Climate-related financial disclosure

On 27 March 2024, the Treasurer introduced and read the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Bill) to the House of Representatives. The fourth schedule of the Bill sets out a new mandatory sustainability reporting regime. It follows an exposure draft (Exposure Draft) and consultation that took place earlier this year. We have previously written about the exposure draft elsewhere: Draft Sustainability Reporting Legislation released for consultation - KWM

The Bill has been referred to the Senate Economics Legislation Committee to report on by 30 April 2024.

If passed, the Bill would implement mandatory sustainability reporting in Australia, following other jurisdictions including New Zealand, the United Kingdom, the United States and Europe.

In this alert, we summarise key elements of the Bill, how it differs from the Exposure Draft and what this means for you.

Overview of the Bill

Which entities will be obliged to report, and when?

It is proposed that climate-related financial disclosures will be phased-in over a period of four years as follows:

The Explanatory Memorandum confirms entities that are already exempt from lodging financial reports under Chapter 2M of the Corporations Act are exempt from preparing annual sustainability reports. This includes small and medium-sized businesses that aren’t covered by the above criteria and charities registered with the Australian Charities and Not-for profits Commission (ACNC).

Contents of sustainability reports

At a minimum, an annual sustainability report should include:

1. the climate statement required by the Australian Sustainability Reporting Standards;
2. notes to the climate statement (if any);
3. statements required in a legislative instrument by the Minister relating to environmental sustainability;
4. any notes on statements required in a legislative instrument by the Minister; and
5. the directors’ declaration about the statement and notes.

Similar to annual financial reporting obligations in the Corporations Act, sustainability reports will also be subject to mandatory audit and assurance requirements. The extent of required assurance will be set out in Australian assurance standards for climate disclosures developed by the AUASB. A full audit will be required for reports for financial years commencing on or after 1 July 2030.

ASIC involvement

ASIC will have the power to issue directions to reporting entities to correct, complete or amend statements made in sustainability reports. A failure to comply with this direction in a timely manner is a strict liability offence of 60 penalty units (currently equal to $18,780).

ASIC also has the discretionary power to exempt entities from complying with all or specified requirements including, but not limited to, the requirement to prepare a sustainability report, lodge reports within a certain timeframe and include certain information. This power will only be exercised where complying would be misleading, inappropriate or unreasonable.

Interaction with the Australian Accounting Standards Board (AASB)

The Bill also empowers the AASB to make a set of sustainability standards that would expand upon what needs to be included in ‘climate statements’. The AASB has previously published draft sustainability standards which are intended to align with the International Sustainability Standards Board’s standards as much as possible, with modifications where necessary or appropriate to apply these standards in the Australian context. We have previously written about the AASB Australian exposure draft standards elsewhere.

Key differences from Exposure Draft

The main differences between the Bill and the Exposure Draft are:

1. The mandatory disclosure requirements will now be phased in from 1 January 2025 (not 1 July 2024).
2. For the first three years of the regime, directors are now only required to give an opinion on whether the entity had taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Bill. After this time, directors will need to declare whether in their opinion the substantive provisions of the sustainability report are in accordance with the Corporations Act, including that the report complies with the Australian sustainability standards and discloses any material financial risks for an entity or material financial opportunities relating to climate for an entity required under the sustainability standards.
3. Climate disclosures will now be subject to assurance requirements which are currently being developed by the Auditing and Assurance Standards Board – these are currently open for consultation and propose assurance will be limited to Scope 1 and 2 emissions for sustainability reports prepared for the first year.
4. The Bill now contemplates that entities will have limited immunity in relation to “protected statements” during the first three years of the regime. Protected statements relate to scope 3 greenhouse gas emissions, scenario analysis and a transition plan, generally considered to be the most uncertain parts of a climate statement. In the first 12 months of the regime, forward looking statements about climate in a sustainability report will also be protected. No legal action can be taken but this does not prevent criminal proceedings or proceedings brought by ASIC.
5. A number of technical drafting issues have also been addressed, including clarity on exactly which entities the regime applies to and when.

Unresolved issues

The Bill permits entities in the third reporting cohort (see above) that have no material climate risks and opportunities to report accordingly and not complete a report in accordance with the sustainability standards. The consultation draft sustainability standards (yet to be finalised) permitted any entity that has no material climate risks or opportunities not to comply with the rest of the standards. Hopefully this inconsistency will be resolved. Note that in any case, directors of entities that issue a sustainability report that simply states that the entity has no material climate risks or opportunities will still be required to make a declaration that the report complies with the law and the standards.

A timing gap still remains between the time that directors are required to make a declaration that the sustainability report is compliant, likely to be for all reports for financial years commencing on or after 1 July 2028, and the time that sustainability statements are required to be fully audited – only for reports for financial years commencing on or after 1 July 2030. It will be helpful if the audit firms provide a level of assurance in the interim period, as many are presently doing for voluntary climate reports.   

How to prepare for mandatory climate reporting

You and your business can prepare for mandatory climate reporting by:

1. reviewing the Bill and the Explanatory Memorandum;
2. considering whether current systems and governance structures need to be updated, including to bring sustainability, legal and finance teams together on mandatory climate reporting;
3. ensuring accountability structures are in place to support compliance with mandatory climate reporting and accuracy of disclosures (not only in annual / sustainability reports but also across other marketing, website and similar materials in light of regulatory focus on greenwashing); and
4. if not already, adopt a robust due diligence and verification process for climate reporting, ensuring statements accurately reflect practices and there are reasonable grounds for forward looking statements, as we’ve written about in more detail elsewhere.

The Government have also signalled that it is taking a ‘climate first, but not only’ approach to mandatory disclosure requirements.[2] This suggests that Australia may ultimately follow in the global direction towards nature and social inequality reporting which we have previously reported on here and here.

For further information and assistance with the transition to mandatory sustainability reporting, please contact a member of the King & Wood Mallesons team.