Mandatory climate reporting in Australia – Treasury proposes a broad reach with a limited safe harbour

Treasury has released its second consultation paper on climate-related financial disclosures. This paper builds on Treasury’s initial consultation paper released late last year. The initial consultation paper received 194 submissions, most of which are publicly available here.

Some key features of the proposed regime include:

mandatory climate reporting would start for the first cohort of captured entities in respect of the 2024-2025 financial year, with phasing in of additional requirements (including assurance requirements) and captured entities until the complete regime is fully in place from 1 July 2030;
the regime will capture a very wide range of entities, expanding beyond listed entities and large financial institutions;
climate-related disclosures will have to be made in the annual report and the legal requirements relating to annual reporting will apply;
the provisions relating to climate disclosures in the Corporations Act will be civil penalty only provisions;
there are no absolute safe harbours from existing liability regimes, but misleading or deceptive conduct (and similar) actions relating to scope 3 emissions and forward-looking statements will be limited to regulator actions for a fixed period of 3 years;
there will be a requirement for limited assurance, moving to reasonable assurance over time; and
Australian-specific reporting standards (based on the International Sustainability Standards Board’s (ISSB) standards) will be developed by the Australian Accounting Standards Board (ASSB) to govern the content of climate reporting.

The timeframe for this consultation is short, with submissions due on the 21 July 2023. The paper seeks views on whether the proposal is workable, and on the detail, implementation and sequencing of mandatory climate-related disclosures.

Following this consultation, Treasury is expected to prepare an exposure draft of legislation to implement mandatory reporting, with a third round of consultation before the legislation is introduced into Parliament.

The AASB is running a parallel consultation process to develop Australian-specific climate reporting standards. The standards will be largely aligned with the final standards developed by the ISSB which were released last week. Consultation on the AASB standards is expected to occur in the second half of 2023.

Key features of the Treasury proposal

In this alert, we answer the following questions in relation to Treasury’s proposal:

Who is required to report?
Where are they required to report?
What are they required to report?
How might they be liable?
What is the proposed timeline for implementation?

WHO is required to report?

The requirement to report is largely based on entity size thresholds. This is a broad approach that captures more than just listed entities or large financial institutions.

The Minister of Finance is running a separate process to implement mandatory reporting for comparable Commonwealth public sector entities.

The reporting entities will be phased in three groups, with all entities required to report by 2027-2028. The thresholds for reporting are as follows:

EXPAND

Entities that are required to lodge annual reports with ASIC and meet at least two of the following thresholds:

consolidated revenue of $500 million or more
consolidated gross assets of $1 billion or more
over 500 employees (including employees of any entities it controls)

AND

Entities that are required to lodge annual reports with ASIC and are a “controlling corporation” under the National Greenhouse and Energy Reporting (NGER) Act and meet the NGER publication threshold.

Entities that are required to lodge annual reports with ASIC and meet at least two of the following thresholds:

consolidated revenue of $200 million or more
consolidated gross assets of $500 million or more
over 250 employees (including employees of any entities it controls)

AND

Entities that are required to lodge annual reports with ASIC and are a “controlling corporation” under the NGER Act and meet the NGER publication threshold.

Entities that are required to lodge annual reports with ASIC and meet at least two of the following thresholds:

consolidated revenue of $50 million or more
consolidated gross assets of $25 million or more
over 100 employees (including employees of any entities it controls)

AND

Entities that are required to lodge annual reports with ASIC and are a “controlling corporation” under the NGER Act, regardless of whether they meet the publication threshold.

WHERE are they required to report?

It is proposed for climate-related reporting to be publicly available in entities’ annual reports. This has significant legal implications:

directors will have to form a view that any climate disclosures included in the financial statements and notes provide a true and fair view, and that climate disclosures comply with relevant accounting standards, when signing the directors’ declaration;
if the entity is listed, the CEO and CFO will have to form this view too when signing the CEO/CFO declaration; and
auditors will have to form a view that the climate-related disclosures are true and fair and compliant with relevant standards when auditing the annual report.

Assurance requirements will be phased in over time. There will be four levels of assurance. The levels of assurance are:

Level 1: limited assurance of scope 1 and 2 emissions; reasonable assurance of governance disclosures
Level 2: reasonable assurance of scope 1 and 2 emissions; limited assurance of scope 3 emissions, scenario analysis and transition plans (process/methodology/assumption assurance)
Level 3: reasonable assurance of scope 1 and 2 emissions and other climate disclosures; limited assurance of scope 3 emissions, scenario analysis and transition plans (full quantitative assurance)
Level 4: reasonable assurance of all climate disclosures

It is proposed that assurance will be conducted or led by the financial auditor with the support of climate and sustainability experts where relevant.

WHAT are they required to report?

The AASB will develop Australian climate-related financial disclosure standards, based on the ISSB standards, which will govern the information that must be reported.

Treasury has indicated that the content to be reported is likely to include:

the entity’s material climate risks and opportunities (over the short, medium and long term) and processes used to identify and manage them;
governance measures used to monitor and manage climate-related financial risks and opportunities;
qualitative scenario analysis (at a minimum), moving to quantitative scenario analysis as reporting matures;
climate resilience assessments against the temperature goal of the Paris Agreement and one other possible future state;
transition plans and climate targets (including offsets used, whether offsets are verified through a standard, targets and mitigation strategies);
gross scope 1 and 2 emissions (not accounting for any applicable credits/certificates), with scope 3 emissions to be reported from the second reporting year onwards; and
reporting against industry-based metrics, where there are well-established and understood metrics available for the reporting entity.

The requirement relating to transition plans and climate targets is focused on transparency, rather than requiring entities to commit to a target. If a company does not have a transition plan or targets set, the requirement can be met by stating that an entity does not have a transition plan and/or target.

It is expected that information will be considered material if it could affect decisions made on the basis of annual reports by primary users (such as investors, lenders and creditors). Unlike the European Corporate Sustainability Reporting Directive (CSRD), the principle of double materiality (ie also considering and disclosing the external impacts of an entity’s operations) will not be embedded in the regime.

HOW might they be liable?

Climate disclosure sections in the Corporations Act will be drafted as civil penalty provisions only. Infringement notices will be available to allow flexibility in enforcement.

Misleading or deceptive conduct (and similar) claims relating to scope 3 emissions and forward-looking statements will be limited to regulator-only actions for the first 3 years of reporting.