Mandatory climate-related financial disclosure has commenced: what you need to know about the new regime, standards and regulatory guidance

Entities that are required to prepare annual financial reports under Chapter 2M of the Corporations Act and meet certain thresholds, will also be required to prepare sustainability reports (section 292A of the Corporations Act). The largest entities (Group 1) will be required to submit sustainability reports for their financial years commencing from 1 January 2025, while other in-scope entities (Groups 2 and 3) will be phased into reporting obligations over three ‘transitional periods’ (section 1707B): 

Table 1

* Part-time employees are to be included as an appropriate fraction of a full-time equivalent employee.

** NGER reporting entities are corporations registered under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) at the end of the financial year or corporations required to make an application to be registered under subs 12(1) of the NGER Act for the financial year.

Asset owners, as captured in Group 2 if above the assets threshold, will include registered schemes, registrable superannuation entities and retail corporate collective investment vehicles (section 292A(6)).

RG 280 confirms that sustainability reporting requirements crystallise at the end of the financial year. In this respect, entities should establish adequate systems to assess whether they may be required to prepare a sustainability report, even if they do not meet the sustainability reporting thresholds at the commencement of that financial year. For example, an acquisition may complete, a corporate restructure may occur or market or economic conditions may shift, resulting in a change to the entity’s reporting status (see [RG 280.34]).

In calculating revenue, assets and employees, entities should refer to the financial statements prepared in accordance with Chapter 2M – the concepts of revenue, assets and employees have the same meaning as equivalent concepts in s 45A(3) of the Corporations Act (at [RG 280.43]).

Consolidated reporting

An entity that is required to prepare a financial statement on a consolidated basis for a corporate group may elect to prepare a sustainability report for the consolidated entity (as the parent entity) (section 292A(2)).

However, a foreign parent entity does not have the option of preparing a consolidated sustainability report under s 292A(2) on behalf of a consolidated entity for a financial year on the basis that this must still be done by the Australian subsidiaries (see [RG 280.46]).

Which entities will not be required to report?

Any entity that is exempt from lodging a financial report under Chapter 2M of the Corporations Act will not be required to prepare a sustainability report. These entities not required to report include:

• Small entities and asset owners that do not meet the thresholds outlined in Table 1 (unless they are a NGER reporting entity).

• Entities exempted from financial reporting by an ASIC class order or individual entity exemption.

• Charities registered with the Australian Charities and Not-for-profits Commission.

• Exempt public authorities (as defined in s 9 of the Corporations Act).

• Foreign companies registered under Division of Part 5B.2 and entities incorporated in a foreign jurisdiction (see [RG 280.42]).

A sustainability report will need to contain the following (s 296A):

1. The climate statement for the year, including any notes made in relation to the statement.

2. Any statements prescribed by the regulations for the year, including any notes made in relation to the statement.

3. A directors’ declaration that the statements comply with the requirements (once enacted) under the Corporations Act.

Climate statement

Pursuant to section 296D(1) of the Corporations Act, climate statements for a financial year and any notes made in relation to the climate statement, will need to contain the disclosures required by the AASB S2. This includes the following core content across an entity’s governance, risk management, strategy, metrics and targets:

 (a)        Level of disclosure required

In respect of the information to be included in climate statements, the AASB S2 and RG 280 provide for the following:

• Entities will not be required to disclose information that is commercially sensitive.

• Entities will be required to "use all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort".

• Entities may disclose information from a reporting period from an entity within its value chain that is different from the entity’s reporting period.

• Entities may use both primary data (data provided by suppliers such as meter readings or utility bills) and secondary data (for example, data provided by third-party providers such as industry-average data from government statistics).

• Entities will not be required to disclose exact data or detailed information for Scope 3 emissions reporting that cannot be easily provided by their customers or suppliers.

• Entities will only be required to disclose Scope 3 emissions from their second reporting year onwards. This can comprise information gathered from public disclosures made by other entities, including entities in the reporting entity’s supply chain, in the previous year.

(b)        Definition of GHG emissions

The definition of Scope 1, 2 and 3 GHG emissions align with the definition given in the draft sustainability standards and the International Sustainability Standards Board (ISSB)’s sustainability standards:

• Scope 1 emissions: direct GHG emissions that occur from sources that are owned or controlled by the entity.

• Scope 2 emissions: indirect GHG emissions from the generation of purchased or acquired electricity, steam, heating or cooling consumed by the entity.

• Scope 3 emissions: indirect GHG emissions (not included in Scope 2 GHG emissions) that occur in the value chain of an entity, including both upstream and downstream emissions.

Disclosures in relation to Scope 3 GHG emissions are to include details of financed emissions. Financed emissions are the portion of greenhouse gas emissions of an investee or counterparty attributed to the loans and investments made by an entity to the investee or counterparty.

(c)         Climate-related scenario analysis

AASB S2 and RG 280 provide additional guidance that reporting entities must:

• Use climate-related scenario analysis to assess their climate resilience (which RG 280 defines as the capacity of an entity to adjust to climate-related changes, developments or uncertainties) using an approach commensurate with the entity’s circumstances.

• Disclose whether and how they use climate-related scenario analysis to inform their identification of material financial risks and opportunities relating to climate.

• Use a minimum of the two prescribed climate scenarios of:

  • increase in global average temperature well exceeding 2°C above pre-industrial levels (with a risk of non-compliance if the increase is less than 2.5°C)

  • increase of 1.5°C above pre-industrial levels.

These scenarios together provide insight into the reporting entity’s potential climate resilience and material financial risks and opportunities under both high-end physical risk and high-end transition risk.

(d)        Statements about forward-looking climate information

ASIC recognises that the quality and availability of climate information will evolve over time and has clarified, in RG 280, that a reporting entity should ‘use all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort’ in disclosing forward-looking climate information, including:

• Climate-related risks and opportunities.

• The anticipated effects of climate-related risks and opportunities.

• Climate-related scenario analysis.

• Any planned use of carbon credits.

Forward-looking information in climate statements should comply with Appendix D of AASB S2, which sets out both the fundamental and enhancing qualitative characteristics of useful climate-related financial information – representations should be relevant, faithful, comparable, verifiable, timely and understandable.

Forward-looking climate information that is required under the Corporations Act and AASB S2 is valuable for investors and supports regulators in considering the future financial stability implications of climate change. However, representations about future matters may be taken to be misleading under the Corporations Act and Australian Securities and Investments Commission Act 2001 (Cth), unless there are reasonable grounds for making the representations (see [RG 280.82]).

(e)        Statement about there being no climate risks or opportunities (Group 3 entities)

Section 296B provides that a Group 3 entity, which does not have any material climate-related financial risks or opportunities, may submit a statement to this effect in their sustainability report. The provision of this statement and an explanation in support, will replace the requirement to submit a climate statement for the entity.

Entities should refer to ASSB S2 to understand whether a climate-related financial risk or opportunity is material or not. This proposed ‘exemption’ to the climate statement requirements applies only to Group 3 entities, which are not NGER reporting entities.

Directors’ declarations

Section 296A(6) requires a declaration by the directors to whether, in the directors’ opinion, the substantive provisions of the sustainability report are in accordance with the Corporations Act and specifically whether they are in compliance with the sustainability standards and the climate statement disclosure standards (subsections 296C and 296D).

The substantive provisions of a sustainability report are anything required to be included in the report under subsection 296A(1), other than the directors’ declaration. The declaration must be made in accordance with a resolution of the directors, dated accordingly to when the declaration was made and signed by a director.

For the first three years of the reporting regime, there will be a transitional period, whereby directors will be permitted to only declare that the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Corporations Act (s 1707C).

RG 280 provides additional guidance (at [RG 280.55]) for directors preparing a sustainability report. It notes that directors should:

• Understand the entity’s sustainability reporting obligations and climate-related risks or opportunities that could reasonably be expected to affect the entity’s prospects.

• Require the entity to establish adequate systems for identifying, assessing and monitoring material climate-related financial risks and opportunities.

• Require the entity to establish controls, policies and procedures for the overseeing, managing and preparing of sustainability reports and maintaining sustainability records.

• Apply a critical lens to the disclosures proposed in the sustainability report, for example, by questioning the appropriateness or completeness of methodologies, inputs and assumptions and identifying any material omissions.

Lodgement, distribution and publication requirements

Sustainability reports will need to be lodged with ASIC in accordance with section 319 of the Corporations Act – within three months after the end of the financial year for a disclosing entity, registered scheme or registered superannuation entity or within four months for all other reporting entities. RG 280 clarifies that:

”The sustainability report and the annual financial report should be lodged at the same time and relate to the same reporting period... This will enable users to understand the connections between information disclosed in both reports as soon as each report is lodged.”

The sustainability report should be distinguished from other reports that may contain voluntary sustainability-related information and should be clearly identifiable and not obscured by additional information (see [RG 280.89] – [RG 280.94]).

A company that is limited by guarantee and required to prepare a sustainability report for a financial year, must send a copy of the report to each member who has made an election to receive the sustainability report for that financial year by the earlier of 21 days before the next AGM after the end of the financial year or 4 months after the end of the financial year (section 316A(3)).

An entity required to prepare a sustainability report, but which is not required to provide a copy to its members, must ensure the report is publicly available on its website from the day on which the report is lodged with ASIC (section 316B(1)). An offence for non-compliance with this publication requirement is an offence of strict liability.

Cross-referencing

The AASB S2 permits a sustainability report to cross-reference information in another report prepared by the reporting entity, if certain requirements are met, including (see [RG 280.86] – [RG 280.88]):

• That the information is available on the same terms and at the same time as the climate-related disclosures in the sustainability report.

• The information is not in a report prepared by another entity.

• The information still complies with the AASB S2 and any other applicable Australian Sustainability Reporting Standards.

• The complete set of climate-related disclosures is not made less clear or obscured by including information by cross-reference.

RG 280 compliments the AASB S2 guidance on cross-referencing by strongly encouraging entities relying on cross-references to information in another report prepared by the entity to lodge the other report with its sustainability report (if it has not already been lodged with ASIC).

As noted below, RG 280 also confirms that the modified liability scheme does not apply to information included by cross-reference in the sustainability report.

Record-keeping  

In-scope entities will need to keep written sustainability records that accurately explain and record the entity’s preparation of the substantive provisions of the sustainability report, including the methods, assumptions, evidence and any expert advice relied on for all forward-looking information in the climate statements (see [RG 280.49] – [RG 280.53]). Sustainability records are defined as the documents and working papers needed to explain the methods, assumptions and evidence from which the substantive provisions of sustainability reports are made (see section 286A and section 9 definitions).

These records must be kept for seven years (section 286A(2)). Where records are kept outside of Australia, sufficient written information to support the substantive provisions of the report must be kept within Australia (section 289A).

Limited immunity for protected statements in sustainability reporting

Under section 1707D, liability for misleading and deceptive and other conduct in relation to the most uncertain aspects of a climate statement will be temporarily protected (Protected Statement) for a period of three years. A Protected Statement is a statement made in:

• a sustainability report, for the first three financial years of the regime; or

• an auditors’ report of an audit or review of a sustainability report made within the first three financial years of the regime; and

about any of the following:

• Scope 3 GHG emissions (including financed emissions)

• scenario analysis

• a transition plan.

Protected Statements also include any forward-looking statements related to climate, if they are made in sustainability reports or auditors’ reports of sustainability reports, within the first 12 months of the regime.

Any action, suit or proceeding in respect of a Protected Statement will only be permitted to be brought against a reporting entity if it is criminal in nature or brought by ASIC (section 1707D(2)).

RG 280 guidance

ASIC has clarified some areas of the scope of statements that will be considered protected statements under the modified liability regime (see [RG 280.69]):

Entities can still make voluntary sustainability related statements and summaries – they just won’t be subject to transitional modified liability. Where entities make such statements, they must be particularly careful to ensure that the statements are accurate and sufficiently verified.

Section 301A directs that sustainability reports will be subject to mandatory audit requirements, in accordance with the AUASB auditing standards (section 307AB). The auditing requirements will be introduced on a phased-in basis. Auditors of sustainability reports will have the same obligations as an auditor of a financial report under the Corporations Act.

Assurance and auditing of reports before 1 July 2030

For financial years commencing before 1 July 2030, section 1707E directed the AUASB to make standards that specify the extent of and provide for the process for, auditing and reviewing sustainability reports.

Under the ASSA 5000 and ASSA 5010, full auditing and assurance for all reporting groups will not be mandatory until 2030. The AUASB standards require limited assurance of certain disclosures, including over Scope 1 and 2 GHG emissions, governance and strategy disclosures from the first year of reporting and all other disclosures from the second year of reporting. Reasonable assurance will be required from the fourth year of reporting for all disclosure items.

An auditor who reviews the sustainability report must report to members on whether the auditor became aware of any matter in the course of the review that would make the auditor believe that the sustainability report does not comply with the requirements for sustainability reports under the Corporations Act. The auditor’s report will need to include any statements or disclosures required by the AUASB auditing standards (see section 1707F).

Phased assurance is not delayed assurance. It’s a transitional period during which directors can adopt voluntary assurance or develop reasonable assurance in advance to prepare for full compliance.

Assurance and auditing of reports from 1 July 2030

From 1 July 2030, the permanent assurance and auditing requirements in the Corporations Act will commence. Entities required to prepare a sustainability report will be required to have the report audited in accordance with Division 3 of the Corporations Act and obtain an auditor’s report (section 301A).

An auditor conducting an audit of a sustainability report will need to form an opinion about whether the report is in accordance with the Corporations Act (including the sustainability standards and climate statement disclosures), whether the auditor has been given all information and whether the entity that prepared the report has kept sustainability records sufficient to enable the sustainability report to be prepared and audited (section 307AA). The auditor’s report must describe any defect or irregularity in the sustainability report or any deficiency, failure or shortcoming in respect of the matters referred to in section 307AA. Working papers for an audit of a sustainability report must be retained for 7 years (section 307B).

ASIC’s general approach to enforcement

ASIC has provided clarification in RG 280 on how it intends to supervise and enforce the sustainability reporting requirements, particularly as the new regime is being phased in.

ASIC has advised that it will:

• Take a proportionate and pragmatic approach to supervision and enforcement as the requirements are being phased in (at [RG 280.23]).

• Engage with reporting entities to understand the basis of disclosures in sustainability reports, where it identifies that a statement in a sustainability report is incorrect or misleading in any way. ASIC notes that if required information has been omitted from the sustainability report, ASIC may consider that one or more statements in the sustainability report are incorrect, incomplete or misleading (at [RG 280.154]).

• If concerns remain, ASIC may exercise its direction power, issuing a written notice directing the entity to explain the statement in the sustainability report, provide certain additional information or amend the statement (at [RG 280.204])

• Be more likely to commence an enforcement investigation where it sees misconduct of a serious or reckless nature or where a reporting entity fails to prepare a sustainability report required under the Corporations Act (at [RG 280.155).

ASIC’s role will not generally extend to assessing the ambition or merit of an entity's climate-related strategy or targets; instead, its role is to ensure that this information is transparently disclosed in compliance with the entity's disclosure obligations under the Corporations Act and other relevant frameworks. It is up to the users of sustainability reports to assess the substance of the disclosures in their decision-making regarding the entity (at [RG 280.21]).

As confirmed in RG 280, ASIC's focus is on ‘fostering high-quality, consistent and comparable climate-related financial disclosures’ to enable users to make informed decisions, thereby facilitating fair and efficient capital markets (at [RG 280.20]).

ASIC’s approach to reviewing sustainability reports

ASIC has confirmed that its review of sustainability-related disclosures will extend to information from sustainability reports reproduced in other documents lodged with ASIC, such as Product Disclosure Documents or prospectuses. ASIC will likely carefully scrutinise information that includes or references information from a sustainability report and review audit files prepared by an auditor of a sustainability report to monitor compliance with the Corporations Act (at [RG 280.116]).

ASIC may undertake reviews proactively by way of thematic surveillance, reactively as part of an investigation or in response to reports of misconduct and/or on any other basis it determines necessary to ensure compliance with the reporting regime (at [RG 280.202]).

ASIC’s approach to granting relief

Pursuant to section 342(1) of the Corporations Act, ASIC has the statutory power to grant individual relief from sustainability reporting if it is satisfied that the entity complying with the relevant obligations under the Corporations Act would:

(a)        render the sustainability report misleading;

(b)        be inappropriate in the circumstances; or

(c)         impose unreasonable burdens on the entity.

ASIC has indicated that it will consider the following factors when assessing whether to grant relief from the sustainability reporting requirements:

• The underlying policy objectives of the sustainability reporting regime to improve the quality, consistency and comparability of climate-related financial disclosures to enable users of that information to make informed decisions about the climate-related risks and opportunities of reporting entities.

• The users of the sustainability report, their information needs and how those users are likely to be impacted if relief is granted.

• Established policy and precedents in relation to financial reporting, including ASIC’s existing regulatory guidance: Regulatory Guide 51 Applications for relief (RG 51), Regulatory Guide 43 Financial reports and audit relief (RG 43) and Regulatory Guide 115 Audit relief for proprietary companies (RG 115). 

ASIC has said that it will consider any applications seeking relief from the sustainability reporting and audit requirements and encourages reporting entities to engage with ASIC early if it considers it may have reasonable grounds for relief. These applications may take some time to consider in the early days as they may raise complex or novel issues (see [RG 280.163] – [RG 280.165]).

Directions from ASIC for insufficient statements

If ASIC considers that a statement made by an entity in a sustainability report is incorrect, incomplete or misleading in any way, under section 296E, ASIC may direct the entity to explain, correct, complete or provide further information in relation to the statement. Where ASIC directs the entity to correct, complete or amend the statement, the entity will publish the updated statement or provide to any specified people noted in the direction. ASIC will also publish a notice on its website for any direction given to an entity.

It is an offence of strict liability not to comply with a direction from ASIC within the specified time or, if not specified, a reasonable time, attracting a maximum penalty of 60 penalty units ($18,780 as of July 2023). Notably, the application of strict liability preserves the defence of honest and reasonable mistake of fact.

A director of a company, registered scheme, registrable superannuation entity or disclosing entity will be found to have contravened s 344(1) of the Corporations Act if they fail to take all reasonable steps to comply with or to secure compliance, with Part 2M.2 (Financial and sustainability records) or Part 2M.3 (Financial and sustainability reporting). A director will be liable to a civil penalty – a declaration of contravention by the Court – if a director contravenes s 344(1) and the contravention is dishonest, the director will be liable for a much more severe penalty of up to 15 years imprisonment (Corporations Act, Sch 3).

Disclosure requirements for a prospectus

RG 280 provides additional guidance on the disclosure of sustainability statements in a prospectus under s 710 of the Corporations Act. Specific key points of guidance include (see [RG 280.134] – [RG 280.135]):

• Where an issuer has submitted a sustainability report under the new regime, a copy of its most recent report should accompany the prospectus or the prospectus should clearly identify where a copy can be obtained.

• An issuer must disclose sustainability-related financial information in a prospectus if investors and their professional advisers would reasonably require this information to make an informed assessment of the rights and liabilities attaching to the securities offered; and the assets and liabilities, financial position and performance, profits and losses and prospects of the entity issuing the securities.

• Disclosure in the prospectus should adopt the definitions for terms in the AASB S1 or S2 and align with the disclosure principles in Annexure D to AASB S1 and S2 (these include that the disclosures are relevant, sufficiently material, accurately and clearly represented, verifiable and align with other information disclosed by the entity).

• Sustainability-related information should be disclosed in the body of the prospectus (as opposed to an annexure for example) and where relevant, detailed in the business model and investment risk sections of the prospectus.

• In making disclosures in a prospectus, an issuer should consider providing an overarching narrative and analysis in the investment section explaining the significance of the sustainability-related financial information within the broader context of the issuer’s corporate strategy, business model and prospects.