ASIC’s sustainability reporting guide finalised

ASIC has finalised Regulatory Guide 280 – Sustainability reporting (RG 280) after a consultation period that garnered 60 submissions, including a joint submission from KWM and Owl Advisory by KWM (read about our submission here). RG 280 is designed to assist reporting entities with complying with the sustainability reporting regime by providing additional information on the sustainability reporting requirements and ASIC's administration of those requirements, including its review of sustainability reports and exercise of relief powers.

This article summarises the key issues raised in the submissions and how the finalised guidance has been updated in response. For further details on the submissions and ASIC’s responses, see ASIC’s Report 809: Response to submissions on CP 380 Sustainability Reporting (Report 809).

This will support entities with reducing corporate risks that may arise from reporting, including litigation risk, risk of non-compliance and reputational risk (see Owl Advisory by KWM’s previous article on reputation risk). The regime more broadly will assist entities with managing climate-related risks & opportunities including physical risks arising from changes in the climate due to global warming and transition risks from the transition to a low-carbon economy. Whether corporate or climate risk, clear governance structures will assist all entities with reporting and managing these risks.

Concerns raised in submissions

Feedback on the draft regulatory guide highlighted four main issues:

Entities face practical difficulties in preparing sustainability reports, such as applying proportionality mechanisms and reporting on scope 3 greenhouse gas (GHG) emissions.
More detailed examples and guidance to help entities comply with the sustainability reporting requirements would be helpful, including guidance on the reporting thresholds and application of AASB S2 Climate-related disclosures (AASB S2).
The applicability of consolidated sustainability reporting for Australian subsidiaries of foreign parent entities was unclear, and guidance on ASIC’s approach to relief applications in these and other circumstances would be helpful.
Further clarification was needed on what ASIC would expect an entity to do to satisfy itself that it had reasonable grounds for forward-looking climate-related disclosures, practical guidance for directors on how to discharge their duties in relation to sustainability reporting, the scope of the modified liability provisions and ASIC's proposed labelling guidance.

Key updates in the finalised guidance ASIC’s approach to enforcement: Additional guidance has been included to explain ASIC’s approach to supervision and enforcement during the early years of sustainability reporting. ASIC says they will engage directly with reporting entities to understand the basis for disclosures they identify as incorrect, incomplete or misleading. If concerns remain, ASIC says they may provide entities with the opportunity to make changes or otherwise direct changes to be made utilising ASIC’s directions power. Additionally, the guide now states that an enforcement investigation is more likely where ASIC sees misconduct of a ‘serious or reckless nature’, or where a reporting entity fails to prepare a sustainability report for the financial year.

ASIC’s powers to grant relief: The updated guidance has not provided further details on specific scenarios, criteria or timeframes for relief applications. However, the guide includes as an example a foreign parent entity, and says such an entity would not have the option of preparing a consolidated sustainability report under section 292A(2) on behalf of the consolidated entity for a financial year because the foreign parent is not required to prepare an annual financial report under section 292 of the Corporations Act. This makes clear ASIC’s view is relief would be required for an entity that is not required to prepare an annual financial report under section 292 to prepare a consolidated sustainability report. ASIC also notes in Report 809 that it intends to publish information about its decisions on significant or novel relief applications in due course and will assess whether further guidance is appropriate on specific matters as it receives and considers relief applications, and as new precedents develop.

Climate scenario analysis: ASIC has added a section in the guidance relating to climate scenario analysis which clarifies that reporting entities must use climate-related scenario analysis to assess their climate resilience and defines climate resilience as the ‘capacity of an entity to adjust to climate-related changes, developments and uncertainties’ (consistent with the definition in AASB S2). The guidance also reaffirms the objective of the scenario analysis is to give information about the entity’s resilience using scenarios that contemplate rapid global decarbonisation in the near term (i.e., a ‘lower warming’ scenario of 1.5⁰C) and more pronounced climate impacts over the medium to long term (i.e., a ‘higher warming’ scenario of well exceeding 2⁰C). The Climate Projections Roadmap for Australia shows that current initiatives underway to update Australian climate projections are using the Intergovernmental Panel on Climate Change (IPCC) scenario which corresponds to warming of between 2.8⁰C and 4.6⁰C by the end of the century as the ‘high warming scenario’.

Scope 3 GHG emissions: An additional section on scope 3 GHG emissions has been included in the guidance, following concerns raised by submitters about the methods available for measuring these emissions still being in development. The added paragraphs state that a reporting entity is permitted to use estimation in measuring its scope 3 GHG emissions and can use primary and secondary data, or a combination of both, as set out in the AASB standards.

There are different types of calculation approaches to measuring scope 3 GHG emissions, for example some methods rely on secondary data such as industry averages, and others on estimating emissions based on spend or mass. The guidance from ASIC confirms that these approaches to measuring Scope 3 emissions are permitted. ASIC has noted that the accuracy of estimation techniques may improve over time as the quality and availability of data for reporting scope 3 GHG emissions improves, and the extent of a reporting entity’s reliance on secondary data may decrease as the availability and quality of data improves.

Forward-looking statements: Additional information has been included regarding the making of forward-looking statements as part of sustainability reporting. This includes examples of forward-looking statements such as climate-related risks and opportunities, their anticipated effects, climate scenario analysis, and planned usage of carbon credits to achieve net GHG emissions targets. ASIC acknowledges that the quality and availability of data to support forward-looking climate information are expected to evolve over time.

In Report 809, ASIC notes that some respondents are referring to RG 170 for guidance; however, this guidance was not informed by, and does not specifically contemplate, the climate-related financial information required to be disclosed in a sustainability report. Therefore, ASIC says, some parts of RG 170 may not be usefully applied to these disclosures. A note has been added to the guidance discussing the applicability of RG 170 for the disclosure of financial information in contexts such as Product Disclosure Statements (PDSs) and prospectuses only.

Directors’ duties and declarations: ASIC has revised the section on directors’ duties in response to requests for further guidance on ASIC’s expectations of directors and concerns that the draft guidance could be interpreted as imposing obligations beyond existing directors' duties. The updated guidance provides that directors of reporting entities should, among other things:

understand the entity's sustainability reporting obligations and the climate-related risks or opportunities that could reasonably be expected to affect the entity’s prospects over the short, medium, and long term;
require the establishing of (a) systems to identify, assess, and monitor material financial risks and opportunities related to climate change, (b) controls, policies and procedures to oversee and manage the preparation of the sustainability report, and (c) controls, policies and procedures to maintain proper sustainability records and
apply a critical lens to the disclosures proposed in the sustainability report, such as questioning the appropriateness or completeness of methodologies, inputs, and assumptions used to support disclosures. ASIC notes that while directors can rely on experts for sustainability reporting, they must independently assess the information or advice provided, using their own skills and judgment in good faith.

In the amended guidance on directors' declarations, ASIC provides that the modified declaration required of directors for financial years commencing between 1 January 2025 and 31 December 2027 reflects an expectation that the sophistication and maturity of a reporting entity’s controls, policies, procedures, and systems for sustainability reporting will develop over time, as will directors' understanding, experience, and capabilities in relation to sustainability reporting.

This reiterates the importance of the board having a level of ‘climate literacy’ to understand the sustainability reporting regime and assess and manage climate-related risks and opportunities, to fulfil their directors’ duties. Entities not already doing so may wish to roll out a staggered training programme with the board, that reflects ASIC’s expectations that directors’ own understanding, experience and capabilities in relation to sustainability reporting will develop over time.

What else has changed?

Additional guidance has been provided on applying reporting thresholds concerning total assets, revenue, and employees, with a terminology change from "assets under management" to "value of assets."
ASIC has confirmed that group 3 reporting entities must conduct yearly assessments of material climate-related risks and opportunities to confirm whether they can rely on section 296B(1) and include in place of detailed reporting under AASB S2 a statement that there are no material climate-related financial risks or opportunities and a statement explaining how the entity determined that was the case.
Guidance on labelling of the report has been amended to provide greater flexibility in what information can be included in a sustainability report. ASIC acknowledges both a standalone report containing the mandatory climate-related financial information, or a broader sustainability report that also includes non-mandatory information, is permitted. ASIC suggests that if doing the latter an index table is provided to clearly identify the mandatory information.
ASIC now ‘encourages’ entities to adopt AASB S1 and S2 definitions and disclosure principles when making disclosures outside the sustainability report, such as in the OFR and prospectuses, rather than stating that they ‘should’ do so.

What next for reporting entities and ASIC?

ASIC intends to compile further guidance as the sustainability reporting regime matures, including in relation to:

the development and delivery of a suite of educational materials on the core concepts underpinning the sustainability reporting requirements in the Corporations Act;
the directors’ declaration for entities lodging a statement of no material climate-related financial risks and opportunities under s296B(1);
information on decisions on significant or novel relief applications to illustrate the application of the approach to sustainability reporting relief; and
an annual review of sustainability reporting as part of ASIC’s annual surveillance program.

We recommend all entities who are undertaking sustainability reporting familiarise themselves with the guidance as part of preparing sustainability reports and updating board and management, and keep up to date with further updates from ASIC via the Sustainability Reporting webpage.

At KWM, we’re continuing to closely monitor the latest developments and advancements in sustainability reporting. For legal assistance relating to sustainability reporting, please contact Tim Bednall, Emma Newnham or Peta Stevenson.