On 12 January 2024, Treasury released a consultation draft of legislation to require mandatory climate reporting by Australian companies. For a description of the proposed reporting regime, see our Client Alert.
The consultation period was short, ending on 9 February 2024. Many interested parties lodged submissions, including KWM. This article reproduces our primary submissions on the critical issues we identified in the consultation draft. We also made a number of drafting submissions. The full text of our submission (and the submissions of others) is available on the Treasury website.
The final form of the legislation to be introduced to Parliament had not been released at the time of writing.
KWM made three primary submissions, concerning:
- The scope of the mandatory reporting requirement
- The requirement for directors to make a declaration that the report complied with the law including applicable sustainability standards
- The proposal for limited immunity from claims from private litigants
Scope of the mandatory reporting requirement
The draft legislation does not limit the scope of mandatory reporting to climate-related matters. The consultation process undertaken by Treasury over the past 12 months has been limited to reporting on climate-related matters, and we submitted that some form of limitation should be included in the legislation so that any extension of the scope of mandatory sustainability reporting is subject to further consultation.
There are five provisions in particular that we submitted require definition, limitation, or deletion in this regard:
- S 296A(1) prescribes the content of sustainability reports, including “climate statements” and notes to “climate statements”. The term “climate statements” is described in s296A(2) as the “climate statements” required by the sustainability standards. But the term is not defined or even used in the draft sustainability standards (and is not otherwise defined in the draft legislation). It is therefore unclear whether mandatory reporting includes compliance with the whole or only part of the sustainability standards.
- Under s296A(3) and s296A(5)(c), the Minister has power to require a sustainability report to include “statements related to matters concerning environmental sustainability” and “disclosures in relation to … other matters concerning environmental sustainability”, in addition to the statements required by the “sustainability standards” – that is, whether or not there are applicable standards to guide reporting entities. There is no definition of “environmental sustainability”, which could extend to any nature-related matters, and any form of pollution, not just greenhouse gas emissions which have been the only form of “pollution” the subject of consultation and the draft sustainability standards. Further, the Federal Court in a recent decision concerning the proposed Scarborough gas field development by Woodside considered the application of regulations that defined the term ‘environment’ to encompass the “social and cultural features of ecosystems and of locations, places and areas”. In the absence of a definition of “environmental sustainability” it is possible that a similar interpretation could be applied and mandatory reporting could be required in relation to cultural and social issues.
- S296A(4)(b)(iii) requires the report to include notes “in relation to … other matters concerning environmental sustainability”. This is completely open-ended and unrelated to climate matters.
- S296C(2) gives the Minister power to “determine requirements in relation to climate statements, notes to climate statements or statements mentioned in paragraph 292A(1)(c)”. Apart from the incorrect cross reference, which should be to s296A(1)(c), we are concerned that this provision gives the Minister power to make rules that are inconsistent with the sustainability standards by which “climate statements” are purported to be defined.
- The definition of “sustainability standards” in s9 is also not limited in any way. Any standard made by the AASB that concerns sustainability could create a mandatory reporting requirement. The concept of “sustainability” is not limited to climate or even environmental matters: it could include nature-related matters but could also extend to equality, social and cultural matters, for example.
We submitted that:
- The critical term “climate statements” must be clearly defined by reference to climate-related matters required to be reported by the sustainability standards;
- S296A(3) and s296A(5)(c) (and all other powers of the Minister to make rules and determinations, including s296C(2)) should be amended by adding at the end “after a public consultation process in each case”;
- S296A(4)(b)(iii) should be deleted;
- S296C(2) should be amended so that determinations that concern climate statements and notes to climate statements must not be inconsistent with the sustainability standards; and
- The proposed s336A should be amended to require a period of public consultation and the approval of the Minister before a sustainability standard is made or amended.
Directors’ declarations
Under proposed s296A(1) sustainability reports must include a declaration by the directors of the reporting entity, the requirements for which are set out in s296A(6). The consultation draft contained 2 separate declarations.
First, sub-section 296A(6)(a) requires a statement to be included in the declaration “if the entity has included in the notes to the climate statements, in compliance with the sustainability standards, an explicit and unreserved statement of compliance with international sustainability reporting standards”. There are four problems with this requirement: the draft Australian sustainability standards do not contain any such requirement, the term “international sustainability reporting standards” is not defined, the declaration does not concern compliance with the requirements of these laws, and even if the Australian standards contained this requirement and the term was defined, it would be almost impossible for any director to give an “unreserved statement of compliance”.
We submitted that this requirement for the directors’ declaration should be deleted. We very much doubt its utility in any event.
Second, and more importantly, sub-section 296A(6)(b) requires directors to declare whether in their opinion the contents of the sustainability report “are in accordance with this Act”. We have two issues with this requirement:
- Given the uncertain nature of the matters that are required to be included in the report, it would be preferable for the declaration to state that in the directors’ opinion, “there are reasonable grounds to believe that” the contents of the sustainability report are in accordance with the Act.
- We are concerned that directors will be required to make this declaration with respect to the content of reports that have not been assured or audited.
The assurance industry has apparently persuaded Treasury that it will not have the resources or expertise to fully audit sustainability reports until the report for the first financial year commencing on or after 1 July 2030 (see s301A). But the draft legislation requires directors, the vast majority of whom are not climate experts, to make this declaration for all reports for financial years commencing on or after 1 July 2024 for very large entities and certain NGERs reporters, and by 1 July 2027 for all other entities, without the benefit of assurance (except for Scope 1 and Scope 2 emissions).
In our submission, this requirement is not fair and places an unreasonable burden on directors. We submitted that the requirement to make a declaration under s296A(6)(b) should be aligned both for timing and relevant content with the requirement for statements to be reviewed or audited. That would mean that unless the assurance requirements change, the directors’ declaration would relate to Scope 1 and Scope 2 emissions and governance arrangements initially.
However, we believe that the 6-year deferral for full audit requirements for all reporting entities should be revised. To that end, we submitted that it would be reasonable for a full audit to be required for the second and subsequent reports of the relevant reporting entity, and for the directors’ declaration to be also required for the second and subsequent reports of the entity. This “compromise” would mean that the assurance burden is phased in as each cohort of reporting entities commences reporting, rather than phasing in the subject matter of the audit requirement. It would also mean that a full audit of the largest cohort of reporting entities (in Group 3) will not be required until the report for the first financial year commencing on or after 1 July 2028, only 2 years earlier than currently proposed. The first actual audit task for that cohort would not be required until mid-2029, in five and a half years’ time. Surely that is long enough for the assurance industry to acquire the necessary resources and expertise.
In summary, in relation to the requirement for a directors’ declaration, we submitted that:
- S296A(6)(a) (containing the first of two declarations) should be deleted;
- The second declaration, required by s296A(6)(b), should be amended so that “in the directors’ opinion, there are reasonable grounds to believe that” [the report complies], and should apply only to the extent that the relevant sustainability report has been reviewed or audited; and
- In that regard a full audit should be required for the second and subsequent sustainability reports of each reporting entity.
Limited immunity
In Treasury’s second round of consultation on mandatory climate-related financial disclosure, it was proposed in response to many submissions in the first round of consultation that disclosures of Scope 3 emissions, scenario analysis and transition planning in sustainability reports would be the subject of limited immunity from suit for a three-year period.
However, the limited immunity in the draft legislation makes no mention of transition plans, and the requirement to make forward-looking statements in relation to matters of significant uncertainty remains problematic. These are areas where there is legitimate concern that the requirements of the applicable sustainability standards are likely to be at odds with Australian laws concerning misleading and deceptive conduct as they apply to forward-looking statements, requiring that forward-looking statements be made on reasonable grounds.
We also note that the draft legislation is inconsistent with the following statement on page 29 of Treasury’s policy impact analysis published with the draft legislation:
“To balance these competing views, Treasury proposes a modified liability framework for the first 3 years of reporting. The application of misleading and deceptive conduct provisions to scope 3 emissions and forward-looking statements would be limited to regulator-only actions for a fixed period of three years.”
Further, there is also no immunity for any statement that ASIC directs an entity to publish under s1705C. An entity would not be able to refuse to publish a statement that ASIC has directed be published even if the entity believes that the statement is untrue, inaccurate or misleading.
We submitted that s1705B(1)(b) should be amended so that the limited immunity regime applies to statements and omissions in all forward-looking statements, disclosures of Scope 3 emissions, scenario analysis and transition planning in sustainability reports published during the immunity period.
We also submitted that the immunity should apply to any statement that an entity is directed by ASIC to publish under s1705C.
There are several other matters of concern in the proposed limited immunity regime:
- The limited immunity regime applies only to “statements” made in sustainability reports concerning matters within the scope of the immunity. It should also apply to omissions in relation to matters within the scope of the immunity (that may be misleading or cause non-compliance with the standard).
- S1705B(2) provides that the limited immunity regime does not apply to criminal offences. This would include offences of strict liability, of which there are several in the proposed legislation. We submitted that the reference to “criminal offence” in this section should not include strict liability offences.
- S1705B(3)(c) permits ASIC to take civil action against reporting entities if the action concerns a provision of a Commonwealth law with a fault-based element, or the only remedy sought is an injunction or declaration. In this context, fault can include negligence, and would arguably allow ASIC to commence actions relating to matters within the scope of the immunity (Scope 3 emissions and scenario analysis, as presently drafted) seeking civil penalties against reporting entities and their directors for a breach of continuous disclosure obligations and the directors’ duty of care and diligence. That seems inconsistent with the spirit of the limited immunity proposal, and undermines any immunity that would otherwise have been afforded to directors. We submitted that the scope of civil actions that ASIC will be permitted to commence should be limited to those in which the only remedy is an injunction or declaration (that is, delete all of s1705B(3)(c) except paragraph (c)(ii)).
- The proposed immunity period will capture the first three sustainability reports of very large entities and some NGERs reporters, and the first report of large entities, asset owners and the remaining NGERs reporters. However, there will be no immunity for medium-sized reporting entities who arguably would benefit most from some level of immunity. We submitted that an equitable application of the immunity period would be that the immunity should apply to the first three sustainability reports of each reporting entity. For medium-sized entities, this would mean that the immunity would apply until their reports are required to be audited (as the timing of audit requirements is currently proposed)
- The references in the draft Explanatory Memorandum to s1041E and the remedies available to ASIC in relation to the limited immunity provisions are inconsistent with the draft legislation
