Mandated climate reporting in Australia

On 27 March 2024, a Bill was passed in the Australian Government to mark a new era in mandated sustainability reporting for all Australian businesses. 

Schedule 4 to the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth) was introduced into the House of Representatives to establish an ISSB-aligned mandatory climate reporting regime.

The announcement of this Bill and the amendments are just about the last hurdle in climate reporting being accepted as 'here and now' for Australia. Previous announcements have left some room for 'waiting and seeing'.

• Following consultation, the Australian Government has introduced a Bill which (if enacted) would establish the framework for a new, internationally aligned, mandatory climate disclosure reporting regime for Aussie businesses
• The Bill differs from the consultation draft in several respects, particularly in that the proposed commencement date for larger Group 1 entities has been pushed back to 1 January 2025
• The specific content of the new disclosure requirements will be set out in new accounting standards, currently under development by Australian Accounting Standards Board (AASB)
• New assurance standards planned to be phased in from 1 January 2025, will be made and maintained by the Australian Auditing and Assurance Standards Board (AUASB)
• The Bill generally requires listed and unlisted companies, NGER reporters, and financial institutions, and registrable superannuation entities that lodge financial reports under Chapter 2M of the Corporations Act and meet certain minimum size thresholds, or have emissions reporting obligations under the NGER scheme, to make disclosures relating to climate in accordance with relevant sustainability standards made by the AASB
• It is not proposed that entities/officers would be shielded from criminal actions, or any changes would be made to existing continuous disclosure requirements
  
• We expect the new Australian requirements (once legislated) to be a floor, rather than a ceiling, when it comes to meeting market expectations in this space
• The new mandatory disclosure requirements are planned to be phased in from 1 January 2025 (not 1 July 2024 as originally proposed), starting with certain large entities (Group 1 entities)
  
• There are a number of steps all boards can take now to prepare for the introduction of new internationally aligned requirements, which are detailed below.

ESG and climate/​sustainability reporting has been on the horizon for some time. We have seen a sharp shift with the agreed standards and reporting dates now being agreed. The experience we face now is ​‘how do we manage it’, not ​‘when’ or ​‘if’ it will need to be managed. Climate and sustainability reporting takes some time to formalise, so our advice is always to try and get ahead of it, get education and processes in place, and make it a competitive advantage rather than a business risk. Jim Allenby, Managing Director, Parvate ESG

Generally speaking

The Bill generally requires entities that lodge financial reports under Chapter 2M of the Corporations Act and meet certain minimum size thresholds, or have emissions reporting obligations under the NGER scheme, to make disclosures relating to climate in accordance with relevant sustainability standards made by the AASB.

This includes listed and unlisted companies, NGER reporters and financial institutions as well as registrable superannuation entities and registered investment schemes.

Timing wise, the new mandatory disclosure requirements are planned to be phased in from 1 January 2025 (not 1 July 2024 as originally proposed), starting with certain large entities (Group 1 entities).

Group 1 (larger) companies

Larger companies (Group 1) would report from 2025/26 onwards. The thresholds for Group 1 entities are unchanged from the consultation draft. However, the timing has been pushed back. Group 1 entities will be required to report from the first financial year that commences after 1 January 2025.

In fact, all entities required to report under Chapter 2M of the Corporations Act 2001 (Cth) (Corporations Act) that meet two of the three thresholds below, would be required to report against the new climate-disclosure requirements (the specifics of which will be set out in Australian Sustainability Reporting Standards (ASRS)):

• 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
• the entity (and the entities it controls) have at the end of the financial year, 500 or more employees' (including part time employees).
  

It is also proposed that all entities required to report under Chapter 2M of the Corporations Act that are registered corporations under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) and that meet the NGER publication threshold, would also need to report against the new requirements.

The Explanatory Memorandum clarifies that 'even if it meets the criteria, an entity which is a registered scheme, registrable superannuation entity, or retail CCIV is not a Group 1 entity'.

Group 2 companies

From 1 July 2026 (assuming a 1 January 2025 start date for the new rules), it is proposed that the requirements would extend to entities required to report under Chapter 2M of the Corporations Act that fulfill two of the three thresholds below:

• 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' (including part time employees).

In addition, the requirements would apply to NGER reporters not captured in Group 1 and to asset owners (registered scheme, registrable superannuation entity, or retail CCIV) where the value of assets at the end of the financial year (including the entities it controls) is equal to $5 billion or more.

Group 3 (all other in scope) entities

From 1 July 2027 (assuming a 1 January 2025 start date for the new rules), the requirements would extend to all other in-scope entities. That is, to entities that are required to report under Chapter 2M of the Corporations Act that fulfill two of the three thresholds below:

• the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $50 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 $25 million
• the entity (and the entities it controls) have at the end of the financial year, 100 or more employees' (including part time employees).

Notably, entities in this third group, that assess (in line with the revised AASB sustainability standards) that their business is not exposed to 'material' climate-related risks/opportunities during the financial reporting period, would only be required to disclose a statement to this effect (as opposed to having to disclose a full annual sustainability report). 

Smaller entities and charities

These new reporting requirements are not relevant to ACNC registered charities and (most) SMEs, which are excluded from the new rules. 

The Explanatory Memorandum states that where an entity is not covered by the above criteria (ie not generally required to report under Chapter 2M of the Corporations Act 2001 (Cth), or does not meet the above tests), they are not required to prepare a sustainability report for a financial year.

Nonetheless, the Australian Securities and Investments Commission (ASIC) has cautioned that even if entities are not directly in scope of the new requirements, they may still be impacted indirectly. 

ASIC states: 'This means that those [out of scope] businesses are not expected to have any direct reporting requirements in the immediate future. However, many small businesses form part of the supply chain of larger businesses, which means they may need to engage with climate reporting considerations over time, even if they do not have any direct climate reporting obligations. This is because the 'scope 3' emissions of a large business with reporting obligations may include the emissions of its small business suppliers. Scope 3 emissions are those emissions that occur up or down a company's supply chain.'

ASIC has flagged that once the new requirements are in effect, it expects to 'work with small business representatives to develop practical guidance for small businesses in relation to the requirements of the new laws and how the new laws may impact them.'

The new requirements are intended to closely align with the requirements in IFRS S2 and are proposed to form a new part of existing annual financial reporting obligations and be contained in an entity's annual report.

Upon enactment of the Bill, it is proposed that entities would need to disclose an annual sustainability report for the financial year consisting of:

• a climate statement to be prepared in accordance with the relevant (and not-yet-finalised) AASB standard. This is expected to include (among other things) 'material' climate-related financial risks/opportunities facing the entity, any metrics/targets including Scope 1 and 2 greenhouse gas (GHG) emissions targets, and details of any governance/risk management processes, controls and procedures related to these matters. Disclosure of Scope 3 emissions (ie value chain emissions, including financed emissions) is not expected to be required for the first year an entity is required to prepare a climate statement 

• a directors’ declaration about the statements and notes. This would be 'a declaration by the directors as to whether, in the directors’ opinion, the substantive provisions of the sustainability report are in accordance with this Act, including section 296C (compliance with sustainability standards etc.) and section 296D (climate statement disclosures)'. The declarations would need to be made with a resolution of the directors, dated, and signed. For first three years of the new rules, directors will only need to give an opinion on whether in the 'entity had taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Act'.

It is proposed that climate disclosures would be subject to similar assurance requirements to those that apply to financial reports. It is envisioned that assurance requirements would be phased in over time commencing with the largest (Group 1) entities.

The Explanatory Memorandum clearly states, the 'extent and level of assurance required will be set out in Australian auditing standards for sustainability reports, developed by the Auditing and Assurance Standards Board (AUASB)'.

The AUASB has yet not finalised its proposal around its approach to phasing in assurance requirements. The AUASB has called for feedback on a potential model that would see only 'limited assurance' Scope 1 and 2 emissions required for sustainability reports prepared for the first year.

In order to alleviate concerns 'in relation to the most uncertain parts of a climate statement', an interim 'modified liability' framework is proposed to apply.

Only ASIC would be able to take action for misleading and deceptive conduct in relation to 'protected statements' included in sustainability reports issued during the first three years of the regime (or in auditor's reports).

The Bill defines 'protected statements' to include statements about Scope 3 emissions (ie value chain emissions, including financed emissions), scenario analysis, and transition plans included in sustainability reports). 

In a departure from the draft Bill, 'modified liability would extend to cover all forward-looking statements related to climate and made for the purpose of complying with sustainability standards, if they are made in sustainability reports for financial years commencing within the first 12 months starting on the start date'.

This would also apply to forward looking disclosures of this kind included in auditor's reports.

The effect of this is that companies and officers would be temporarily shielded from civil actions (eg misleading or deceptive conduct claims) brought by private litigants.

After the first year, only 'protected statements' as defined in the Bill would be covered, and then only for a further two years – after this period existing liability arrangements would apply.

To be clear, it is not proposed that entities/officers would be shielded from criminal actions, or any changes would be made to existing continuous disclosure requirements.

The explanatory memorandum states that the policy intent is to 'ensure that during the transitional period ASIC can undertake a role that promotes education about compliance with the new reporting regime and deter poor behaviours and reporting practices that are contrary to the objectives of the new reporting regime'.

It is proposed that a Statutory Review of the operation of the reforms would be conducted 'as soon as practicable after 1 July 2028' with a copy of the Review's report to be tabled in each House (within 15 sitting days after the report is delivered to the Minister).

Even without the introduction of legislated (mandatory) requirements, companies are already under considerable pressure to manage and disclose how they are managing their climate-related financial risk and increasingly their broader sustainability-related risks. The release of the ISSB's initial sustainability standards (the first of what is expected to be a suite of standards) will reinforce, detail and extend the existing requirements.

We expect the new Australian requirements (once legislated) to be a floor, rather than a ceiling, when it comes to meeting market expectations in this space.

There are a number of steps all boards can take now to prepare for the introduction of new ISSB-aligned requirements. These include:

• understanding when the new reporting/assurance rules are proposed to apply to your organisation
• understanding what information your organisation is likely to be required to disclose
• reviewing existing governance structures to identify responsibility and accountability
• reviewing existing strategy, transition plans, and sustainability disclosures to identify gaps in alignment with the proposed new requirements
• understanding from management what the gaps are between current and future resourcing, data and disclosure needs
• formulating a time-bound plan to address these gaps (which includes assigning responsibility for delivery/oversight).

The time really has come now for all businesses to plan, prepare and self-assess where they are ahead of this transition. If you don’t know where to begin, time to call us now. Ken Weldin, Partner, PKF

With any questions or assistance, contact your local PKF Audit and Assurance team member.