Draft Australian Climate Standards: getting ready for the ‘biggest change to corporate reporting in a generation’

By Suzie Leask, Meg Lee and Anne MacNamara

‘Environmental, social and governance (ESG) issues are driving the biggest changes to financial reporting and disclosure standards in a generation,’ according to ASIC Chair Joe Longo. ^[1] On 23 October 2023, the Australian Accounting Standards Board (AASB) released three draft climate-related financial disclosure standards (collectively, the Draft Australian Climate Standards) for consultation. The Draft Australian Climate Standards provide uniquely Australian amendments to the International Sustainability Standards Board’s (ISSB) climate standards, which were released earlier this year.  This is an expansion of ESG duties for directors as the AASB has signalled that the disclosure requirements will attract civil penalty provisions under the Corporations Act 2001 (Cth).

What are the Draft Australian Climate Standards?

The AASB is proposing to mandate climate reporting (rather than sustainability related financial disclosures more broadly), with the standards applying to annual reporting periods beginning on or after 1 July 2024. However, the financial period in which an entity is first required to apply the Draft Australian Climate Standards would be subject to a later decision by the Australian Government.  The most significant proposal by the AASB is requiring entities to disclose Scope 1, 2 and 3 greenhouse gas emissions.

Scope 1 greenhouse gas emissions are the emissions directly released into the atmosphere because of an activity. For example, emissions from the burning of diesel fuel in trucks. The reporting of these emissions will be required from the commencement date, 1 July 2024.

Scope 2 greenhouse gas emissions are the emissions released to the atmosphere from the indirect consumption of an energy commodity. For example, the use of electricity produced by the burning of coal in another facility. The reporting of these emissions will be phased in after three years.

Scope 3 greenhouse gas emissions are indirect emissions other than Scope 2 emissions that are generated in the wider economy. The Draft Australian Climate Standards introduce several relief mechanisms to reduce the burden of Scope 3 emissions reporting and propose a one-year exemption and three-year modification to liability for reporting Scope 3 emissions.

Are you affected?

A three-phased approach has been proposed. As a result, Australia’s largest listed and private companies, financial institutions including superannuation funds and asset-managers and emitters will begin reporting on 1 July 2024. Other entities will begin reporting on a phased basis as set out below.

Group	Commencement	Entity requirements
1	2024 – 2025	Entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) and meet the NGER publication threshold. AND 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 of the company and any controlled entities is $1 billion or more; the consolidated revenue of the company and any controlled entities is $500 million or more.
2	2026 – 2027	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. AND 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 of the company and any controlled entities is $500 million or more; the consolidated revenue of the company and any controlled entities is $200 million or more.
3	2027 – 2028	Entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act. AND 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 of the company and any controlled entities is $25 million or more; the consolidated revenue of the company and any controlled entities is $50 million or more.

Key points

There are some key differences between the Draft Australian Climate Standards and ISSB standards as outlined below:

• Materiality: entities that conclude that there are no material climate-related risks or opportunities that could reasonably be expected to affect its prospects must disclose and explain the basis of this conclusion.
• Scope 3 emissions: the Draft Australian Climate Standards introduce a number of relief mechanisms to reduce the burden of scope 3 emissions reporting. For example, permitting the use of estimates, reflecting data for the immediately preceding reporting period ‘if reasonable and supportable data related to the current reporting period is unavailable’; removing the mandatory requirement for those in the asset management, commercial banking and insurance activities to make financed emissions disclosures (instead, they will only be required to consider the applicability of these additional disclosures).
• Climate resilience/scenario analysis: entities must make climate resilience assessments against at least two possible future climate scenarios, one of which must include keeping temperature increase to 1.5 degrees above pre-industrial levels.
• Industry-specific disclosures: specifies that if an entity elects to make industry-based disclosures, the entity should ‘consider the applicability of well-established and understood metrics associated with particular business models, activities, or other common features that characterise participation in the same industry, as classified in the Australian and New Zealand Standard Industrial Classification (ANZSIC)’.
• GHG emissions disclosures: changes to the methodologies for measuring and reporting greenhouse gas emissions to avoid regulatory burden and to align with existing NGER requirements.
• Remuneration disclosure: it is proposed that entities be required to disclose both a description of whether and how climate-related considerations are factored into executive remuneration and the percentage of executive management remuneration in the current period linked to climate-related considerations.
• Not-for-profits: potential coverage of not-for-profit as well as for-profit entities. The Draft Australian Climate Standards do not appear to capture charities registered with the Australian Charities and Not-for-Profits Commission (ACNC) (that are not required to disclose under Chapter 2M of the Corporations Act); however, those that are not registered with the ACNC and are required to disclose under Chapter 2M may be in scope. The draft states that the objective would be for a not-for-profit entity to disclose information about climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, access to finance or cost of capital, and its ability to further its objectives, over the short, medium or long term. The draft standards also clarify that not-for-profit entities would not need to:

‘undertake an exhaustive search for information to identify climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects, but would be required to use all reasonable and supportable information available to the entity at the reporting date without undue cost or effort in preparing material climate-related financial information required…’

Implications

As stated by ASIC Chair Joe Longo, ESG issues are driving big changes to financial reporting and disclosure standards. In submissions to the AASB, a wide range of organisations, including the Australian Institute of Company Directors and the superannuation sector, have widely welcomed the introduction of mandatory climate-related disclosures. However, the implementation of climate-related disclosure standards is not a small task and will inevitably require significant additional resources, climate-focused data collection and changes to business reporting to ensure Australian companies, funds and investors are prepared.

Many entities will face challenges in preparing realistic estimates for a significant section of their emissions – specifically, the emissions arising from their portfolios. The availability and quality of the third-party data required for accurate Scope 3 emissions reporting may also expose entities to significant time-lags and make it difficult for asset owners to meet reporting dates, as they will need time to receive the data (which may be delayed where investee entities need to disclose to funds), process it and then disclose. Consequently, the new requirements will involve additional resources and introduce additional costs to address the current skills gap, both domestically and internationally, to ensure compliance, modelling, and assurance in relation to the disclosures.

Another potential issue is that investees may be located in a foreign jurisdiction that has not  adopted the ISSB standard. Consequently, these investees may not record and provide sufficient information or may disclose information in a way that does not meet reporting standards.

The AASB has acknowledged the particular Scope 3 reporting challenges for superannuation funds and is seeking feedback on whether there are circumstances specific to superannuation funds that affect compliance with the proposed requirements. While the AASB initially decided against issuing a separate set of standards for superannuation funds, they have not ruled it out for the future.

Next steps

You should now identify whether you will be subject to the mandatory reporting and disclosure requirements, how and when the new requirements will impact your business. The AASB will consider feedback and, based on the information received, will determine whether the proposals should be implemented, with or without amendment.

The AASB invites stakeholders to provide feedback on the Draft Australian Climate Standards before 1 March 2024 by:

• submitting a comment letter on the AASB website;
• completing an online survey – access the survey; or
• attending a roundtable discussion – details to be provided shortly.

If you would like advice on how to prepare for climate reporting, please reach out.

Our article, New sustainable finance strategy: what you need to know, examines the Sustainable Finance Strategy Consultation Paper, which is ambitious in its scope to help Australia become a renewable energy superpower, and discusses the key implications financial market participants should be aware of.

This article was written with the assistance of Julia Rowland, Law Graduate.

[1] ASIC Chair Joe Longo, Committee for Economic Development of Australia (CEDA) State of the National conference, 13 June 2023.