On 12 January 2024, Treasury released draft legislation, Treasury Laws Amendment Bill 2023: Climate-related financial disclosure, and an accompanying explanatory memorandum and policy document for the implementation of mandatory sustainability reporting in Australia.
The draft documents are open for consultation. The closing date for submissions is 9 February 2024.
Which entities will be obliged to report, and when?
The implementation of annual sustainability reporting will be phased in, with very large enterprises required to report for the first financial year commencing on or after 1 July 2024 (although it is possible that date may be pushed back to 1 January 2025). The implementation program is:
ENTITY
|
THRESHOLDS AT THE END OF THE RELEVANT FINANCIAL YEAR
|
REPORT FROM FIRST FINANCIAL YEAR COMMENCING ON OR AFTER
|
Very large |
Any two of:
|
1 July 2024 |
Large |
Any two of:
|
1 July 2026 |
Medium |
Any two of:
|
1 July 2027 |
Asset owners: registered schemes and registrable superannuation entities |
$5 billion of assets |
1 July 2026 |
National Greenhouse and Energy Reporting Act reporters |
Main thresholds:
|
1 July 2024 |
NGER reporters |
All others |
1 July 2026 |
If a company is required to lodge consolidated financial statements for a corporate group, the head company of the corporate group may elect to prepare a single sustainability report for the corporate group, and in that case there is no obligation on other entities in the corporate group to prepare separate sustainability reports. (See draft section 292A(2).)
A medium-sized entity (excluding NGER reporters and asset owners with assets of $5 billion or more) that does not face material climate risks and does not have material climate opportunities is not required to prepare a sustainability report except to make a statement accordingly.
Contents of sustainability reports
The contents of the sustainability report are prescribed in section 296A of the draft legislation:
- climate statements,
- any notes to the climate statements,
- any additional statements required under Ministerial rules, and
- a directors’ declaration declaring whether, in the directors’ opinion, the climate statements, any notes to the climate statements and any statements required by Minister rules are in accordance with the Corporations Act.
The required contents of the climate statements and notes will be set out in new sustainability standards made by the Australian Accounting Standards Board. Draft standards were released by the AASB in November last year. The draft AASB standards incorporate the climate-related elements of the IFRS / ISSB Sustainability Standards S1 and S2 and are generally consistent with those international standards.
Content requirements for the climate statements will include disclosures about:
- material climate risks and opportunities,
- governance arrangements
- Scope 1 and Scope 2 emissions,
- Scope 3 emissions from the second year of reporting for all reporting entities,
- the impact of climate-related matters on cash flows, revenues and asset values for the relevant financial year,
- the anticipated future impact on cash flows, revenues and asset values in the short, medium and long term, and
- scenario planning for the reporting entity under at least 2 climate change scenarios, one of which must be based on achieving a limit on global warming of 1.5 degrees Celsius.
The sustainability report will not form part of the statutory financial report. Accordingly, while directors will be required to make the declaration described above, the report will not be the subject of a “true and fair” declaration by directors, and there is no requirement for certification by the CEO and CFO.
Audit
All reports for years commencing before 1 July 2030 will be required to be reviewed by the entity’s auditors. However, the draft legislation limits the review to reporting of Scope 1 and Scope 2 emissions only. It is proposed that the scope of the review may be extended on a phased basis over the period to 1 July 2030.
For years commencing on or after 1 July 2030, reports must be fully audited.
Limited immunity from suit and ASIC’s powers of enforcement
There is limited immunity from suit for non-compliant or misleading sustainability reports prepared for financial years commencing on or after 1 July 2024 and before 1 July 2027. The immunity is proposed to apply only to statements made in sustainability reports about Scope 3 emissions and scenario analysis. Very large reporting entities will have limited immunity for their first three reports, and large entities for their first report, but medium-sized entities will not have the benefit of the limited immunity at all, because they will commence reporting after the immunity period has ended.
Further, there is no immunity from criminal prosecutions, and there is no immunity from civil actions brought by ASIC if the action involves a fault element and / or the only remedy sought is a declaration or injunction.
ASIC will also have power to issue directions to reporting entities to correct, complete or amend statements in sustainability reports.
Submissions
We expect that submissions will focus on at least three main issues (apart from the drafting issues in the legislation):
1. The open-ended scope of matters that could be required in sustainability reports
The consultation process has been limited to climate-related reporting, but:
- the Minister has explicit powers to require the inclusion of statements relating to any “matters concerning environmental sustainability”, which could include any nature-related matters, pollutants other than greenhouse gas emissions, and possibly any inequality-related matters; and
- there is no definition or limit to the subject matter of “sustainability standards” that may be made by the AASB – compliance with any sustainability standard is mandated by this legislation.
We expect that submissions will recommend some form of limitation of mandatory reporting to climate-related matters.
2. The requirement for directors to make declarations that unaudited sustainability reports are compliant with the Act
Full audits are not required for sustainability reports for financial years commencing before 1 July 2030. This is presumably to allow the assurance industry to develop the resources and expertise to audit these reports. However directors, the vast majority of whom have no expertise in these matters, are required to declare that sustainability reports for years commencing before 1 July 2030 are compliant, without the comfort of any independent assurance.
Submissions are likely to highlight a fairness issue here. Directors will have personal responsibility for the contents of mandatory reports for which no expert review, independent or otherwise, is required. Non-expert directors are likely to be exposed to material risk, particularly as the matters required to be reported involve significant uncertainty.
3. Limited immunity from suit
The scope of immunity from suit in the draft legislation is narrower than the proposal in the preceding consultation process, which included all forward-looking statements. The legislation provides limited immunity from suit for statements in sustainability reports relating only to Scope 3 emissions and scenario analysis. The legislation contains no immunity from suit for any other forward looking statements required by the reporting regime. Even in this limited scope of immunity, there is no immunity from prosecution for criminal offences including strict liability offences, and no immunity from civil actions by ASIC for contraventions of any Commonwealth law with a fault-based element, which can include mere negligence. Lastly, the immunity period expires before the first report for medium-sized enterprises, and before the full audit requirement commences.
We expect that submissions will be made to expand the scope of the limited immunity to address these issues, and to extend the period in which the immunity applies to include all reports for which there is no full audit requirement (that is, for financial years commencing before 1 July 2030) or at least to provide limited immunity for the first three reports prepared by each cohort of reporting entities.
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