Mandatory climate-related financial disclosure: government releases draft framework

The Australian Government’s draft legislation would introduce mandatory climate-related financial disclosures from 2024/25. We analyse key aspects of the draft legislation and explore the implications and next steps for reporting entities.

After two rounds of consultation, the exposure draft of the Treasury Laws Amendment Bill 2024: Climate-related financial disclosure (Draft Legislation) has been released and is open for consultation until 9 February 2024. The Australian Accounting Standards Board (AASB) is also currently consulting on an exposure draft of the proposed climate disclosure standards known as ED SR1 (Draft Standards), which the Draft Legislation will give effect to, once passed.

Implementation will be phased in over three years commencing with large entities and certain entities currently required to report under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act). This group will be required to publish their first disclosures for the financial year beginning on or after 1 July 2024.

Phased implementation: reporting entities and timeline

As foreshadowed in the Government’s second consultation paper, the implementation of the mandatory climate-related financial disclosure regime (CRFD Regime) will be progressively phased in. The Draft Legislation proposes for the regime to be implemented via amendments to the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investment Commission Act 2001 (Cth).

The proposed three-phased implementation approach, including the reporting groups and their first reporting year, is outlined below.

The reporting groups include some notable changes from the Government’s second consultation paper.

First, asset owners with funds under management of ≥$5 billion at the end of the financial year are now captured. They will be required to report for the financial year commencing on or after 1 July 2026 (Group 2C Entities). This reflects the significance of registered superannuation entities and registered schemes to Australia’s financial system.

Second, the Draft Legislation clarifies that entities required to report under the NGER Act that do not meet the ‘publication threshold’ will be a Group 2 entity, not a Group 3 entity.

The inclusion of NGER Act reporting entities within Group 1 and Group 2 of the CRFD Regime will inevitably capture smaller entities, in both size and capability, who may find it significantly more challenging to meet the reporting requirements by the first reporting year. These entities will be required to make additional climate disclosures over and above what is required under the NGER Act and publish this information. This will also affect larger private entities who are reporting under the NGER Act but who are not currently required to publish their financial reports.

Also, the inclusion of some entities, regardless of whether or not they report under the NGER Act in all groups, means that mandatory climate reporting will be new for a number of entities across all sectors, for example smaller entities whose operations fall below the facility threshold[3] and corporate group threshold[4].

Third, the Draft Legislation leaves it open to the Minister to set, via regulation, different thresholds for Group 3 entities, and a different threshold asset value amount for Group 2C Entities.

Accordingly, the thresholds for Group 2 and Group 3 entities could change once the Draft Legislation is passed, meaning entities who are on the cusp of meeting these thresholds will need to continue to monitor CRFD Regime regulatory changes.

Corporate governance: reporting requirements, audit and assurance

Reporting requirements

The Draft Legislation will amend Chapter 2M of the Corporations Act to require reporting entities to prepare an annual sustainability report for lodgement with ASIC. The contents of the sustainability report will need to include:

• a climate statement (see below for more details);
  
  
• any notes to the climate statement;
  
  
• any other statements relating to ‘matters concerning environmental sustainability’ (see below for more details); and
  
  
• a directors’ declaration, to the effect that the climate and environmental sustainability statements comply with the Corporations Act.

Many of the largest entities, including many banks, are already voluntarily publishing a sustainability report. The proposed CRFD Regime will formalise and standardise this practice. Once legislated, entities will need to ensure it complies with the mandated requirements.

Consolidated group reporting

Where an entity is required by accounting standards to prepare financial statements on behalf of consolidated entities, the entity (the group head) will be able to choose to prepare a sustainability report on a consolidated basis. In such cases, only the group head will be required to prepare a sustainability report. Consistent with financial statements, directors and officers of controlled entities will be required to give the group head all information requested that is necessary to prepare the consolidated climate statement.

Sustainability records

Reporting entities will also be required to keep written records that explain and record its preparation of the sustainability report. Consistent with financial records, an entity will be able to decide where it keeps sustainability records.

Lodgement and provision to members

The requirements for an entity to lodge a sustainability report with ASIC and provide it to members will mirror the requirements for financial reports, directors’ reports and auditor’s reports in the Corporations Act. Those entities not required to provide a sustainability report to members will be required to make the sustainability report publicly available on its website the day after it is lodged with ASIC.

Directors of a public company required to hold an AGM will also be required to lay the sustainability report before the AGM.

It is likely that reporting entities may face increased scrutiny from members, investors and other stakeholders, such as financiers, regarding their management of climate-related risks and the veracity of their mandated disclosures. For example, mandated disclosures are likely to be a factor in financier credit risk assessments and will influence due diligence in transactions.

Audit and assurance

Under the Draft Legislation, a sustainability report will be subject to similar mandatory audit and assurance requirements to financial reports. The assurance requirements will be phased in as follows:

• between 1 July 2024 and 30 June 2030, only review by an auditor will be required for statements in sustainability reports. Additionally, the scope of the review will be limited to the content of the sustainability report that address scope 1 and scope 2 greenhouse gas (GHG) emissions;
  
  
• from 1 July 2030, an audit will be required for all disclosures made in an entity’s sustainability report, including for scope 1, 2 and 3 GHG emissions, and an auditor’s report will need to be obtained.

This is a more streamlined assurance timeline and proposes implementation over a longer timeframe than in the Government’s second consultation paper. The original proposal would, for example, have required Group 1 entities to obtain reasonable assurance of all climate disclosures for the financial period beginning on or after 30 June 2027.

The proposed timeline will give the Auditing and Assurance Standards Board more time to develop appropriate assurance standards, and professional services firms a longer lead time to build the necessary capacity to meet the demand for sustainability assurance.

Reporting content: AASB’s Draft Standards

The Draft Legislation requires an entity’s climate statement and the accompanying notes to comply with the ‘sustainability standards’ and disclose, at a minimum:

• its material climate risks and opportunities;
  
  
• climate-related metrics and targets, including scope 1, 2 and 3 GHG emissions; and
  
  
• governance policies relating to the above.

The AASB is currently consulting on the Draft Standards as the relevant ‘sustainability standards’ under the Draft Legislation. The Draft Standards adopt the ISSB’s IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related disclosures (ISSB Standards) as a baseline, with a few modifications for the Australian context, such as the NGER Act.

Broadly, the Draft Standards will require disclosure of:

• Material climate-related information: the kind of information that could reasonably be expected to influence the decisions made by the primary users of general-purpose financial reports;
  
  
• Governance information: an entity’s governance processes, controls and procedures for monitoring and managing climate-related financial risks and opportunities;
  
  
• Strategy information: how climate-related risks and opportunities might affect an entity’s prospects, business model and strategy, as well as the entity’s strategy to manage such risks and opportunities. This includes an entity’s scenario analysis and transition planning;
  
  
• Risks and opportunity management information: an entity’s processes to identify and assess climate-related risks and opportunities and its overall risk profile; and
  
  
• Climate-related metrics and targets: an entity’s performance against cross-industry metrics, including disclosure of scope 1, scope 2 (both location-based and market-based) and scope 3 GHG emissions and any targets set by the entity (or otherwise required by law).

While entities already reporting against the ISSB Standards or the Financial Stability Board’s Taskforce for Climate-related Financial Disclosures (TCFD) Recommendations will be well placed to comply with the CRFD Regime, entities should ensure they understand any differences between the Draft Standards and the ISSB Standards and TCFD Recommendations.

NGER alignment

The new disclosure framework aligns with the existing NGER Act in many important respects. Specifically:

• the definitions of greenhouse gas and scope 1 and scope 2 emissions under the Draft Legislation is consistent with the NGER Act; and
  
  
• as outlined above, all companies, registered schemes, registrable superannuation entities or disclosing entities who are also ‘controlling corporations’ under the NGER Act will be required to report under the Draft Legislation, regardless of their size.

Further, under the Draft Standards, an entity required to report must measure its GHG emissions using methodologies set out in the NGER Act, the National Greenhouse and Energy Reporting Regulations 2008 (Cth), and the National Greenhouse and Energy Reporting (Measurement) Determination 2008 (Cth) (NGER Framework) to the extent practicable, before referring to other prescribed GHG measurement methods or frameworks, such as the Greenhouse Gas Protocol.

An example of when the methodologies under the NGER Framework might not be practicable could include measurement of Scope 3 emissions (as the NGER Framework does not prescribe measurement methods specific to Scope 3 GHG emissions) and where the NGER Framework does not provide methods for the estimation of emissions (as is the case for agricultural sources or land use, land use change and forestry).

Transitional safe harbour and other relief

To balance investors’ demand for reliable and comparable information on climate-related risks and opportunities with entities’ concerns about the reporting burden and associated disclosure risks, the Draft Legislation and Draft Standards include certain relief measures for reporting entities.

Safe harbour

In response to stakeholder concerns about the risks associated with forward-looking statements and scope 3 emissions reporting, the Draft Legislation includes a safe harbour for statements made in a sustainability report about scope 3 GHG emissions and scenario analysis. Notably, the safe harbour will not extend to transition planning as originally proposed in the second consultation paper.

The safe harbour will only apply to statements made in sustainability reports prepared during the transitional implementation period for all groups (i.e. for financial years commencing between 1 July 2024 and 30 June 2027) and will not apply to statements made outside of sustainability reports, even if the statement is also made in a sustainability report.

The safe harbour will provide time-limited immunity from any civil action, suit or proceeding, including in relation to misleading and deceptive conduct under the Australian Consumer Law and/or breach of directors’ or fiduciary duties. However, the safe harbour will not apply to civil actions brought by ASIC which relate to offences with a fault element and/or where an injunctive or declaratory remedy is sought. Criminal proceedings are also excluded from the safe harbour.

The Government’s earlier position proposed that all actions by ASIC and the Australian Competition and Consumer Commission would be able to proceed despite the safe harbour for private action. While carve-outs to regulatory action are now proposed in the Draft Legislation, the scope of action which can still be initiated aligns with the stated intention of ensuring that regulators can take an educational and deterrence role during the transitional implementation period.

Other GHG emissions relief

Consistent with the ISSB Standards, the Draft Legislation and the Draft Standards include an exemption for all reporting entities from disclosing scope 3 GHG emissions in their first reporting period. However, the Draft Standards provide additional relief by exempting an entity from using data for its current reporting period to disclose scope 3 GHG emissions where reasonable, supportable data related to that reporting period is not available without undue cost or effort. In such a case, an entity will be permitted to disclose its scope 3 GHG emissions using data for the immediately preceding reporting period.

The Draft Standards also provide reporting entities with three-year transitional relief for the disclosure of market-based scope 2 GHG emissions. The Government’s policy position statement to the Draft Legislation indicates that this relief would only be available between 1 July 2024 and 1 July 2027, but only entities required by the NGER Act to disclose market-based scope 2 emissions would have to make such disclosures under the CRFD Regime. The disclosure of market-based scope 2 GHG emissions is a notable departure from the ISSB Standards which only require disclosure of location-based scope 2 GHG emissions.

Smaller reporting entities with no material climate risks or opportunities

The Draft Legislation proposes that Group 3 entities (i.e. entities that are in-scope but do not meet the thresholds for Group 2) that do not have material climate-related risks or opportunities, will not have to prepare extensive climate statements. Instead, they will need to prepare a climate statement to the effect that they do not have material climate-related risks and opportunities. This exemption is not available for larger reporting entities that meet the Group 1 and Group 2 reporting thresholds.

Commercially sensitive information

The Draft Standards also provide a limited exemption for commercially sensitive information. Specifically, an entity will be exempt from disclosing information about a climate-related opportunity if each of the following is satisfied:

• information about the climate-related opportunity is not already publicly available;
  
  
• disclosure of that information could reasonably be expected to prejudice seriously the economic benefits the entity would otherwise be able to realise in pursuing the opportunity; and
  
  
• the entity has determined that it is impossible to disclose that information in a manner (for example, at an aggregated level) that would enable the entity to meet the objectives of the disclosure requirements without prejudicing seriously the economic benefits of pursuing the opportunity.

Looking forward: possible expansion to other sustainability topics

The Draft Legislation anticipates that the sustainability reporting requirements will be expanded to other sustainability topics in the future. In particular, the Minister may, by regulation, require a sustainability report to include statements relating to ‘matters concerning environmental sustainability’. This is consistent with the Government’s first consultation paper, which indicated that the CRFD Regime may need to be adaptable to accommodate future global developments in nature and other sustainability reporting.

While ‘environmental sustainability’ is not defined in the Draft Legislation, it seems reasonably likely that, over time, the sustainability disclosure regime will be expanded to include nature-related financial disclosures, given the Government’s support for the Taskforce on Nature-Related Financial Disclosures as a strategic funding partner.

Next steps: key issues to consider during consultation

Now that the Draft Legislation and Draft Standards have been released for consultation, organisations should familiarise themselves with the proposed CRFD Regime and consider whether they want to make a submission on the proposed reporting requirements and/or standards.

In doing so, we recommend organisations consider the following issues:

• whether your organisation has the internal capabilities required to implement the CRFD Regime within the proposed timeline;
  
  
• how reporting under the CRFD Regime will align with your organisation’s other reporting obligations, including under the NGER Act (where applicable);
  
  
• the extent to which your organisation will qualify for the available safe harbour and other relief provisions and whether these mechanisms are sufficient to protect your organisation against risk; and
  
  
• if your organisation is part of a broader corporate structure, how your corporate group will approach sustainability reporting and whether there is enough flexibility in the reporting level and consolidation of information under the proposed CRFD Regime.

^{[1] The publication threshold for controlling corporations is a combined total of scope 1 and scope 2 GHG emissions of ≥50 kilotonnes carbon dioxide equivalence (CO2-e). Separate thresholds apply for Reporting Transfer Certificate Holders.}

^{[2] While the Draft Legislation does not currently limit this group of entities to controlling corporations which meet the publication threshold, the supplementary materials indicate that this is the policy intent. Accordingly, it is likely that this will be clarified in the final form of the legislation.}

^{[3] The facility thresholds are: (i) 25 kt or more of greenhouse gases (CO2-e) (scope 1 and scope 2 emissions); (ii) production of 100 TJ or more of energy; or (iii) consumption of 100 TJ or more of energy.}

^{[4] The corporate group thresholds are (i) 50 kt or more of greenhouse gases (CO2-e) (scope 1 and scope 2 emissions); (ii) production of 200 TJ or more of energy; or (iii) consumption of 200 TJ or more of energy.}