On 27 March 2024, the Federal government introduced the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth) (the Bill) to the House of Representatives. Schedule 4 of the Bill proposes a new mandatory climate risk disclosure framework for large Australian entities. The Bill follows the recent consultation on the Treasury Laws Amendment Bill 2024: Climate-related Financial Disclosure (Exposure Draft) which the Federal government released in January. See Gilbert + Tobin’s Sustainability Insights March 2024 issue for further details on the regime proposed under the Exposure Draft.

If enacted, the Bill will require entities that lodge financial reports under Chapter 2M of the Corporations Act 2001 (Cth) (Corporations Act) and meet certain thresholds - or have emissions reporting obligations under the National Greenhouse and Energy Reporting (NGER) scheme - to submit a sustainability report disclosing climate-related risks and opportunities in accordance with sustainability standards.

Below, we summarise the important elements of the Bill, the key differences between the Bill and the Exposure Draft, and how businesses can prepare for the proposed regime.

Key takeaways

• Delayed commencement of reporting obligations: the mandatory disclosure requirements will now be phased in from 1 January 2025.
• Transitional period for directors’ declarations: for the first three years of the regime, directors who are required to provide a declaration alongside a sustainability report will only need to provide an ‘opinion’ on whether the entity took reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Bill.
• Modified liability approach: ‘protected’ statements made within sustainability reports and auditors’ reports will be protected from misleading and deceptive conduct claims for the first three years, unless the claim is made by ASIC. This temporary immunity will also apply to forward-looking statements within the first 12 months of the regime.
• Greenhouse gas emissions: the definitions for Scope 1, 2 and 3 greenhouse gas emissions have been amended to align with the definitions included in the Australian Accounting Standards Board’s (AASB) Australian Sustainability Reporting Standards.
• Climate disclosure standards: will be subject to the Auditing and Assurance Standards Board’s (AUASB) forthcoming assurance requirements (which are currently open for consultation).

Who will be required to report, and when?

Consistent with the Exposure Draft, 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. 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’: 

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.

The Bill has clarified that the reporting regime will apply to specific asset owners, including registered schemes, registrable superannuation entities and retail corporate collective investment vehicles (CCIVs).

Companies that are limited by guarantee, with a consolidated annual revenue of $1 million or more and which meet the sustainability reporting thresholds will also be required to prepare a sustainability report.

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).

Which entities will not be required to report?

The Explanatory Memorandum to the Bill confirms that 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 exempt entities 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; and
• exempt public authorities (as defined in section 9 of the Corporations Act).

What will sustainability reports be required to include?

A sustainability report will need to contain the following:

• the climate statement for the year, including any notes made in relation to the statement;
• any statements prescribed by the regulations for the year, including any notes made in relation to the statement; and
• a directors’ declaration that the statements comply with the Bill.

Climate statement

The Bill has provided some further clarification on the scope of climate statements. Climate statements for a financial year, and any notes made in relation to the climate statement, will need to disclose the following:

• any material climate-related financial risks or opportunities;
• any metrics and targets relating to climate that are required to be disclosed by the forthcoming sustainability standards, including Scope 1, 2 and 3 greenhouse gas emissions (and financed emissions); and
• any information about the governance, strategy or risk management by the entity in relation to the climate risks, opportunities, metrics and targets.

The climate statement will need to be prepared in accordance with the Australian Sustainability Reporting Standards (ASRS) developed by the AASB. The AASB released an Exposure Draft of these standards (draft sustainability standards) in October 2023. The draft sustainability standards align as far as possible with the International Sustainability Standards Board (ISSB) IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures (ISSB sustainability standards).  

The draft sustainability standards provide for the following:

• entities will be required to use all reasonable and supportable information that is available to them at the reporting date;
• 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;
• entities will not be required to disclose information that is commercially sensitive.

Amended definition of greenhouse gas emissions

The Bill proposes to align the definition of Scope 1, 2 and 3 greenhouse gas emissions with the definition given in the draft sustainability standards:

• Scope 1 emissions: direct greenhouse gas emissions that occur from sources that are owned or controlled by the entity;
• Scope 2 emissions: indirect greenhouse gas emissions from the generation of purchased or acquired electricity, steam, heating or cooling consumed by the entity; and
• Scope 3 emissions: indirect greenhouse gas emissions (not included in Scope 2 greenhouse gas emissions) that occur in the value chain of an entity, including both upstream and downstream emissions.

These definitions in the draft sustainability standards are adopted from the ISSB sustainability standards. Previously the definitions for Scope 1 and Scope 2 emissions had been linked to the NGER Act. We assume the change is to ensure consistency between the Bill and the ASRS, noting also that some entities required to prepare sustainability reports will not meet reporting thresholds under the NGER Act.

The Bill also provides that any disclosures in relation to Scope 3 greenhouse gas 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.

Exemption for Group 3 entities 

The Bill 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 the draft sustainability standards 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

The Bill introduces a transitional provision for directors’ declarations for the first three years. Directors will be permitted to declare that the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Bill. 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.

After the first three years, directors will be required to declare 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).

Lodgment, distribution and publication requirements

The Bill provides that sustainability reports will need to be lodged with ASIC within 3 months after the end of the financial year.

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 or 4 months after the end of the financial year.

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.

Record-keeping for sustainability reports

The Bill provides that entities required to prepare a sustainability report will be required to keep records explaining their preparation of the substantive provisions of the report for 7 years.

Where records are kept outside of Australia, sufficient written information to support the substantive provisions of the report must be kept within Australia.

ASIC directions

The Bill directs that if ASIC considers that a statement made by an entity in a sustainability report is incorrect, incomplete or misleading in any way, ASIC may direct the entity to correct, complete or provide further information in relation to the statement. ASIC must 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.

Assurance and auditing requirements for sustainability reports

The Bill proposes that sustainability reports will be subject to mandatory audit requirements, in accordance with the Auditing and Assurance Standards Board (AUASB) auditing standards. Auditors of sustainability reports will have the same obligations as an auditor of a financial report under the Corporations Act.

In response to stakeholder consultation, the Bill proposes a phased-in approach for auditing of sustainability reports. 

Assurance and auditing of reports before 1 July 2030

For financial years commencing before 1 July 2030, the Bill directs the AUASB to make standards that specify the extent of, and provide for the process for, auditing sustainability reports.

The Bill provides that 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.

The Explanatory Memorandum to the Bill indicates that the sustainability report will initially only be required to be reviewed or audited to the extent required by AUASB auditing standards. Over time, it is anticipated that these standards will evolve in terms of both the extent and level to which disclosures in the sustainability report will need to be assured. The Consultation Paper on the draft AUASB auditing standards proposes a progressive assurance phasing-in regime from 1 July 2024 to 1 July 2030 onwards.

Assurance and auditing of reports from 1 July 2030

From 1 July 2030, the permanent assurance and auditing requirements in the Bill 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.

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.

Limited immunity for statements in sustainability reporting

The Bill proposes a new modified liability approach for the first three years of sustainability reporting. Transitional provisions provide that 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.

For the purpose of this modified liability approach, a protected statement is:

• a statement made within a sustainability report within the first three years of the regime; or
• an auditor’s report of audits or reviews of sustainability reports about:
  • Scope 3 greenhouse gas emissions;
  • scenario analysis made in those sustainability reports; or
  • a transition plan.

During this transitional period, no action, suit or proceeding may be brought against a reporting entity in relation to a protected statement. Only ASIC will be able to take action for misleading and deceptive conduct in relation to climate-related disclosures for the first three years of the reporting regime.

The modified liability also covers all 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.

Next steps: Getting prepared for the climate-related financial disclosure regime

The Senate has referred the Bill to the Senate Economics Legislation Committee for inquiry and report by 30 April 2024. The Committee is currently accepting public submissions in relation to the inquiry.

Companies can start preparing for the introduction of the new climate-related financial disclosure framework by:

• reviewing the new framework requirements, and how they will apply to their entity;
• consider whether there are any matters that they wish to raise in respect of the Bill and consider making a submission to the Committee;
• identifying what climate-related risks and opportunities are impacting their entity, and how they are being managed; and
• identifying any gaps between the draft sustainability standards and the entity’s current approach to climate governance, strategy, risk management, metrics and targets.

Other developments in Australia and overseas

Update on sustainability-related disclosure litigation in Australia

Regulators have indicated that they will be placing greater scrutiny on sustainability-related claims. While in the context of greenwashing, such claims demonstrate Australian regulators’ focus on enforcing transparent and accurate claims and disclosures from companies about climate-related operations.

On 28 March 2024, the Federal Court of Australia handed down judgment in Australian Securities and Investments Commission v Vanguard Investments Australia Ltd [2024] FCA 308. The Federal Court found that Vanguard had contravened the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) numerous times by making false or misleading claims about the ESG exclusionary screens that were applied to one of its ESG funds, including by failing to exclude investments in companies with fossil fuel activities. 

The ASIC deputy chair Sarah Court commented: ‘As ASIC’s first greenwashing court outcome, the case shows our commitment to taking on misleading marketing and greenwashing claims made by companies in the financial services industry. It sends a strong message to companies making sustainable investment claims that they need to reflect the true position’.

Claims against companies for sustainability-related disclosures are not just being brought by the Regulators. Not-for-profit Greenpeace Australia filed proceedings in the Federal Court of Australia in December 2023 against Australia’s largest oil and gas company, Woodside Energy, alleging that Woodside had issued misleading and deceptive statements about its green credentials.

Earlier in 2023, Greenpeace Australia also filed a complaint to the Australian Competition and Consumer Commission (ACCC) requesting the ACCC to investigate whether environmental claims by Toyota are misleading or deceptive.  

How are other jurisdictions implementing climate-related disclosure?

The Bill follows other jurisdictions including New Zealand, the United Kingdom, Europe and the United States, in implementing mandatory climate-related disclosure frameworks.

In October 2021, New Zealand introduced its mandatory climate-related disclosure regime. Reporting against the Aotearoa New Zealand Climate Standards is required for large companies, insurers, banks and investment by the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021. Reporting obligations commenced on 1 January 2023 and the first reports from climate reporting entities will be published through 2024. 

In April 2022, the United Kingdom (UK) introduced the Companies (Strategic Report)(Climate-related Financial Disclosure) Regulations 2022, implementing mandatory sustainability reporting for large companies. The UK Government is currently preparing UK Sustainability Disclosure Standards (UK SDS), intended to align corporate disclosures on sustainability-related risks and opportunities for companies with the ISSB standards. The UK SDS are anticipated to take effect from 1 January 2025.

In January 2023, the European Union’s Corporate Sustainability Reporting Directive (CSRD) entered into force. The CSRD introduced detailed sustainability reporting requirements for large European Union (EU) companies, non-EU companies above certain turnover thresholds and non-EU companies with securities listed on an EU-regulated market. Companies subject to the CSRD will be required to report according to the European Sustainability Reporting Standards (ESRS). Guidance on reporting in accordance with the ESRS has recently been released to assist reporting entities.

In March 2024, the United States Securities and Exchange Commission (US SEC) issued a final rule under the Securities Act 1993 and Securities Exchange Act 1934 that will require registrants to include climate-related disclosures in their registration statements and annual reports. Registrants will be required to disclose information about climate-related risks that have materially impacted, or are likely to impact, its business strategy, operations or outcomes. Whilst the final rule is currently subject to a number of legal challenges and an administrative stay, if those are dismissed, large accredited filers would need to begin reporting for the period year ending 2025.