On 27 June 2023, the Australian Treasury released a second consultation paper setting out the key elements of the Government's proposed climate-related financial risks disclosure regime.
Treasury is seeking submissions by 21 July 2023, with exposure draft legislation expected to be released later this year.
Who would need to report on climate-related financial risks – and when?
The consultation paper proposes that the following entities will be required to comply with the new mandatory reporting requirements.
FY24-25 onwards
Group 1
An entity which is required to report under Chapter 2M of the Corporations Act 2001 (Cth) and fulfills at least two of the following three thresholds:
- it has over 500 employees;
- the value of consolidated gross assets at the end of the financial year of the entity and any entities it controls is $1 billion or more;
- the consolidated revenue for the financial year of the entity and any entities it controls is $500 million or more.
AND
An entity which is required to report under Chapter 2M of the Corporations Act is a "controlling corporation" under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) and meets the NGER publication threshold.
FY26-27 onwards
Group 2
An entity which is required to report under Chapter 2M of the Corporations Act and fulfills at least two of the following three thresholds:
- it has over 250 employees;
- the value of consolidated gross assets at the end of the financial year of the entity and any entities it controls is $500 million or more;
- the consolidated revenue for the financial year of the entity and any entities it controls is $200 million or more.
AND
An entity which is required to report under Chapter 2M of the Corporations Act is a "controlling corporation" under the NGER Act and meet the NGER publication threshold.
FY 27-28 onwards
Group 3
An entity which is required to report under Chapter 2M of the Corporations Act and fulfills at least two of the following three thresholds:
- it has over 100 employees;
- the value of consolidated gross assets at the end of the financial year of the entity and any entities it controls is $25 million or more;
- the consolidated revenue for the financial year of the entity and any entities it controls is $50 million or more.
AND
An entity which is required to report under Chapter 2M of the Corporations Act is a "controlling corporation" under the NGER Act
What climate information must be reported?
The Australian Accounting Standards Board (AASB) will be responsible for developing Australian climate disclosure standards, which are envisaged to closely align to the requirements in IFRS S2 Climate-related Disclosures, the final form of which was released by the International Sustainability Standards Board on 26 June 2023.
The AASB is expected to conduct a public consultation process and to be in a position to release the Australian climate-related disclosure standards in Q2 2024, so that the disclosure regime would be in place for the start of FY24-25.
While, in recent years, many leading Australian companies have voluntarily adopted reporting in accordance with the voluntary framework published by the Taskforce for Climate-related Financial Disclosure (TCFD), the Government's proposal for mandatory reporting will require a step change even for a number of these companies.
For example, the disclosure regime will require reporting on the following additional information:
- the reporting entity's governance of climate-related risks and opportunities;
- additional, more granular information around how the reporting entity is directly responding to risks and opportunities, including changes to its business model;
- the reporting entity's emission reduction targets and use of carbon offsets;
- input parameters which the reporting entity uses to identify risks (for example, data sources, the scope of operations covered and the detail used in assumptions);
- the reporting entity's Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions; and
- how the climate-related targets which the reporting entity has set compare with those targets set in the latest international agreement on climate change and whether the targets have been validated by a third party.
This will require significant investment by companies to enable them to report climate information to a level of specificity and detail beyond anything that has been seen before in Australia. It also raises concerns about capacity for companies to obtain independent assurance of their disclosures (see below).
In recognition of the significance of the changes required, the consultation paper proposes a phased introduction of the enhanced disclosure requirements, as follows.
From commencement
Governance: information about the reporting entity's governance processes, controls and procedures used to monitor and manage climate-related financial risks and opportunities
From commencement, reporting entities would be required to use qualitative scenario analysis to inform their disclosures, moving to quantitative scenario analysis by FY 27-28.
From commencement, reporting entities would be required to disclose climate resilience assessments against at least two possible future states, one of which must be consistent with the global temperature goal set out in the Climate Change Act 2022 (Cth). Strategy for identifying and addressing climate-related risks and opportunities (including scenario analysis): including information about:
(a) the current and anticipated effects of risks and opportunities faced by the reporting entity (for the reporting period and over the short-, medium- and long-term); and
(b) climate resilience of its strategy and business model to both transition and physical risks.
Transition planning and climate-related targets: including transition plans with offsets, target setting and mitigation strategies and any climate-related targets (if the reporting entity has them) and progress towards these targets.
Risks and opportunities for the reporting entity, including information about material climate-related risks and opportunities for its business, as well as how the entity identifies, assesses and manages risk and opportunities.
From commencement, Scope 1 and 2 emissions would need to be disclosed for the reporting period.
Disclosure of material Scope 3 emissions would be required for all reporting entities from their second reporting year onwards. Scope 3 emissions disclosures could be in relation to any one-year period that ended up to 12 months prior to the current reporting period.
Greenhouse gas emissions: the reporting entity's gross Scope 1 and Scope 2 and emissions and material Scope 3 emissions.
By FY 27-28, it is expected that, where there are industry-based metrics available which are appropriate for Australian industry specific sectors, reporting entities in those sectors would disclose against these metrics.
Industry-based metrics: the reporting entity would be required to have regard to disclosing industry-based metrics, where there are well-established and understood metrics available for the reporting entity (eg., area of properties located in 100-year flood zones, by property subsector).
Where and how often climate disclosures will be made
Climate disclosures would be published in a reporting entity’s annual report, and Part 2M.3 of the Corporations Act would be modified to reflect this. The disclosures will be included as part of both the directors’ report and the financial report, with an index table indicating where the relevant climate disclosure requirements (ie., governance, strategy, risk management, metrics and targets) are located. Listed entities may report the proposed "metrics and targets" standards in a separate report that is referenced in the directors’ report.
The inclusion of the disclosure regime in Part 2M.3 of the Corporations Act means that it will be subject to the liability regime in that Part (see below).
Continuous disclosure and fundraising documents
The consultation paper notes that climate-related disclosure obligations would extend to continuous disclosure and fundraising document obligations under existing legal principles, and no modifications to or exclusions from those obligations are proposed. ASIC has previously noted that, depending on the circumstances, climate-related risk disclosure may already be required by law, for example within a prospectus or continuous disclosure announcement.
Level and nature of assurance
In recognition of the need to develop skills, capacity and processes to provide assurance, the proposed policy parameters for the level of assurance required for climate disclosures are:
- a requirement for "limited assurance", moving to "reasonable assurance" over time.
- reasonable assurance of Scope 3 emissions as a final step in scaling requirements.
- assurance to be provided against the Australian equivalent standards to the ISSB and Corporations Act and Regulations, in line with Auditing and Assurance Standards Board (AUASB) standards.
- assurance to be carried out by a qualified and experienced independent provider (conducted or led by the financial auditor).
Further consultation on areas that extend beyond climate disclosure assurance will be conducted by the AUASB, after the release of draft international sustainability assurance standards, the exposure draft for which is expected to be released this month.
Liability regime for climate-related financial disclosures
Many commentators have argued for significant modifications to the liability regime which currently applies to financial statements prepared by entities under Chapter 2M.3 of the Corporations Act and other financial forecasts, to recognise the unique characteristics of the climate-related financial disclosures required under the regime.
The consultation proposes only limited modifications.
Current law
Climate-related financial disclosures
Forward-looking statements
A representation about a future matter which is made without "reasonable grounds" is deemed to be misleading.
For the first 3 years of the regime, elements of mandatory disclosure, including Scope 3 emissions reporting, scenario analysis and transition planning, would be given protection from misleading or deceptive conduct, false or misleading representations, and similar claims by private litigants.
ASIC could still take action.
Continuous updating of material changes by ASX-listed entities
Listed entities must immediately tell the ASX any information "that a reasonable person would expect to have a material effect on the price or value of the entity’s securities".
This requires continuous updating of material changes to forward looking information published by ASX-listed entities.
No changes proposed, apart from the above.
Climate-related financial disclosures incorporated into the finance report regime (Part 2M.3 of the Corporations Act)
Personal liability for directors who fail to take all "reasonable steps" to comply with, or to secure compliance with, Part 2M.3.
Non-compliance with the Part 2M.3 regime could amount to false and misleading conduct.
The new climate reporting requirements would be drafted as civil penalty provisions, attracting the protection of sections 1317S and 1318 of the Corporations Act for entities and relevant officers respectively. These provisions only give the court discretion to relieve individuals from liability in civil proceedings where they have acted honestly and ought fairly to be excused for the breach.
A failure by relevant senior management or directors to take available steps to ensure compliance with the standard could result in personal liability for a breach of duty of care and diligence.
Same as for non-compliance with Part 2M.3.