Mandatory climate-related financial reporting: Preparing for Australia’s upcoming disclosure requirements

The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 (Cth) (the Act) was passed by both houses of Parliament on 9 September 2024 and received Royal Assent on 17 September 2024. Schedule 4 of the Act amends the Corporations Act 2001 (Cth) (Corporations Act) to introduce a new mandatory climate-related financial disclosure reporting regime.

The new reporting regime imposes a requirement to prepare a sustainability report that discloses risks and opportunities arising from climate change and the transition to a net zero economy to the existing financial reporting requirements under Chapter 2M of the Corporations Act.

Reporting Groups and Timing for Implementation

Entities that are required to prepare and lodge financial reports under Chapter 2M of the Corporations Act and who meet certain size thresholds or have emissions reporting obligations under the National Greenhouse and Energy Report Scheme will be impacted by the new reporting regime and will be required to prepare a sustainability report for a financial year. The sustainability report will form part of the entity’s annual financial report.

The new reporting regime will be phased in as follows:

Entities that do not fit within Groups 1, 2 or 3, as well as entities that are exempt from lodging financial reports under Chapter 2M of the Corporations Act, are not captured by the new reporting regime.

Contents of the Sustainability Report

A sustainability report will need to consist of:

• climate statements for the year;
• any notes to the climate statements;
• any statements prescribed by regulations; and
• a directors’ declaration about the statements and the notes.

Climate Statement

Climate statements will need to disclose:

• the material climate-related financial risks and opportunities that the entity faces. Whether or not something is a material climate-related financial risk or opportunity is to be determined in accordance with the sustainability standards and will depend on an entity’s individual circumstances;
• any metrics and targets of the entity relating to climate that are required to be disclosed by sustainability standards, including metrics and targets relating to scope 1, 2 and 3 greenhouse gas emissions; and
• any information about governance of, strategy of, or risk management by the entity in relation to these risks, opportunities, metrics and targets.

Climate statements will need to be prepared in line with the Australian Sustainability Reporting Standards (comprising AASB S1 General Requirements for Disclosure of Sustainability-related Financial Information and AASB S2 Climate-related Disclosures) that have been developed by the Australian Accounting Standards Board using the International Sustainability Standards Board’s sustainability standards as a baseline.

Notes to the Climate Statement

The notes to the climate statements must include any disclosures required by the regulations or the sustainability standards relating to the preparation of, and contents of, the climate statements (other matters concerning environmental sustainability) or any notes containing other information necessary to ensure that the climate statements and notes together meet the requirements introduced by the Act.

Directors’ Declaration

The directors’ declaration is a declaration by the directors as to whether, in the directors’ opinion, the substantive provisions of the sustainability report are in accordance with the Corporations Act, including compliance with the relevant sustainability standards and climate statement disclosures. The declaration must be made by a resolution of the directors and be dated and signed.

As a transitional measure, for the first three years of the reporting regime, directors will only need to provide an opinion on whether the entity took reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Corporations Act and the AASB S2.

Assurance

From 1 January 2025 to 30 June 2030, a sustainability report will only be required to be reviewed or audited to the extent required by the audit standards made by the Australian Auditing and Assurance Standards Board (AUASB). It will then revert to the enduring provisions on and from 1 July 2030.

The AUASB has released an exposure draft of the audit standards titled ‘Proposed Australian Standard on Sustainability Assurance ASSA 5010 Timeline for Audits and Reviews of Information in Sustainability Reports under the Corporations Act 2001’. Comments on the exposure draft are due by no later than 16 November 2024.

Record-Keeping Obligations

Reporting entities will be required to keep written sustainability records that explain and record their preparation of the substantive provisions of the sustainability reports for a period of 7 years after the sustainability report to which the records relate is completed. A failure to keep such records for 7 years will be an offence of both fault-based and strict liability.

ASIC’s Powers

In addition to existing liability regimes under the Corporations Act and the Australian Securities and Investments Commission Act 2001 (Cth), ASIC will have the power to issue directions to reporting entities where it considers that a statement made in a sustainability report is incorrect, incomplete or misleading in any way. ASIC may direct reporting entities to:

• confirm to ASIC that the statement is correct or complete;
• explain the statement to ASIC;
• give to ASIC information or documents that could substantiate or support the statement;
• correct, complete or amend the statement in accordance with the direction;
• publish a corrected, completed or amended statement; and
• give a corrected, completed or amended statement to specified persons.

Failure to comply with such a direction within the time specified is an offence of strict liability.

ASIC has established a sustainability reporting webpage for the purposes of providing reporting entities with information about the new reporting regime and how ASIC will administer it. We recommend that reporting entities monitor this page for further information and guidance. The webpage can be accessed here.

Temporary Modified Liability

A temporary modified liability approach is imposed by the Act.

In brief, limited immunity will apply to protected statements (which are defined in the Act to include statements within a sustainability report or an auditor’s report of an audit or review of a sustainability report that are about scope 3 greenhouse gas emissions, scenario analysis or transition plans) in sustainability reports or auditors’ reports prepared for financial years commencing during the first three years of the reporting regime (i.e. 1 January 2025 to 31 December 2027). During this period, only ASIC will be able to take action for misleading and deceptive conduct in relation to protected statements included in sustainability reports and auditors’ reports. Given the staged introduction of the reporting regime, Group 2 and Group 3 entities will get the benefit of this modified liability for a shorter period (with some Group 3 entities missing out completely).

Following this modified liability period, mandatory climate-related disclosures will be subject to existing liability regimes.

This modified liability also applies to all forward-looking statements relating to climate made in sustainability reports and auditors’ reports for financial years commencing within the first 12 months of the reporting regime (i.e. 1 January 2025 to 31 December 2025). Given the staged introduction of the reporting regime, Group 2 and Group 3 entities will not get the benefit of this aspect of the modified liability.

Recommendations

With 1 January 2025 fast approaching, it is important that entities start preparing for the incoming mandatory climate-related financial disclosures. We recommend that all entities caught by the new reporting regime (including those that are already voluntarily making climate-related disclosures) undertake a preliminary gap analysis to understand how existing targets, metrics, governance, risk management and strategy measure up against the new reporting requirements and develop a plan for addressing any gaps. Although Group 2 and Group 3 entities have more time before the commencement of their reporting obligations, we encourage these entities to start preparing now to ensure that they are ready when their time arrives.

From a corporate governance perspective, we recommend that entities begin by undertaking a review of their existing board and committee charters and structures to ensure that appropriate governance arrangements are in place to support effective climate reporting.