris Climate Agreement as well as against a warmer climate scenario. The standards currently do not mandate the second future state warmer scenario, which means it may be preferable that companies in similar sectors and companies in the same value chain align and select the same warmer scenario analysis to conduct their climate scenario analysis. It is expected that there will be work to do through the various industry agencies to discuss alignment in a practical and effective way. Some may query whether this raises competition law concerns, but for alignment of data sharing within the value chain or investment ecosystem (and for comparability) it seems alignment will assist to maintain and create competition rather than impede it. 

5. Transition planning

Under the proposed standards, transition plans are not mandated. However, if an in-scope reporting organisation has a transition plan, it must provide disclosures related to it. 

As we have noted above, it is difficult to see how any in-scope reporting entity cannot have a net zero transition plan considering the impact of Scope 3 emissions (which are reported as being the highest percentage of most organisations’ emissions).¹² Also, if every company must have a strategy for managing its climate risks (including its Scope 3 emissions), it seems inevitable every company must also have a transition plan for net zero by 2050.

In Switzerland, transition plans are mandatory. In the UK, in-scope listed reporting companies must disclose their transition plans from January 2025. In the UK, the Government set up the Transition Plan Taskforce and issued a Disclosure Framework in late 2023 for UK companies to use and follow in providing disclosures about their transition plans. The framework is guidance and not mandatory but likely to become mandatory.¹³

In Australia, it has been reported in 2023, that certain of the Big 4 Banks are requiring certain of their corporate borrower customers to deliver their transition plans by 2025.¹⁴

So, it appears inevitable that for in-scope reporting entities under the Australian climate-reporting regime - in order to be able to substantiate their own climate strategies and net zero transition plans - that the key organisations in their value chain with high levels of GHG emissions must also have net zero transition plans that they can assess and rely upon. This means that organisations which are non-reporting entities with substantial emissions will be required by reporting entities to provide their transition plans (even if they are not in the scope of the regime). 

Draft ASRS 2 provides for examples of 15 categories of Scope 3 emissions which Australian in-scope reporting entities may use for reporting their Scope 3 emissions. An analysis of these categories against the companies in an organisation’s value chain will assist to determine which entities create the highest risk for higher levels of Scope 3 emissions. 

We would recommend that organisations start to undertake this analysis in considering how to develop a net zero transition plan taking into account risks associated with these organisations’ relevant Scope 3 emissions.

We also recommend organisations consider the UK Disclosure Framework for transition plan disclosures.

6. Scope 1, 2 and 3 emissions data

The draft legislation and standards require disclosure of gross emissions of Scope 1, Scope 2 and Scope 3 emissions to be reported using the NGER Act measurement and attribution methodology unless it is impractical to do so, in which case another relevant jurisdiction’s requirements may be applied, or the GHG Protocols Standards.¹⁵

The Australian reporting requirements also require disaggregation of Scope 1 and 2 emissions data between the consolidated group and associates, joint ventures and unconsolidated subsidiaries.

The most challenging aspect of this reporting requirement will be the uplift required for Scope 3 emissions data, as currently:

• NGER Reporters are not required to report Scope 3 emissions; and
• as stated above, the methodologies for reporting Scope 3 emissions disclosures across ASX200 companies which are reporting Scope 3 emissions are not consistent (and not consistently applied year on year) and reporting is sparse.

There is some relief though. The requirement for any in-scope reporting organisation to report Scope 3 emissions under the current draft legislation and standards does not commence until the second year of reporting. 

This does give organisations some ‘breathing space’ to develop their methodologies for Scope 3 emissions reporting, which must include:

• methodology and approach for capturing Scope 3 emissions data up and down the value chain (noting this must be based on NGER methodologies unless impractical, in which case other international standards may apply);
• approach to contracting with suppliers and investees (and requirements in contractual arrangements for provision of data);
• approach to decision-making and determinations as to what and whether data can be measurable or must be estimated;
• approach to verification of measurable data;
• methodology for estimates; and
• procedures for determining how to make disclosures on methodology and approach in accordance with the standards.

As noted above, the draft standards have listed 15 example categories of Scope 3 emissions¹⁶ which are available for companies to use in assessing and categorising their Scope 3 emissions but this is not mandated (as is mandated under IFRS SR1). 

An important consideration for all reporting organisations is that, as part of this disclosure on gross emissions, an organisation’s carbon offset usage is also required to be disclosed to provide the net emissions data. Organisations which don’t currently have an offset strategy will need to start considering whether they will have a need (to meet their net zero targets) for an offset strategy.

7. Directors declarations

For the financial years commencing in the first three years after the start date of the regime (i.e. FY26 to FY28), the directors’ declaration in relation to the sustainability report will be confined to a declaration that “the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with this Act”. 

After that period, however, directors will be required to declare that the substantive provisions of the sustainability report are “in accordance with the Act”.

This will be an absolute requirement for the directors of an organisation to provide a ‘statement of compliance’ with ASRS 1 and ASRS 2.

Directors should be aware there will be significant penalties for non-compliance which are different, for example, compared to the current Modern Slavery regime.

Directors should also be aware they may be required to provide these strict directors’ declarations prior to the audit regime for the sustainability reports that will be introduced in 2030.

In our next Insight article, we will provide information about the penalty regime proposed, implications for the delay in audit and issues directors need to be mindful of with respect to their obligations under the draft Bill (and standards) and their directors’ duties.

As a result, all organisations will need to make efforts for strict compliance. 

In our view and experience, the strict compliance approach needs to come from the top down and so boards will need significant training and education as to what strict compliance means, as directors will also have ancillary duties. For example, if directors fail to have appropriate oversight as a board of the requirements to be met by the organisation, this could result in a breach of directors’ duties under section 180 (the duty to act with care and diligence) under the Corporations Act.

8. Managing climate litigation risk

Many organisations are already well aware of greenwashing risk and have governance and data systems and processes in place (including verification processes) for ensuring any disclosures meet the standard of not being misleading or deceptive.

In our next Insight article we will provide further insights into greenwashing risk for directors having regard to Australia’s mandatory climate-related reporting regime and similar regimes being implemented globally.

In relation to Australia’s climate-reporting requirements, we set out a couple of key points below:

Modified 3-year liability regime

There is proposed to be a modified liability regime where any statements in a sustainability report (or a PDS or other document required by Commonwealth law) made about (referred to as ‘protected statements’): 

1. scope 3 emissions
2. climate scenario analysis, and
3. transition plan data,

in the first 3 years between 2025 to 2028 will not be subject to claim or prosecution by a private litigants. In this period, only claims by ASIC for non-compliance or misleading or deceptive conduct may be made with respect to the information in a sustainability report.

One year for future climate statements

There is also a one year protection period for any reporting organisation in their first year of reporting, such that a private litigant may not take action in respect of any future statement in a sustainability report relating to climate.

It is important for organisations to understand that these safe harbours do not apply to website or marketing materials.

And there is no safe harbour from ASIC civil penalties and enforcement action.

Therefore, even within this modified liability regime, there are significant risks, including the risk of action by ASIC so organisations should be focused in this period on strict compliance.

What should Australian in-scope organisations be doing now?

1. Training and education of board and executives.
2. Gap analysis against the standards.
3. Embedding a climate focused governance structure.
4. Building a compliance roadmap.
5. Identifying resource and expertise gaps and filling those gaps.
6. Identifying the organisation’s approach for obtaining data for Scope 3 emissions.
7. Identifying the organisation’s offset strategy and implementation.
8. Identifying what is the organisation’s plans for obtaining information about value chain transition plans.
9. Confirming and consolidating the organisation’s climate data expertise and capability.
10. Embedding a roadmap for how the organisation will demonstrate readiness over the next two years – FY24 and FY25 reporting towards ASRS reporting compliance.

How can Dentons help?

1. Training Boards and executives on the reporting requirements.
2. Providing regular legal updates on ESG matters – e.g. regulatory reforms and case law precedents (e.g. Supreme Court of NZ Smith v Fonterra 2024).
3. Using our Compliance Matrix, undertaking a gap analysis for where the company is now in respect of reporting against ASRS 1 and ASRS 2 to where the company needs to be to meet full compliance.
4. Advising on climate governance requirements (see 7. below for more information).
5. Assisting with the drafting of the disclosures in your sustainability reports (e.g. frameworks and narratives) to comply with the requirements (using your climate-related data) for the required disclosures for your:

(a) Governance Framework;

(b) Climate Strategy;

(c) Risk Management Framework;

(d) Climate Risks;

(e) Climate Opportunities;

(f) Transition Plan; and

(g) Climate Scenario Analysis.

6. Assisting with the drafting of disclosures as to how you articulate your methodologies for using Scope 3 estimates, where applicable.

7. Advising on:

(a) your governance framework and structure (including assisting with updating board charters, committee charters for sustainability committee, template reports on climate matters from committee to board, template reports on climate matters from business units to committee, assisting with advising on roles and responsibilities for sustainability executives, sustainability data controllers etc, and including for relevant executives how this interacts with FAR obligations (and accountability mapping), AFSL obligations and directors’ duties, and assisting with and advising on reporting and decision-making frameworks and processes;

(b) policies; and

(c) verification procedures for climate data (to mitigate risks of misleading and deceptive statements),

for compliance with the Australian Standards.

1. See which companies are caught in our previous article here.
2. FAQ.pdf (ghgprotocol.org).
3. Start preparing now: Early ASIC guidance on the mandatory climate disclosure regime | ASIC.
4. ASIC Chair Mr Joe Longo’s keynote speech Start preparing now: Early ASIC guidance on the mandatory climate disclosure regime dated 22 April 2024.
5. ASFA_Research_Paper-Super_and_the_net_zero_challange.pdf (superannuation.asn.au).
6. Macquarie Bank 2024 Annual Report.
7. It is noted however that there are short-term courses being introduced by Australian universities to assist, for example, Net Zero course to equip business leaders - The University of Sydney; Net Zero For Your Building Portfolio - Monash Sustainable Development Institute; Path to Net Zero: Carbon Emissions within the Mining Industry | UQ Short Courses; as well as at overseas universities, eg: Climate Change for Decision-Makers: Challenges, Transformations, Strategies | Cambridge Advance Online.
8. Climate Governance Study 2024: Moving from vision to action (aicd.com.au).
9. Exposure Draft ED SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information (aasb.gov.au).
10. Federal Register of Legislation - Climate Change Act 2022.
11. Promises-Pathways-Performance-Climate-reporting-in-the-ASX200-August-2023.pdf (acsi.org.au).
12. FAQ.pdf (ghgprotocol.org); SBT_Value_Chain_Report-1.pdf (sciencebasedtargets.org); 180824_prospects_understandingscope3footprintofourvaluechain.pdf (bhp.com).
13. Transition Plan Taskforce | Setting a gold standard (transitiontaskforce.net).
14. Big four chart separate paths on customers’ transition plans (afr.com).
15. Standards | GHG Protocol; Corporate Standard | GHG Protocol.
16. Scope 3 Calculation Guidance | GHG Protocol.