Climate disclosure consultation provides some direction to industry

By Vanessa Murphy, Julian Hammond, Meg Lee, Adrian Verdnik and Michelle Eastwell

Treasury has released the 'Climate-related financial disclosure' Consultation Paper, seeking input on the implementation of disclosure requirements for certain Australian entities in relation to climate change financial risks and opportunities.

Until now, it has been stakeholder pressure and litigation about the climate impacts of investment decisions as well as the regulatory focus on greenwashing that has been driving the extent and nature of sustainability disclosures for Australian entities.

The Consultation Paper is an initial step towards Australia following (slowly) behind other jurisdictions in introducing mandatory climate-related disclosure requirements for certain entities. In the Consultation Paper, Treasury has focused on how disclosure requirements are internationally recognised, and highlighted the importance of any disclosure requirements in Australia meeting international market expectations so that Australian entities do not hit roadblocks in raising capital on the basis that the standards are not consistent with international markets.

Implementation and application

The Consultation Paper proposes that, consistent with international jurisdictions, Australia could follow a ‘phased’ approach to implementation of the obligations.

This would see disclosure obligations initially targeted at:

• large listed entities; and
• large financial institutions (such as insurers, credit unions and super funds).

The Consultation Paper seeks submissions on the appropriate thresholds that should be applied to determine whether entities are captured as ‘large’ for that purpose. The Consultation Paper also calls for views on whether listed schemes should be subject to climate disclosure requirements (with most climate-related reporting to date being adopted by listed companies).

In our experience, the responsible entities and managers of listed schemes are (depending on the asset class in which the fund invests) coming under increased pressure from investors to be accountable for ESG considerations, and so it may be appropriate for the reporting requirements to also apply to listed schemes.

The Consultation Paper raises the prospect, and seeks views, on whether disclosure standards should also apply to large entities that are neither listed nor financial institutions.

Australia has previously taken the approach of requiring smaller entities to report on ESG considerations through the broad application of the modern slavery reporting requirements.

Treasury has confirmed that if the obligations were applied more broadly under the Corporations Act, there are certain entities, such as sole traders, unincorporated bodies, trusts and partnerships, which would need to be excluded from the regime. The reference to trusts in this context is presumably not intended to rule out the application to all registered schemes.

Alignment with international standards

The Consultation Paper recognises the importance across international markets of the interaction between the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations and the International Sustainability Standards Board standards (which will seek to achieve standardisation). Given this, submissions are sought on whether the International Sustainability Standards Board (ISSB) climate disclosure standards are appropriate for Australian entities, and whether there are any particular considerations relevant to the Australian market in relation to the ISSB’s implementation of the disclosure standards.

Interaction with the regulatory framework

The regulatory framework for climate-related disclosures is proposed to be broadly consistent with the existing regulatory framework for financial reporting (which is largely contained in legislation such as the Corporations Act, regulatory guidance, ASX listing rules, and other standards, such as the Australian Accounting Standards Board (AASB) and the Auditing and Assurance Standards Board (AUASB).

While existing and draft international frameworks such as the TCFD and ISSB standards combine disclosure obligations supported by more prescriptive requirements, it is proposed that the Australian regime will contain more prescriptive details in the climate standards. Submissions are encouraged on where overarching disclosure obligations should sit within the regulatory framework. Similarly, views are sought on:

• the interaction between climate reporting and other reporting obligations;
• the potential interaction between the new Australian disclosure requirements and the existing national emissions reporting frameworks such as National Greenhouse and Energy Reporting (NGER) framework, Corporate Emission Reporting Transparency Initiative (CERT) and Climate Active’s Carbon Neutral Standards; and
• how the new standardised disclosure requirements could sit alongside the existing periodic reporting requirements (with the current practice generally being that any relevant disclosures are included in the directors’ report for relevant reporting entities, or in a separate sustainability report).

We are seeing many large listed entities (including those in the funds management and superannuation industries) currently issuing separate sustainability reports which contain TCFD disclosures on the basis of stakeholder expectations.

Materiality of climate risks

For disclosing entities, materiality of information is constantly being assessed to ensure compliance with Corporations Act and ASX Listing Rule continuous disclosure requirements (as well as for the purpose of any other disclosure requirements that the entity may have, including to stakeholders such as financiers).

ESG information, including climate-related disclosures, has become a much more prominent focus over recent times, and the Consultation Paper recognises this as an evolving area. The Consultation Paper calls for submissions on the considerations that should apply to materiality judgements in undertaking climate reporting.

Given that ‘materiality’ as a concept in the current regulatory framework takes on varying meanings depending on the reporting obligation (for example, from an accounting vs continuous disclosure perspective), it may be possible that the different thresholds should apply where climate-related disclosures are contained in different reports.

Metrics

As noted above, the Consultation Paper seeks submissions on the potential interaction between the Australian standards and existing reporting frameworks for greenhouse gas emissions reporting. Treasury is seeking to ensure consistency between those frameworks and any potential requirements, to minimise duplication. It is also proposed that some requirements to disclose Scope 3 emissions will apply to Australian entities captured by the regime.

The Consultation Paper also raises the relevance of other metrics, particularly in relation to emissions, and calls for views on:

• whether a common baseline of metrics should be defined so that there is a degree of consistency between disclosures (including industry-specific metrics);
• what considerations should apply so that transparent information is provided about how entities are managing climate-related risks, including what transition plans are in place and any use of offsets to meet the published targets; and
• whether any particular disclosure requirements and/or assurance obligations should commence in different phases, and the reasons.

Liability regime for climate-related disclosures

As highlighted in the Consultation Paper, contravention of the statutory disclosure requirements set out in the Corporations Act (which include, among financial reporting requirements, the continuous disclosure obligations that are incorporated into the ASX Listing Rules) can result in civil penalties. This is in addition to liability for misleading or deceptive conduct that may arise under statute or general law.

The Consultation Paper recognises that climate-related disclosures involve a significant amount of forward-looking information and therefore necessarily, a lot of uncertainty.

The Consultation Paper calls for consideration of:

• how suitable ASIC’s ‘reasonable grounds’ requirement for forward-looking statements, and the disclosure of uncertainties or assumptions, are for climate-related disclosures; and
• whether there are other tests or measures that could be considered to ensure that liability for climate-related disclosures is proportionate to the inherent uncertainties that can be involved.

Other matters

The Consultation Paper also seeks submissions on various other related issues, including:

• whether a particular authority should be responsible for providing information on climate-related financial disclosures in Australia, and governance of that information;
• how data challenges could impact entities complying with the new requirements in Australia and how they might be addressed; and
• whether the capability of users to prepare, collect, interpret and report data required to make climate disclosures can be implemented ahead of international timelines for mandatory reporting (which are slated for 2024-2025), and whether there are particular international initiatives that would assist with this.