Mandatory climate-related financial disclosure in Australia

Climate-related financial disclosure consultation paper released 

On 27 June 2023, the Federal Government released a second consultation paper Climate-related financial disclosure consultation paper seeking views on the structure and implementation of standardised, internationally-aligned requirements for disclosing climate-related financial risks and opportunities in Australia.  Views are being sought on the workability of the Government's proposed positions in the consultation paper relating to coverage, content, framework and enforcement of the proposed new requirements.

The consultation paper proposes: 

• mandatory reporting requirements to commence from 1 July 2024 for Australia's largest listed and unlisted companies and financial institutions, with other businesses subject to the requirements over time. 
• reporting subject to a three-year transitional period, with regulator only action against directors and reporting entities in relation to forward-looking statements and scope 3 emissions possible during this time. 

Entities should identify now whether they will be subject to the mandatory reporting and disclosure requirements and how the new requirements will impact their business.

If you wish to make submissions on the consultation paper, ensure your submissions are made before 21 July 2023. 

First and second consultation papers

In December 2022, the Australian Government issued its first consultation paper seeking comment and feedback on key considerations for the design and implementation of standardised, internationally-aligned requirements for disclosure of climate-related financial risks and opportunities in Australia.  Specific considerations included the alignment of disclosures with international standards, entities subject to disclosure, the scope and timing of reporting, and interaction with other reporting obligations.  

Almost 200 written submissions were received during consultation between December 2022 and February 2023.

A second consultation paper Climate-related financial disclosure was issued on 27 June 2023 seeking feedback on the positions proposed by the Government in the consultation paper. 

Submissions on the consultation paper are due by 21 July 2023.

Coverage - which entities will be subject to mandatory climate-related disclosures? 

Only some entities will be required to make climate-related financial disclosures. 

These are entities which are required to lodge financial reports under Chapter 2M of the Corporations Act 2001 (Cth) and that meet prescribed size thresholds.  

Entities lodging financial reports under Chapter 2M that meet at least two of the following three thresholds will be required to make climate-related disclosures: 

• a consolidated revenue of $50 million or more for the financial year; 
• a value of $25 million or more of consolidated gross assets at the end of the financial year; or 
• an employee count of 100 or more at the end of the financial year. 

Entities that are required to lodge financial reports under Chapter 2M and that are registered as a 'Controlling Corporation' under the National Greenhouse and Energy Reporting Act 2007 (Cth) would also be required to make climate-related financial disclosures even if they do not meet the above thresholds. 

Timing – when are the climate-related disclosure obligations proposed to commence?

The mandatory climate-related disclosure requirements are set to be implemented via a three phased approach based on the size of the entity. 

Group 1 - 2024-2025 onwards - entities that are required to report under Chapter 2M of the Corporations Act and meet 2 of the following 3 thresholds:

• has over 500 employees;
• the value of consolidated gross assets of company and controlled entities is $1 billion or more;
• the consolidated revenue for the financial year of the company and controlled entities is $500 million or more.

Group 1 also includes entities required to report under Chapter 2M and that are a "controlling corporation" under the NGER Act and meet the NGERs publication threshold.

Group 2 - 2026-2027 onwards - entities that are required to report under Chapter 2M of the Corporations Act and meet 2 of the following 3 thresholds:

• has over 250 employees;
• the value of consolidated gross assets of company and controlled entities is $500 million or more;
• the consolidated revenue for the financial year of the company and controlled entities is $200 million or more.

Group 2 also includes entities required to report under Chapter 2M and that are a "controlling corporation" under the NGER Act and meet the NGER publication threshold.

Group 3 - 2027-2028 onwards - entities that are required to report under Chapter 2M of the Corporations Act and meet 2 of the following 3 thresholds:

• has over 100 employees;
• the value of consolidated gross assets of company and controlled entities is $25 million or more;
• the consolidated revenue for the financial year of the company and controlled entities is $50 million or more.

Group 3 also includes entities required to report under Chapter 2M and that are a "controlling corporation" under the NGER Act whether or not they meet the publication threshold.

Content - what are the proposed reporting requirements?

The ISSB released its sustainability and climate-related financial disclosure reporting standards on 26 June 2023, IFRS S1 and IFRS S2. IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1.  Both fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Financial materiality 

In alignment with international climate disclosure standards, principles of financial materiality would apply to climate-related financial information.  It is proposed that information would be material if "omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial reports (existing and potential investors, lenders and other creditors) make on the basis of the reports".

Governance

Reporting entities will be required to disclose information about governance processes, controls and procedures used to monitor and manage climate-related financial risks and opportunities.  The governance requirements would apply from commencement.

Strategy, risks and opportunities  

Reporting entities' strategies for identifying and addressing climate change risks and opportunities will form a key disclosure requirement.  This would include information about:

• current and anticipated effects of risks and opportunities faced by the reporting entity on the entity's business model and value chain, business strategy and decision making and financial position, financial performance and cash flows; and
• climate resilience of its strategy and business model to both transition and physical risks.

The consultation paper proposes that reporting entities disclose the following: 

• Methodology for identifying climate risks and opportunities by reference to a quantitative scenario analysis but with scope to only undertake qualitative scenario analysis during the transition period.
• Climate resilience assessments against at least two possible future states including the global temperature goal set out in the Climate Change Act 2022. 
• Transition plans including information about offsets, target setting and mitigation strategies.
• Any climate-related targets the entity may have and the entities' progress towards these targets.

Reporting entities will also be required to disclose any of the identified risks and opportunities and how they will be managed. 

Greenhouse Gas Emissions 

Reporting entities will need to disclose their greenhouse gas emissions data. The consultation paper acknowledges existing data limitations on the reporting of emissions and provides for the following:

• Initially, only scope 1 and 2 emissions will be required to be disclosed;
• Disclosure of material scope 3 emissions would be required for all reporting entities from their second reporting year onwards.  Scope 3 emissions disclosures do not need to be contained to the financial year but may be made in relation to any one-year period that ended up to 12 months prior to the current reporting period.  The scope 3 emissions would need to incorporate material emissions both upstream and downstream from the reporting entity in line with a recognised emissions accounting framework (eg GHG Protocol) drawing on Australia-specific emissions factors where relevant;
• After end of the transition phase, reporting entities would be required to have regard to disclosing industry-based metrics, where there are well-established and understood metrics available for the reporting entity. 

The phased approach to the implementation of mandatory reporting for scope 3 emissions is designed to allow for entities to build the capability to report scope 3 emissions.  

In the meantime, the consultation paper has affirmed the Australian Government's commitment to addressing these key data challenges and providing relevant guidance to reporting entities.  

Reporting framework 

Climate-related financial disclosures would be required to be published in an entity's annual report, consistent with rules relating to the lodgement of annual reports in Part 2M.3 of the Corporations Act.  

Climate-related disclosure obligations would also extend to continuous disclosure and fundraising document obligations.  For listed entities, climate disclosures would be required in the operating and financial review within the director's report.  

Where climate-related risks and opportunities have a material impact on the financial position of an entity, this would be included in the financial report or the operating and financial review.

Existing annual report requirements are proposed to be adapted for assurance requirements and to:

• require entities to Include an index table within their annual report that displays climate disclosure requirements (governance, strategy, risk management, metrics and targets) and the correlating disclosure section and page number); and
• allow listed entities to report the proposed "metrics and targets" standards in a separate report provided that it is referenced in the director's report (eg a sustainability report).

The climate disclosures in the annual reports will be required to be made available to the public.

Assurance

The Australian Government proposes to take a phased approach to assurance requirements which is set out in a "road map" in the consultation paper (at page 26).  

From 1 July 2024, it is proposed that there be limited assurance of scope 1 and scope 2 emissions and reasonable assurance of government disclosures.  The proposed assurance roadmap provides for reasonable assurance on all climate disclosures by the 2030-31 financial year. 

Stakeholders during the earlier consultation phase expressed strong concerns regarding the feasibility of assuring scope 3 emissions disclosures.  This is because of the complexity of calculation emissions across an entity's value chain, which also varies between industries and the need for adequately auditable data. It is proposed that as an interim step, scope 3 calculations would be assured as a minimum  

The IAASB is currently developing an overarching standard for assurance on sustainability reporting which would address limited and reasonable assurance.  It is expected that the IAASB will release an exposure draft of the standard in July or August 2023.

Liability and enforcement

Climate-related financial disclosure requirements are proposed to be drafted as civil penalty provisions in the Corporations Act and would be subject to the defence in sections 131ZS and 1318 of the Corporations Act.

The application of misleading and deceptive conduct and false or misleading representation provisions to scope 3 emissions and forward-looking statements would be limited to regulator-only actions during the transitional period. 

Next steps 

Entities should identify now whether they will be subject to the mandatory reporting and disclosure requirements and how the new requirements will impact their business.

If you wish to make submissions on the consultation paper, ensure your submissions are made before 21 July 2023.

Authors: Tony Hill, Partner; and Eric Zykov, Lawyer.