Non-bank lenders and mandatory sustainability reporting

On 22 August 2024, the Australian Senate passed the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Bill) with some minor amendments. Schedule 4 of the Bill would implement Australia’s first mandatory climate reporting regime.

The Bill will now return to the House of Representatives to seek the House’s concurrence with the amendment, which would be the last stage before the Bill is sent for Royal Assent. The next House of Representative sitting dates are scheduled for 9 – 12 September 2024.

Once passed, the Bill will introduce mandatory climate reporting requirements for certain entities, including non-bank lenders that meet the thresholds. The Bill aims to align Australia with international standards on climate reporting to “help Australia maximise the economic opportunities of cleaner, cheaper and more reliable energy, and better manage climate risks in our economy.”^[1]

In this alert, we explore the potential impact of these changes on non-bank lenders specifically, and the steps they should consider taking now to prepare.

Direct application to non-bank lenders

Non-bank lenders, among other entities, may fall within the broad scope of the proposed reporting obligations. Specifically, non-bank lenders could be categorised as ‘Group 1’ reporting entities and be required to comply from financial years starting on or after 1 January 2025.^[2]

Group 1 includes entities (and the entities they control) which meet at least two of the following:

1. consolidated revenue equal to or greater than $500 million;
2. consolidated gross assets equal to or greater than $1 billion; or
3. 500+ full-time equivalent employees at the end of the financial year.

With the expansion of the non-bank sector in recent years, many non-bank lenders have now grown to a level that may meet these thresholds.

Even if a non-bank lender does not classify as a Group 1 entity, it may meet the reporting thresholds for ‘Group 2’ or ‘Group 3’ reporting entities, and will be required to report for financial years starting on or after 1 July 2026 or 1 July 2027.

Non-bank lenders within the Bill’s scope will be required to make disclosures in relation to their material climate-related financial risks and opportunities, including their governance, strategy, risk management and metrics and targets. That includes:

1. scope 1 greenhouse gas emissions (GHG emissions): direct GHG emissions from sources owned/controlled by the entity;
2. scope 2 GHG emissions: indirect GHG emissions from the generation of purchased or acquired electricity, steam, heating or cooling consumed by the entity; and
3. scope 3 GHG emissions: indirect GHG emissions that occur in the value chain of the entity). Importantly, scope 3 includes financed emissions, which include the portion of greenhouse gas emissions of a borrower attributed to the loans made by the entity to the borrower. Under the current proposal, reporting entities will only be required to disclose Scope 3 GHG emissions from their second reporting year, and this may comprise information from a reporting year up to 12 months prior to the current period.

These disclosures will need to be made in accordance with sustainability standards currently being prepared by the Australian Accounting Standards Board and, ultimately, subject to similar assurance requirements to those currently in the Corporations Act for financial reports. Assurance requirements are proposed to be phased in over time, with a full audit required by at least 1 July 2030.

Indirect application to non-bank lenders

The regime may also indirectly impact non-bank lenders before they are directly caught by it, to the extent that they are part of the value chain of entities required to report their indirect scope 3 emissions.

In particular, given the extent to which non-bank lenders typically participate in the securitisation market, non-bank lenders may be required by financiers to provide emissions data to enable the financier to comply with their scope 3 mandatory reporting obligations.

Application to securitisation special purpose vehicles (SPVs)

In addition to the thresholds outlined above, the mandatory reporting obligations in the Bill only apply to entities that are required to prepare financial reports under Chapter 2M of the Corporations Act. Therefore securitisation SPVs that aren’t required to prepare financial reports under Chapter 2M of the Corporations Act won’t be required to prepare sustainability reports under the Bill.

Implications for directors of non-bank lenders

Directors of non-bank lenders reporting under this regime will be required to declare that the sustainability report is in accordance with the Bill, even if the report says the entity has no material climate risks or opportunities.

However, for financial years commencing during the first three years of the regime, directors will only be required to declare whether the entity has taken reasonable steps to ensure the sustainability report is in accordance with the Bill.

Practically, this means that directors of non-bank lenders will need to oversee that there are robust systems and processes in place to comply with the regime.

What’s next?

‘Start preparing now’ says ASIC, to the more than 6,000 entities that will be required to report under new climate-related disclosure requirements in the next few years.^[3]

That preparation includes:

1. confirming whether you will be included as a Group 1, Group 2 or Group 3 entity required to report under the regime;
2. if so, conducting a gap analysis of current disclosures to what will be required under the mandatory regime, and preparing a project plan to address the ‘gaps’; and
3. if not already, planning how you’re going to get the data, support and capabilities you need, and start keeping the necessary records.

At King & Wood Mallesons, we’re continuing to closely monitor developments related to the Bill and helping many companies prepare for mandatory climate reporting. Please reach out if you need any assistance.