It's here in Australia: Climate-related financial disclosure 

What you need know

Treasury has released an exposure draft bill of the long awaited proposed changes to the Corporations Act 2001 (Cth) regarding the obligations of certain Australian entities in relation to climate-related financial disclosure.

The Bill requires entities that:

• lodge financial reports under Chapter 2M of the Corporations Act;
• meet certain minimum size thresholds; and/or
• have emissions reporting obligations under the National Greenhouse and Energy Reporting (NGER) scheme,

to make disclosures relating to climate in accordance with sustainability standards published by the Australian Accounting Standards Board (AASB).

The Bill phases in the new obligations over a period of four years depending on the size of the relevant entity.

Climate disclosures will be subject to similar assurance requirements to those currently required by the Corporations Act for financial reports and will require entities to obtain an assurance report from their financial auditor. The extent and level of assurance required will be set out in Australian assurance standards for climate disclosures, to be developed by the Auditing and Assurance Standards Board (AUASB).

Consultation in relation to the Bill is open until 9 February 2024.

Who has to comply?

The size thresholds that determine the year in which entities are required to commence climate reporting are based on existing concepts in the Corporations Act and Regulations. That is, consolidated gross assets, consolidated revenue and employee thresholds which apply to the company or entity and any entities it controls at the end of the financial year.

In addition, NGER entities are required to make climate-related financial disclosures based on the publication threshold which determines whether the Clean Energy Regulator publishes emissions data about reporters.

Small and medium entities, below the relevant size thresholds (unless they are NGER controlling corporations) are not required to make climate related financial disclosures. Neither are entities that are exempt from lodging financial reports under Chapter 2M.

When do I have to comply?

The Bill proposes a phased in approach, starting with a relatively limited group of very large entities that expands to apply to progressively smaller large entities.
Under the transitional rules, entities required to prepare sustainability reports are separated into three groups and their obligations are generally phased-in across a number of financial years, generally dependent on size:

• Entities that are in Group 1 must prepare an annual sustainability report for the financial year that commences between 1 July 2024 and 30 June 2025; and between 1 July 2025 and 30 June 2026 ;
• Entities that are in Group 2 must prepare annual sustainability reports for the financial year that commences between 1 July 2026 and 30 June 2027;
• All entities to which the new requirements apply must prepare an annual sustainability report for each financial year that commences on or after 1 July 2027.

How do I know what group I am in?

A Group 1 entity is any of the following:

• an entity that meets at least two of the following three criteria:

the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $500 million;

the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $1 billion; and/or

the entity (and the entities it controls) have at the end of the financial year, 500 or more employees; or

• an entity that is a registered corporation under the NGER Act or required to make an application to be registered under the NGER Act and that meets a publication threshold in the NGER Act.

A Group 2 entity is any of the following:

• an entity that meets at least two of the following three criteria:

the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $200 million;

the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $500 million; and/or

the entity (and the entities it controls) have at the end of the financial year, 250 or more employees; or

• an entity that is a registered corporation under the NGER Act or required to make an application to be registered under the NGER Act; or
• an entity that is an asset owner where the value of assets at the end of the financial year (including the entities it controls) is equal to or greater than $5 billion.

If the entity is required to prepare financial statements on a consolidated basis, it may choose to prepare a sustainability report on a consolidated basis (as the group head). Where this occurs, each individual entity that is otherwise required to prepare a sustainability report would not need to do so, if the group head’s sustainability report covers those individual entities in the consolidated sustainability report.

What do I have to do to comply with these new requirements?

The Bill requires that certain entities prepare a ‘sustainability report’ each financial year in addition to financial statements, notes to financial statements and a director declaration which will form part of the annual financial report.

The sustainability report for a financial year will consist of:

• the climate statement for the year;
• notes to the climate statement;
• any statements prescribed by the regulations for the year; and
• the directors’ declaration about the compliance of the statements with the relevant sustainability standards.

The climate statements must be prepared in line with the relevant sustainability standards issued by the AASB.

The Bill includes a requirement that the sustainability reports be laid before the annual general meeting of the entity in the same way as financial statements.

Climate statements

The climate statement must be prepared in a manner consistent with the relevant sustainability standards and must include the following disclosures for a financial year:

• material climate-related financial risks and opportunities the entity faces;
• any metrics and targets of the entity related to climate, including scope 1, 2 and 3 emissions of greenhouse gas; and
• any governance or risk management processes, controls and procedures of the entity related to these matters.

Disclosure of the quantity of scope 3 emissions do not apply to the first year an entity is required to prepare climate statements.

The notes to a climate statement must include:

• any disclosures required by a legislative instrument of the Minister regarding the preparation of, and contents of the climate statement, and other matters concerning environmental sustainability;
• any notes required by the sustainability standards in relation to the preparation of, and contents of the climate statement, and other matters concerning environmental sustainability; and
• any notes containing other information necessary to ensure that the statement and notes together meet the requirements of the Bill.

It is intended that extensive climate statements would not be required for smaller entities who do not have material risks or opportunities for the financial year. If an entity required to prepare a climate statement does not have material climate risks or opportunities for the financial year, the entity’s climate statement will only include a statement to that effect, made in accordance with the sustainability standards that relate to climate. This rule applies only if the following do not apply to the entity:

• where the entity meets at least two of the following three criteria:

the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $200 million;

the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $500 million;

the entity (and the entities it controls) have at the end of the financial year, 250 or more employees; or

• if the entity is a registered corporation under the NGER Act or required to make an application to be registered under subsection 12(1) of the NGER Act; or
• if the entity is an asset owner where the value of assets at the end of the financial year (including the entities it controls) is equal to or greater than $5 billion.

Directors' Declaration

The directors will be required to make a declaration of their opinion on whether the climate statements are made in accordance with the Corporations Act, including in compliance with the relevant sustainability standards. These declarations must be made by a resolution of the directors, dated, and signed.

What if I don't comply?

A modified liability approach will apply for a transitional period to ensure that reporting entities are allowed time to develop experience. After this period, the existing liability arrangements will apply.

Liability for misleading and deceptive and other conduct is suspended where the statement relates to scope 3 greenhouse gas emissions and scenario analysis. This limited immunity applies to statements in sustainability reports prepared for financial years commencing between 1 July 2024 and 30 June 2027. During this time, only ASIC will be able to take action for misleading and deceptive conduct in relation to these types of disclosures.

No action, suit or proceeding (collectively ‘legal action’) is able to be brought against a person or entity in relation to statements about scope 3 emissions or scenario analysis made in those sustainability reports. However, this does not prevent criminal proceedings.

The most common legal actions likely to be affected are proceedings for misleading or deceptive conduct. Alleged breaches of directors’ duties are also protected (for example, actions under section 344).

The protection applies generally and extends to other forms of alleged misconduct in making climate-related disclosures related to scenario analysis or scope 3 emissions including actions such as negligent misstatement, breach of statutory duty and breach of fiduciary duties.

This protection does not apply to legal actions that are civil actions brought by ASIC relating to contraventions of provisions with a fault element and/or where the remedy sought by ASIC is an injunction or declaration.

Accordingly, ASIC may still pursue actions under various sections, including section 1041E (false or misleading statements which include a fault element), but during the transitional period, the remedies available to ASIC are limited to declarations and injunctions.

What are the auditing and assurance requirements?

Climate disclosures will be subject to similar assurance requirements to those currently in the Corporations Act, which require entities to undertake mandatory audit and assurance of financial reports.

The sustainability disclosure report would be audited by the auditor of the financial report supported by technical climate and sustainability experts where appropriate.

AUASB will develop assurance standards in line with the IAASB final standard. The AUASB will also set out a pathway for phasing in requirements over time, which would commence with assurance of Scope 1 and 2 emissions disclosures from 1 July 2024 onwards and end with assurance of all climate disclosures made from 1 July 2030 onwards.

Under the Bill, an entity required to prepare a sustainability disclosure report for a financial year must have the sustainability disclosure report audited and obtain an auditor’s report.

The Bill provides for a transitional period where only limited assurance of sustainability reports is required for reports prepared between 1 July 2024 and 30 June 2030. The auditor’s review is limited to the climate statements relating to scope 1 or 2 emissions of greenhouse gases.

Interaction between the draft AASB sustainability standards and the Bill

The International Sustainability Standards Board (ISSB) has developed a global baseline for sustainability and climate-related financial disclosure reporting standards, which aims to improve consistency and comparability across entities reporting.

The proposed AASB sustainability standards are intended to align with the ISSB standards. There are two primary proposed Australian Sustainability Reporting Standards (ASRS Standards) that include modifications to IFRS Sustainability Reporting Standards:

• ASRS 1 General Requirements for Disclosure of Climate-related Financial Information -based on IFRS S1 but limited to climate-related financial disclosure; and
• ASRS 2 Climate-related Financial Disclosures-based on IFRS S2 with Australian specific requirements.

ASRS 1:

• sets out general requirements for the presentation of climate-related financial disclosures, guidelines for their structure and minimum requirements for their content;
• is limited to climate-related financial information and requires entities to disclose material information about climate-related risks and opportunities. The materiality concept is aligned with the AASB standards;
• requires that if there are no material climate-related risks and opportunities, that fact is disclosed and explain how the entity came to conclusion;
• does not require industry-based disclosures;
• requires that if an entity elects to disclose against industry-based disclosures it must use well-established and understood metrics associated with particular business models, activities or other common features that characterise participation in the same industry as classified in Australian and New Zealand Standard Industrial Classification; and
• does not include a reference to the Sustainability Accounting Standards Board (SASB) Standards.

ASRS 2:

• sets out disclosure requirements about 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;
• requires disclosure regarding:

how climate-related targets will be resourced and achieved;

climate-related transition plans, including key assumptions and dependencies

planned adoption of new technologies

adaptation and mitigation efforts, including use of offsets

use of climate-related scenarios – at least two possible scenarios are required one consistent with the most ambitious global temperature goal in the Climate Change Act 2022 (1.5°C above pre-industrial levels);

key inputs, uncertainties and assumptions in scenarios.

• requires disclosure regarding:

Greenhouse gas emissions – Scope 1, 2 and 3 with conversion and measurement based on the NGER legislation and Scope 2 emissions to be location-based & market-based(when applicable) and Scope 3 emissions not being required to be disclosed until the second period of reporting. If an entity is disclosing market-based Scope 2 GHG emissions, this is not required to be disclosed for first three reporting periods;

Transition risks;

Physical risks;

Climate-related opportunities;

Capital deployment

Internal carbon price, where used

Remuneration

Author: Miriam Kleiner, Partner.