Mandatory climate-related financial disclosure: Australian Government releases second consultation paper

By Meg Lee and Sheruni Fernando

The Australian Government has released its second Climate-Related Financial Disclosure Consultation Paper (Consultation Paper). Feedback is sought on the detail, implementation and sequencing of standardised, internationally-aligned requirements for the disclosure of climate-related financial risks and opportunities in Australia.

The Consultation Paper follows a previous consultation which occurred earlier this year and is the next step in delivering the Government’s commitment to ensuring Australia’s large businesses and financial institutions provide more information and greater transparency on how they are contributing to Australia’s net zero transformation and responding to climate change and, importantly, to standardising the way in which such information is reported.

Submissions in response to the Consultation Paper close 21 July 2023.

Proposals

The key proposals in the Consultation Paper are summarised below.

Who is required to report?

• All entities that meet prescribed size thresholds and that are required to lodge financial reports under Chapter 2M of the Corporations Act 2001 (Cth) (Corporations Act) (which will include registrable superannuation entities from 1 July 2023) would be required to make climate-related financial disclosures. This includes:
  • entities that meet two of the following criteria:
    • the consolidated revenue for the financial year of the company and any entities it controls is $50 million or more;
    • the value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is $25 million or more;
    • the company and any entities it controls have 100 or more employees at the end of the financial year.
  • entities that are required to report under Chapter 2M of the Corporations Act that are registered as a ‘Controlling Corporation’ reporting under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act).

When will the obligations commence?

• A three-phased approach has been proposed, which will start with a relatively limited group of very large entities that expands over two years to apply to progressively smaller entities. The table below summarises this phased approach:

	Criteria	First reporting year
Group 1	Entities required to report under Chapter 2M of the Corporations Act and that fulfill two of the three thresholds: has over 500 employees; the value of consolidated gross assets at the end of the financial year of the company and any entities it controls is $1 billion or more; the consolidated revenue for the financial year of the company and any entities it controls is $500 million or more. and entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act and meet the NGER publication threshold.	2024-25 (beginning 1 July 2024)
Group 2	Entities required to report under Chapter 2M of the Corporations Act and that fulfill two of the three thresholds: has over 250 employees; the value of consolidated gross assets at the end of the financial year of the company and any entities it controls is $500 million or more; the consolidated revenue for the financial year of the company and any entities it controls is $200 million or more. and entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act and meet the NGER publication threshold.	2026-27 (beginning 1 July 2026)
Group 3	Entities required to report under Chapter 2M of the Corporations Act and that fulfill two of the three thresholds: has over 100 employees; the value of consolidated gross assets at the end of the financial year of the company and any entities it controls is $25 million or more; the consolidated revenue for the financial year of the company and any entities it controls is $50 million or more. and entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act.	2027-28 (beginning 1 July 2027)

 

What is required to be included in the report?

• The proposed reporting requirements would be phased in over three years, with full application of the mandatory reporting for all groups of reporting entities starting from the 2027-28 reporting year onwards.
• Reporting requirements will likely align with the requirements of the International Financial Reporting Standards (IFRS) Climate-related Disclosures, which is currently being developed by the International Sustainability Standards Board. There will be a separation public consultation process for the development of these requirements.
• The Consultation Paper provides an outline of the suggested reporting contents as follows.
  • Materiality: reporting entities must disclose any climate-related financial information which if omitted, misstated or obscured, could reasonably be expected to influence decisions that primary users of general purpose financial reports would make on the basis of those reports.
  • Governance: reporting entities must disclose information about their governance arrangements which may enable investors to appropriately understand and assess the adequacy of their processes, climate-related oversight, and management.
  • Strategy: reporting entities must disclose information regarding the current and anticipated effects of risks and opportunities they face on their business model and value chain business strategy, decision making, financial position, financial performance and cash flows, in addition to the climate resilience of its strategy and business model to both transition and physical risks.
    • Scenario analysis: reporting entities must use qualitative scenario analysis to inform their disclosures, moving to qualitative scenario analysis from the 2027-28 reporting year onwards. Further, reporting entities would be required to disclose climate resilience assessments against at least two possible future states, one of which must be consistent with the global temperature goal set out in the Climate Change Act 2022 (Cth).
    • Transition plans: reporting entities must disclose any transitional plans, including information about offsets, target setting and mitigation strategies. Further, reporting entities would be required to disclose information about any climate-related targets (if they have them) and progress towards those targets.
  • Risks and opportunities: reporting entities must disclose any information about material climate-related risks and opportunities to their business, alongside details on how it identifies, assesses and manages risks and opportunities.
  • Metrics and targets: reporting entities must disclose any Scope 1 and 2, and material Scope 3 greenhouse gas emissions (from an entity’s second reporting year onwards) as well as any relevant industry-specific metrics.

What are the proposed publication requirements?

• To maintain alignment with existing corporate reporting practices, climate disclosures would be required to be published in an entity’s annual report. It is proposed that the requirement to comply with climate disclosure standards would be contained in Part 2M.3 of the Corporations Act. Climate disclosures would be required as part of both the directors’ report and the financial report.
• The timing of annual financial report lodgement with ASIC would be consistent with current section 319 of the Corporations Act. Disclosing entities and registered managed investment schemes must lodge complete financial reports within three months after the end of financial year. All other companies must lodge their financial reports within four months after the end of the financial year. For entities that report under the NGER Act, the statutory deadline for reporting is 31 October.
• All covered entities would be required to make climate disclosures in the annual report available to the public.

Will assurance be required?

• The Government proposes to implement a phased approach to assurance requirements.
• Starting from 1 July 2024, the Consultation Paper suggests limited assurance for Scope 1 and Scope 2 emissions, along with reasonable assurance for government disclosures. The assurance roadmap aims to achieve reasonable assurance for all climate disclosures by the 2030-31 financial year.
• During the earlier consultation phase, stakeholders expressed concerns about assuring Scope 3 emissions disclosures due to the complex nature of calculating emissions. As an interim measure, the proposal suggests assuring scope 3 calculations at a minimum level.
• The International Auditing and Assurance Standards Board is currently developing a comprehensive standard for assurance on sustainability reporting that addresses limited and reasonable assurance. An exposure draft of the standard is expected to be released by the Board by August 2023.

Will there be any enforcement or liability attached to the requirements?

Climate-related financial disclosure requirements would be drafted as civil penalty provisions in the Corporations Act. However, 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.

What are the next steps?

The proposals are a step forward in providing certainty and standardisation in an area of reporting that has long been inconsistent and of variable quality. The proposed disclosure requirements should generally mean less risk – for reporting entities – of facing greenwashing allegations, provided they comply with the standard.

Businesses should determine if (and when) they will be subject to the proposed mandatory reporting and disclosure obligations and assess the impact of these obligations on their business.

If you intend to provide feedback on the Consultation Paper, your submission must be lodged prior to 21 July 2023. Please let us know if you require any assistance with your submission.

This article was written with the assistance of Ben Pohl, Seasonal Clerk.