Climate-Related Financial Disclosures Bill: five key takeaways

The federal government has introduced its mandatory climate-related financial disclosures (CRFD) legislation to Parliament. Known as the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Bill), it follows consultation by Treasury on the exposure draft legislation, explained in detail in our recent insight, Mandatory climate-related financial disclosure: government releases draft framework.

There are five key takeaways from the Bill for in-scope entities:

1. Group 1 reporting period to commence no earlier than 1 January 2025; Groups 2 and 3 remain the same

Group 1 entities will now have to report for a financial year that commences on or from 1 January 2025. The Bill allows for the first reporting period to be pushed back, subject to when the Bill is passed. (This will follow the parliamentary process, which may include amendments to the Bill). The first reporting period for Group 2 (the financial year commencing between 1 July 2026 and 30 June 2027) and Group 3 (the financial year commencing on or after 1 July 2027) otherwise remain the same.

For more information on the three groups, see Mandatory climate-related financial disclosure: government releases draft framework.

2. Scope of safe harbour from private litigation expanded, but representations made in voluntary marketing materials are not immune

The exposure draft had proposed a three-year safe harbour (immunity) from private litigant action in relation to statements made in a sustainability report about scope 3 Greenhouse Gas (GHG) emissions and scenario analysis. The safe harbour has now been expanded to also include statements made in a sustainability report or auditor’s report about:

• scope 3 GHG emissions (including financed emissions);
  
  
• scenario analysis; and
  
  
• transition plans.

The Bill also introduces a one-year safe harbour from civil liability for forward-looking statements from the ‘start date’ of the regime. Statements that are protected by the three-year and one-year safe harbour are now referred to as ‘protected statements’.

Statements that are required under a Commonwealth law outside the sustainability report or auditor’s report (for example, in a Product Disclosure Statement or pursuant to the National Greenhouse and Energy Reporting Act 2007 (Cth)) are also now subject to the safe harbour. This is provided that the statement:

• is the same as a protected statement made within the sustainability report or auditor’s report; or
  
  
• differs from a protected statement only insofar as it contains updates or corrections to the protected statement.

The safe harbour will not apply to voluntary statements made in marketing materials, even if they are the same as those made in the sustainability report.

3. No safe harbour from ASIC’s ability to commence civil penalty proceedings and other enforcement action

Previously, the exposure draft had proposed that the safe harbour would apply to civil penalty proceedings brought by ASIC, though not to enforcement action that relates to offences with a fault element and/or where an injunctive or declaratory remedy is sought. Under the Bill, all ASIC enforcement action is outside the safe harbour. This enables ASIC to bring any suit, action or proceeding, including seeking penalties for misleading or deceptive conduct in relation to ‘protected statements’ during the safe harbour periods.

4. Directors’ declaration amended

The Bill will provide transitional relief for the scope of directors’ declarations. For financial years commencing in the first three years after the start date of the regime, the directors’ declaration will be confined to a declaration that “the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with this Act”. Notwithstanding, there remains a gap between the expiration of this relief period and the commencement of any requirements for reasonable assurance for all mandated disclosures.

The Bill no longer requires directors to make a declaration of compliance with “international sustainability reporting standards”. Instead, directors will need to make a declaration that the sustainability report is “in accordance with the Act”.

5. Assurance timeline open for consultation

The Auditing and Assurance Standards Board (AUASB) will be required to make auditing standards that specify the extent to which the sustainability report must be audited or reviewed (if at all) before 1 July 2030. The Explanatory Memorandum to the Bill explains that before the requirement for reasonable assurance commences from 1 July 2030, auditing standards are expected to evolve in terms of the extent and level to which disclosures in the sustainability report will need to be assured.

The AUASB has consulted on a proposed model to phase in assurance requirements before 1 July 2030.

Next steps for the Bill

The Bill is still before the House of Representatives. The Senate Standing Legislation Committee on Economics (Committee) conducted an inquiry into the Bill and handed down its report on Friday 3 May 2024 (Committee Report).

A majority of the Committee welcomed the key CRFD measures in the Bill and recommended that the Bill be passed. In particular, the Committee:

• welcomed the phased-in approach over the next four years, noting that this should allow for a reasonable transition period for entities;
  
  
• considered that the modified liability provisions are a necessary transition and noted that ASIC will have appropriate oversight during this time;
  
  
• supported provisions that reflect the potential compliance burden on Group 3 entities, such as where they identify they have no material financial risks; and
  
  
• considered the discretion given to the Minister for the use of delegated legislation to require additional disclosure for financial matters concerning environmental sustainability is appropriate, to ensure Australians can align with international standards as they develop.

Coalition Senators authored a dissenting report within the Committee Report. They raised concerns over the 'significant increase’ in compliance costs proposed by the CRFD regime, particularly for small to medium businesses, which they consider have been ‘under-scrutinised’. The Coalition Senators acknowledged that there is space for a ‘pragmatic and sensible’ mandatory CRFD regime. However, they reserved their position on the CRFD component of the Bill until their concerns are addressed. They recommended:

• an extension be granted to the Committee’s consideration of the Bill;
  
  
• Group 3 entities be removed entirely from the regime, or the Group 3 threshold be increased to $100 million in gross revenue or $50 million in gross assets (up from $50 million in consolidated revenue and $25 million in gross assets set out in the Bill);
  
  
• if Group 3 entities are retained, they should be subject to simplified climate reporting standards and the requirement for an audit of a statement of no material climate risks or opportunities be removed;
  
  
• the Minister’s discretion to require additional disclosure of financial matters concerning environmental sustainability be removed or subject to requirements of industry consultation;
  
  
• the safe harbour be extended to protected statements replicated in investor briefings, website statements, public addresses and other like documents, and that further consideration be given to the appropriateness of compliance enforcement remaining with ASIC for an extended period; and
  
  
• mandatory reasonable level assurance requirements be removed, and an assessment be done after four years to consider what is possible and important to assure by early 2030.

The Greens and Senator Pocock also made additional comments and recommendations in relation to the safe harbour and scenario analysis in the Committee Report. For example, the Greens recommended:

• the Bill require companies to use at least two possible future climate scenarios, being a low (1.5 degree) and a high (>2.5 degree) warming scenario;
  
  
• the safe harbour be spread out amongst the three groups to run for one, or at most two years, from the commencement of each group; and
  
  
• the safe harbour be reduced to only cover misleading and deceptive conduct claims seeking loss or damage.

As the federal government does not hold a majority of seats in the Senate, the Committee Report indicates the potential for further amendments to be made to the Bill to secure its passage in the Senate.

While it is unclear when the Bill will be passed, the timing will determine the first reporting date for Group 1 entities.

Next steps for organisations

Organisations, especially Group 1 entities, need to prepare now, as the reporting period could commence as early as 1 January 2025.

ASIC Chair Joe Longo recently provided some early guidance on the anticipated CRFD regime. Some key takeaways are:

1. Start preparing now. As Mr Longo stated,“[i]t’s simply not an option to put this off until after legislation has passed, and then scramble to comply.”
   
   
2. Preparation includes figuring out how to obtain the necessary data, reviewing internal capability and support needed to comply.
   
   
3. ASIC continues to encourage listed companies to report voluntarily under the Taskforce on Climate-Related Financial Disclosures (TCFD) requirements and recommends beginning to engage with ISSB standards. Companies that have been reporting under the TCFD must conduct a gap analysis and determine how they need to modify their reporting approach.
   
   
4. Start developing systems to support possible expanded reporting on other sustainability-related topics, such as nature and biodiversity.