Bringing the Heat: Mandatory Climate-Related Financial Disclosure in Australia

Australian companies are increasingly facing pressure to consider their exposure to climate related financial risks and opportunities, and disclose to regulators and investors their climate related plans and strategies.

In response to this growing demand, and as part of Australia’s obligations under the Paris Agreement¹ to combat climate change, the Government has recently taken a further step towards introducing mandated climate-related financial disclosure in Australia.

The Treasury Laws Amendment Bill 2024: Climate-related financial disclosure (Exposure Draft)² was released by Government on 12 January 2024 and seeks to amend provisions of the Australian Securities and Investments Commission Act 2001 and the Corporations Act 2001 to introduce mandatory requirements for large businesses and financial institutions to disclose their climate related risks and opportunities.

If passed in its current form, the Exposure Draft will apply to entities that:

• lodge financial reports under Chapter 2M of the Corporations Act and
• meet certain minimum size thresholds; and/or
• have emission reporting obligations under the National Greenhouse and Energy Reporting Act 2007 (NGER Act).

These entities will be required to prepare a new “sustainability report” to be included in their annual financial report. This report will comprise climate statements that comply with sustainability standards to be developed by the Australian Accounting Standards Board (AASB) and which will align Australia’s disclosures with those of other jurisdictions, including the EU, UK, New Zealand and Japan.

The Government has indicated that the proposed changes are intended to:

• provide Australians and investors with greater transparency and more comparable information about an entity’s exposure to climate-related financial risks and opportunities, and climate-related plans and strategies;
• support regulators to assess and manage systemic risks to the financial system because of climate change, and efforts taken to mitigate its effects; and
• support Australia’s reputation as an attractive destination for international capital and help draw the investment required for the transition to net zero.

This new obligation is proposed to be phased in over a four-year period, commencing in FY 2024-25 for a limited group of large financial institutions and NGER entities and expanding over time to apply to progressively smaller entities.

DOES THIS APPLY TO YOU?

The new disclosure obligations will apply to:

• large entities that are required to prepare and lodge annual financial reports under Chapter 2M of the Corporations Act, including listed and unlisted companies and financial institutions;
• asset owners (such as registerable superannuation entities and registered managed investment schemes) with funds under management of more than $5 billion; and
• those entities that are subject to both the annual reporting requirements under the Corporations Act and emissions reporting obligations under the NGER Act, regardless of their size.

However, the following entities will not be required to comply with the new obligations:

• small and medium sized businesses that are below the relevant size thresholds (unless they have reporting obligations under the NGER Act); and
• entities that are exempt from lodging financial reports under Chapter 2M of the Corporations Act.

WHEN WILL THE NEW OBLIGATIONS COMMENCE?

To determine when the reporting obligations will commence, affected entities are arranged into a three-tiered system, depending on their size and level of emissions.

The table below was released by Treasury, and identifies the start date for each of these three-tiers of entities, assuming that they are required to prepare and lodge annual reports under Chapter 2M of the Corporations Act.

WHAT WILL THE NEW SUSTAINABILITY REPORT INCLUDE?

The intention of the new disclosure requirements is to bring Australia into line with the international requirements, as set out in the International Sustainability Standards Board’s IFRS S2 Climate-related Disclosures standard, as modified for the Australian environment. The exact terms of this are currently being developed by the Australian Accounting Standards Board, which published a draft standard SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial information, in October 2023.

However, the Exposure Draft does identify the broad parameters of what content will be required. Specifically, climate-related financial disclosures will be required to be included in a sustainability report, which will form the fourth report within annual financial reporting obligations and be contained in an entity’s annual report. The climate disclosures will be subject to similar assurance requirements to those currently in the Corporations Act for financial reports and will require an assurance report from the entity’s auditors.

The sustainability report itself must comply with the relevant sustainability standards (to be finalised), and broadly must include:

• the material climate risks the entity faces and the material climate opportunities the entity has for the financial year (if any);
• any metrics and targets of the entity for the financial year related to climate, which are required to be disclosed by the sustainability standards, including metrics and targets relating to scope 1, 2 and 3 emissions of greenhouse gas (as defined in the NGER Act);
• any governance policies of the entity related to these matters, which are required to be disclosed by the sustainability standards; and
• the quantity of scope 3 emissions for the entity (i.e. indirect emissions, not included in scope 2, that result from value chain activities including both upstream and downstream emissions) for the financial year (or as specified in the sustainability standards). Note that this requirement does not apply to the first financial year for which the entity is required to prepare a sustainability report.

At this stage, smaller entities that have no material climate-related financial risks or opportunities for a financial year will be able to rely upon a provision in the Exposure Draft to prepare a climate statement to the effect that it does not have material climate risks or opportunities for the financial year.

WHO WILL BE LIABLE FOR THE NEW DISCLOSURES?

Liability for the new climate disclosures will be aligned with the existing liability regime under the ASIC Act and Corporations Act. Although, for the first three years, the Exposure Draft proposes a more limited liability regime in respect of scope 3 emission disclosures and select forward-looking disclosures, to enable entities to adjust to the new requirements.

HOW TO PREPARE?

Duties and expectations of Directors
The Board of Directors has a crucial role to play in relation to ensuring an entity’s compliance with the new requirements – in line with their Director’s duties. As such, Directors should understand what internal expertise and expert support will be required to meet these new obligations, and ensure that they continue to exercise due care and diligence in overseeing the robustness of corporate reporting systems and processes, and in assessing the materiality of climate-related risks and opportunities to their organisation.

Practical steps
To prepare for the upcoming mandatory climate reporting, Directors of effected entities should focus on:

The entity’s current climate-governance structure which includes:

• who has executive responsibility;
• how climate-related risks and opportunities are identified and managed;
• what mitigation and adaptation activities are underway; and
• what disclosures and representations are currently being made.

The gap between current disclosures and the required end state under the incoming laws, and consider:

• what additional resourcing is required;
• whether governance structures are fit for purpose;
• what can we learn from market leaders in our industry; and
• where does climate reporting sit relative to other priorities.

Material in this article is available for information purposes only and is a high level summary of the subject matter. It is not, and is not intended to be, legal advice. Hazelbrook does not guarantee the accuracy of the information provided. You should first obtain professional legal advice prior to taking any action on the basis of any information contained in this article. This article is copyright. For permission to reproduce this article please email Hazelbrook Legal: enquiry@hazelbrooklegal.com