No green screen – mandatory climate disclosure is coming

The Federal Government’s Treasury Laws: Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Bill) will introduce a new mandatory climate-related reporting regime in Australia. Although the regime is expected to commence in January 2025, ASIC’s early guidance is to start preparing for these obligations now.

Here’s a snapshot of what’s being proposed by the Bill.

Mandatory climate-related reporting – what to expect?

Who must disclose?

According to ASIC, more than 6,000 entities will be required to comply with the new climate-related reporting obligations.²

The regime will be rolled out in a phased approach over the course of three years, initially applying to the following entities:

• very large entities which meet two of the following criteria:
  
  • the consolidated revenue of the entity and the entities it controls (if any) is $500 million or more per annum;
  • the value of the consolidated gross assets of the entity and the entities it controls (if any) is $1 billion or more; or
  • the entity and the entities it controls (if any) have 500 employees or more; and
• prescribed entities which are required to report under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) and meet the NGER Act publication threshold for that financial year.

Once the regime is fully implemented from around FY28, the following entities will have mandatory climate-related reporting obligations:

• entities which are required to report under Chapter 2M of the Corporations Act 2001 (Cth) (Corporations Act) and meet two or more of the following criteria:
  
  • the consolidated revenue of the entity and the entities it controls (if any) is $50 million or more per annum;
  • the value of the consolidated gross assets of the entity and the entities it controls (if any) is $25 million or more; and
  • the entity and the entities it controls (if any) have 100 employees or more;
• registered schemes, registrable superannuation entities or retail CCIVs where the value of its assets and the assets of the entities it controls (if any) is $5 billion or more; or
• prescribed entities which are required to report under the National Greenhouse and Energy Reporting Act.

What must be disclosed?

The new mandatory climate-related reporting regime will broadly require reporting entities to make disclosures regarding their scope 1, 2 and 3 greenhouse gas emissions during a financial year. According to the draft Australian Sustainability Reporting Standards currently being developed by the Australian Accounting Standards Board (AASB):³

• scope 1 emissions include the direct greenhouse gas emissions that occur from sources that are owned or controlled by an entity;
• scope 2 emissions include the indirect greenhouse gas emissions from the generation of purchased or acquired electricity, steam, heating or cooling consumed by an entity; and
• scope 3 emissions include the indirect greenhouse gas emissions (other than scope 2 emissions) that occur in the value chain of an entity, including both upstream and downstream emissions.

This means that, while most small businesses will not directly be captured by the new mandatory climate-related reporting laws because they don’t meet the size thresholds outlined above, they may still be affected as reporting entities look up and down their supply chains in making the required disclosures on their scope 3 emissions. In short, small businesses that supply reporting entities are likely to need to disclose information to those reporting entities to meet the reporting entities’ scope 3 emissions reporting obligations.

Sustainability reports

One of the biggest features of the new regime is the introduction of the obligation on reporting entities to prepare and lodge annual ‘sustainability reports’. This means that the annual reporting package of reporting entities will comprise of a financial report, directors’ report, auditor’s report and now a sustainability report.

An entity’s sustainability reports will comprise:

• a ‘climate statement’ (and notes on the climate statement), which contains the entity’s disclosures for that financial year on:
  
  • the material climate-related financial risks and opportunities the entity faces;
  • any metrics and targets of the entity related to climate, including in respect of scope 1, 2 and 3 emissions (except that disclosures in respect of scope 3 emissions will only be required from an entity’s second reporting year onwards); and
  • any governance or risk management processes, controls and procedures of the entity in relation to the above;
• statements on any matters which may be prescribed by the Minister from time to time (and notes on those statements); and
• a director’s declaration in relation to the compliance of such statements with the Australian Sustainability Reporting Standards currently being developed by the AASB.

As with financial reports, sustainability reporting will be subject to similar requirements in respect of audit and assurance and record-keeping.

Limited liability period

To assist with the introduction of the mandatory climate-related reporting regime, the Bill is proposing a 3-year transitional period during which no legal action (other than actions by ASIC) may be taken against a reporting entity in respect of the statements contained in their sustainability reports or audit reports (‘protected statements’). The only action which will be available in respect of protected statements will be actions taken by ASIC for misleading and deceptive conduct.

At the end of the transitional period, sustainability reporting will be subject to the full force of the existing liability regime under the Corporations Act and the Australian Securities and Investments Commission Act 2001.

Conclusion

While the mandatory climate-related reporting regime is not set to commence until January 2025, ASIC has suggested that companies start preparing for their obligations now by considering the systems and practices which will need to be place in order to comply with the new climate-related reporting obligations.

With ASIC also recently succeeding in its first ever civil penalty action in relation to greenwashing conduct,⁴ companies should also continue to carefully review all environmental and sustainability-related statements in relation to their products and services.

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