Article Mandatory climate related financial disclosures Web

Assessing your preparedness for mandatory climate-related financial disclosures

11 September 2024

Mandatory climate-related financial disclosures for Australian entities will commence from 1 January 2025.

Australia has now passed landmark climate reporting legislation through the Parliament. The legislation introduces mandatory climate-related financial disclosure requirements, commencing with large businesses and emitters from 1 January 2025.

The legislation extends existing financial reporting obligations set out in the Corporations Act 2001 (Cth) (Corporations Act) to the preparation of a ‘sustainability report’. Consistent with the federal government’s ‘climate first, not only’ approach to sustainable finance, the new regime is directed to enabling investors to assess the financial impact of climate change on the companies in which they invest and to make capital allocation decisions consistent with their net zero commitments.

With only a few months until the regime commences, this insight explains the key legal requirements of the new regime and identifies six ways in-house legal teams can prepare to support their organisations to meet the regime’s legal requirements.

Summary of legal requirements

In-scope entities

Entities will have to prepare a sustainability report if they meet certain reporting thresholds:

Large entities: entities that meet at least two of the following three criteria:
- the entity (and the entities it controls) have 100 employees or more at the end of the financial year;
- the value of consolidated gross assets of the entity and any entities it controls is A$25 million or more, at the end of the financial year;
- consolidated revenue for the financial year of the company and any entities it controls is A$50 million or more.
NGER reporters: entities that are a registered corporation (or are required to register) under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER).
Asset owners: registered schemes, registrable superannuation entities or retail CCIVs with assets (including assets of the entities it controls) valued at A$5 billion or more at the end of the financial year.

Reporting requirements will be phased in over three years based on threshold criteria.

Preparing and lodging reports with ASIC

Reporting entities must prepare an annual sustainability report for lodgement with ASIC for a financial year if it meets the reporting thresholds for that financial year.

Parent entities required by accounting standards to prepare financial statements on behalf of consolidated entities can elect to prepare a sustainability report on a consolidated basis.

Contents of the mandatory sustainability report

Climate-related financial disclosures (CRFD) are a particular form of general-purpose financial report. They provide information about the reporting entity’s climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, access to finance or cost of capital over the short, medium or long-term.

The contents of the sustainability report will need to include:

a climate statement;
any notes to the climate statement; and
a directors’ declaration, to the effect that the climate and environmental sustainability statements comply with the Corporations Act.

The government intends to allow the regime to be expanded over time to include other sustainability topics. Consistent with this, the Minister may make regulations that require sustainability reports to include statements relating to financial matters concerning environmental sustainability. No regulations are currently proposed.

The climate statement and accompanying notes must disclose the following matters in accordance with sustainability standards, to be issued by the Australian Accounting Standards Board (AASB):

the entity’s material financial risks and climate opportunities;
metrics and targets relating to climate including scope 1, 2 and 3 greenhouse gas (GHG) emissions;
governance of, strategy of, or risk-management by the entity in relation to risks, opportunities, metrics and targets.

Release of the AASB’s final sustainability standards is imminent.

Mandatory temperature scenarios for assessing climate resilience

The regime requires reporting entities to use climate-related scenario analysis to assess its climate resilience. Climate resilience is the capacity of an entity to adjust to climate-related changes, developments or uncertainties. It involves the capacity to manage climate-related risks and benefit from climate-related opportunities. This includes the ability to respond and adapt to climate-related risks and opportunities, including transition and physical risks and both strategic and operational resilience.

The legislation requires disclosure of information about an entity’s climate resilience based on two temperature scenarios: a 1.5°C increase in global temperature by 2050 (1.5 degree scenario) and a scenario that ‘well exceeds’ 2°C by 2050 (high warming scenario). The 1.5 degree scenario is designed to assess an entity's resilience to risks that arise from efforts to transition to a lower carbon economy. For example, the Intergovernmental Panel on Climate Change's (IPCC) sixth report found limiting warming to 1.5°C would ‘involve rapid and deep and, in most cases, immediate greenhouse gas emissions reductions’. The IPCC also found higher global warming levels escalate the risks of adverse physical impacts, such as droughts, sea level rise or biodiversity loss, and the likelihood of abrupt and/or irreversible changes. Accordingly, the high warming scenario is designed to assess an entity's resilience to the physical risks of climate change.

Assurance

The legislation provides for the phasing in of assurance requirements. The Auditing and Assurance Standards Board (AUASB) will issue auditing standards that specify the extent to which the sustainability report must be audited or reviewed before 1 July 2030. The AUASB has indicated that it will require:

limited assurance over scope 1 and 2 emissions for the first year of reporting, progressing to reasonable assurance in the second year;
limited assurance over governance and strategy (risks and opportunities) from the first year of reporting, progressing to reasonable assurance in the fourth year;
limited assurance over all other disclosures from the second year of reporting, progressing to reasonable assurance in the fourth year.

The final assurance standard is expected to be issued later this year.

Record-keeping

Reporting entities must keep written records that explain and record their sustainability report preparation. Consistent with financial records, an entity will be able to decide where it keeps sustainability records, though additional requirements apply to records kept outside of Australia.

Directors’ declaration

Sustainability reports must include a declaration that, in the directors’ opinion, the substantive provisions of the sustainability report are in accordance with the Corporations Act, including compliance with the sustainability standards.

ASIC’s new directions power and enforcement approach

ASIC has new powers to issue directions to require an entity to correct, complete or amend a statement made in a sustainability report if it believes the statement is incorrect, incomplete or misleading in any way. This enables ASIC to respond to potentially misleading or deceptive representations without having to issue infringement notices or take enforcement proceedings.

ASIC has indicated it will consult with the market to prepare specific regulatory guidance, including in relation to the circumstances in which ASIC will give relief from or otherwise adjust the disclosure requirements (similar to financial reporting). ASIC’s most recent greenwashing surveillance and findings report examined disclosure made under the Taskforce for Climate-related Financial Disclosures (TCFD) by very large listed companies. It did not identify any concerns about misleading or deceptive disclosure. It also examined the sustainability-related representations made by listed companies outside of the ASX 200 with a focus on disclosures concerning ‘net zero’, and ‘climate negative’. It found the inconsistent and interchangeable use of key terms, insufficient disclosure of inputs, assumptions and contingencies for climate-related statements and climate-related claims were not supported by appropriate levels of expenditure or capital investment.

Offences

The legislation introduces new offences and extends offences for financial statements to sustainability statements.

New offences include a failure to comply with a direction from ASIC, a failure to keep sustainability records and, for records kept outside of Australia, a failure to notify ASIC of the location and/or a failure to keep sufficient information in Australia. Maximum penalties range from $93,900 to $751,200.

Transitional relief

The legislation relieves or modifies some reporting obligations during the first three years of the regime’s operation.

Modified directors’ declaration: For a financial year commencing between 1 January 2025 and 30 December 2027, directors need only declare that ‘the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with this Act’. The substantive provisions include the climate statement and notes.
Immunity from private litigant action for ‘protected statements’: For a financial year commencing between 1 January 2025 and 30 December 2027, statements made in a sustainability report or auditor’s report or review about scope 3 GHG emissions, scenario analysis and/or transition plans are immune from private litigant action. For a financial year commencing between 1 January 2025 and 30 December 2025, forward looking statements that relate to climate and are about the future are also immune from private litigant action. A statement is immune from private litigant action if it is required to be made under a Commonwealth law and is the same as a protected statement, or differs only insofar as it updates or corrects a protected statement.

The draft sustainability standards propose to exempt reporting entities from disclosing scope 3 GHG emissions in their first reporting period. It also provides three-year transitional relief for disclosing market-based scope 2 GHG emissions.

Six ways for in-house legal teams to prepare

1. Assess your team’s climate literacy

In-house counsel will be called upon to assist their organisations in complying with the regime’s legal requirements and to maximise the benefit of the transitional relief. Beyond promoting compliance, there are many other circumstances in which the matters underpinning an entity’s disclosures will be relevant to the role of in-house legal teams. These include when assessing climate-related liability risks, such as activist legal challenges to regulatory approvals, novel tortious claims for loss and damage, shareholder action for greater disclosure or climate action, and regulatory action for greenwashing or other non-compliances.

In-house teams will need to understand core climate concepts and climate-related liability risks to advise on and mitigate the range of legal risks that will arise in the transition to a lower carbon economy.

2. Review the governance of sustainability reporting

In the absence of auditing to test the assumptions made by directors and management in the preparation of their reports, general users of financial reports will be reliant on the adequacy of a reporting entity’s systems to discharge the entity’s disclosure obligations and understand the financial impact of climate risks and opportunities on the entity’s prospects. They may also place greater reliance on declarations given by directors as to the entity’s compliance with the disclosure requirements and underlying climate statements. This heightened focus on the directors’ declaration exposes directors and corporate officers to greater reputational and legal risks.

In-house legal teams will have an important role to play in ensuring management and the board understand the entity’s disclosure obligations and whether the entity’s compliance framework is sufficient to meet those obligations so as to enable corporate officers to discharge their duties and responsibilities. In-house legal teams will need to review existing compliance processes to ensure they support directors to give the necessary declarations.

3. Mitigate greenwashing risks

The regime requires targets, strategies and commitments to be disclosed for many years into the future (for example, 2030 and 2050 emission reduction targets), amidst considerable uncertainty about the future state of the climate. Statements about future matters are at risk of being found to be misleading or deceptive if there are no reasonable grounds for making them. To mitigate greenwashing risks, in-house legal teams will need to ensure entities have an ongoing reasonable basis for their forward-looking statements and any assumptions made, and a robust process for ensuring the accuracy of their disclosures.

4. Consider a global reporting strategy to manage cross-jurisdictional disclosure requirements

In-house legal teams of multinational corporate groups should consider developing a global reporting strategy to manage cross-jurisdictional mandatory and voluntary reporting requirements.

They should undertake a gap analysis to identify new or more onerous disclosures in the Australian regime and then identify any gaps in data or internal capability that require uplift to comply. In preparing an uplift program, in-house legal teams should consider whether existing processes and procedures (for example, in relation to modern slavery or anti-bribery and corruption) can be leveraged.

5. Understand reporting complexities for multinational corporate groups

In many cases, the intersection between the criteria that determines which entities report and when, and consolidated reporting for the purposes of financial statements, will assist to streamline sustainability reporting. However, the complexity of some corporate group structures (including group heads domiciled in foreign jurisdictions, group entities whose operations span a range of sectors and/or controlled entities not individually within the scope of the regime) may present sustainability reporting complexities.

Reporting entities should consider whether they will need to disaggregate quantitative data about emissions and targets, as well as the broad range of qualitative data they need to report across the governance, strategy and risk management reporting pillars in a climate statement. In-house legal teams will need to understand how data is collected, recorded and reported across controlled entities and consider the suitability of reporting processes to maximise the accuracy of reported information.

6. Stay tuned for nature-related financial disclosures

Treasury recently released a Sustainable Finance Roadmap which outlines a comprehensive ‘climate first, not only’ reform agenda. The Roadmap makes clear that the government will consider extending disclosure requirements to nature-related standards which are currently being developed by the International Sustainability Standards Board.

In-house legal teams should therefore be aware of the CRFD regime’s natural extension to nature-related financial risks. As ASIC Chair Joe Longo told audience members earlier this year, entities should “ensure that any systems and processes they adopt for the purpose of climate-related financial disclosures be sufficiently agile to incorporate additional sustainability topics in future years.”