Australian climate reporting: proposed legislation introduced into Parliament

Timing: when are entities required to prepare sustainability reports?

When does the climate-related financial disclosures regime commence?

It is proposed that the climate-related financial disclosure regime will come into force on 1 January 2025 and there will be a phased implementation.

Step 1: Determine your relevant Group

Under the Bill, there are provisions that enable the Minister to set regulations to determine a different threshold in some instances.

Step 2: Determine the first reporting period for your reporting group

Your first reporting period will reflect which reporting group you are in:

• Group 1 entities will first need to report on a financial year commencing during 1 January 2025 – 30 June 2026.
• Group 2 entities will first need to report on a financial year commencing during 1 July 2026 – 30 June 2027.
• Group 3 entities will first need to report on a financial year commencing during 1 July 2027 – 30 June 2028.

Group 3 entities would only be required to make climate-related financial disclosures if they face material climate-related financial risks or material climate-related financial opportunities for the financial reporting period (and otherwise can include a statement saying they do not consider they are materially exposed to such risks or opportunities). However, directors’ declarations and audit requirements would still apply in those circumstances.

Reporting entities: who is (and is not) required to prepare a sustainability report? 

In response to industry feedback, there is now flexibility for corporate groups to report on a consolidated basis, where there are multiple entities within the group which may be caught by the reporting criteria.

The Bill clarifies that if an entity is required to prepare financial statements on a consolidated basis, it may choose to prepare a sustainability report for the consolidated group as the parent entity. Entities which are exempt from lodging financial reports under Chapter 2M of the Corporations Act (including pursuant to deed of cross-guarantee relief and other class order relief instruments), will be exempt from making their own climate-related financial disclosures.

This will benefit non-wholly owned subsidiaries and certain other members of larger corporate groups, although further consideration will be needed in some cases such as entities consolidated into the reporting of overseas based parents.

Our initial view of the legislation is that companies will not be able to rely on ISSB-compliant reports of foreign parent companies to satisfy the Australian climate-related disclosure requirements. To the extent the corporate group comprises Chapter 2M reporting entities that meet the relevant sustainability reporting thresholds in the Bill, we expect that relevant reporting under the Corporations Act would need to occur at the ‘regional’ Australian level (albeit, the Australian group could report on a consolidated basis). The Explanatory Memorandum provides that an entity may apply to ASIC for relief if it considers that there are "appropriate grounds to prepare a consolidated sustainability report on behalf of related entities" (when not otherwise permitted), however we are not optimistic this will ultimately provide a pathway for consolidated reporting at the global level.

Entities registered with the Australian Charities and Not-for-profits Commission will also receive relief from reporting.

Companies limited by guarantee with consolidated annual revenue of $1 million or more and which meet the sustainability reporting thresholds must prepare a financial report and sustainability report, which must be audited. These companies must also prepare a directors’ report, which can be less detailed than typically required of other companies. All three reports must be provided to members who choose to receive them.

Location, location, location: where will the reporting occur?

Where will the climate-related financial disclosures be included?

The Explanatory Memorandum to the Bill states that climate-related financial disclosures will be incorporated in ‘a new annual sustainability report’, which will be ‘added to the existing obligations to prepare annual financial reports under Chapter 2M of the Corporations Act’ and be contained in an entity’s annual report. Unfortunately, it is still unclear the extent to which entities can cross-reference to:

• sections of the broader annual report (for example, the operating and financial review or remuneration report); or
• a separate document outside of the annual report (for example, a sustainability databook).

While ASIC has an instrument that permits cross-referencing in the annual financial report in certain circumstances, the sustainability report will be a separate report and ASIC’s relief would likely need to be updated to extend to facilitate cross-referencing.

Where will the sustainability report be lodged and published?

The sustainability report must be made publicly available on the company’s website the day the report is lodged with ASIC.

Where listed entities rely on dual lodgement relief from needing to lodge their annual financial report with ASIC where it is lodged on the ASX Market Announcements Platform, we expect that ASIC will look to amend the dual lodgement relief to also cover the sustainability report – but a reporting entity would still need to comply with the website disclosure requirement.

Similar to financial reports, directors’ reports and auditor’s reports, the directors of a public company that is required to hold an Annual General Meeting (AGM) must also lay the sustainability report before the AGM. This means that shareholders will have an opportunity to ask questions about the sustainability report and auditors will also need to be prepared to respond to questions in relation to their audit of the sustainability report.

Does it have to be called a “sustainability report”?

Regrettably, yes – the Bill does require the preparation of a “sustainability report” (notwithstanding only climate disclosure is proposed at present). The Government has not adopted industry feedback that flexibility should be provided for entities to label their disclosures as a “climate report” or similar.

This means that entities which already do sustainability reports (separate to their Annual Reports) will need to either integrate that broader information into the new reporting, change the titling of their separate report, or learn to live with the double up.

Content: what will sustainability reporting cover? 

What is disclosed in the sustainability report?

The sustainability report will initially include only climate-related financial disclosure. Specifically, the sustainability report will comprise:

• climate statements;
• any notes to the climate statements;
• any statements prescribed by the Minister (and notes to the statements); and
• a directors’ declaration.

The Bill and the Explanatory Memorandum do not set out the specific content of the climate statements in full, given they will be contained in the Australian Sustainability Reporting Standards being separately developed by the Australian Accounting Standards Board (see here for our most recent briefing on the draft standards).

Notably, however, the Explanatory Memorandum to the Bill does provide that ‘entities will only be required to disclose Scope 3 emissions from their second reporting year, and this may comprise information from a reporting year up to 12 months prior to the current period’. This allows entities to use information gathered from public disclosures made by other entities in the previous year.

Directors’ declaration

The table below sets out the key aspects of the directors’ declaration.

Additional sustainability disclosures mandated by the Minister

The Explanatory Memorandum clearly indicates that while climate is the focus for now, other topics under the ‘environmental sustainability’ umbrella are not far away – referred to as “climate first, but not only…”.

In this regard, the Bill allows for the Minister to make legislative instruments to require the disclosure of additional statements and notes relating to environmental sustainability-related financial matters to be included as part of the sustainability report.

This proposal is despite industry concern that the regime could be broadened significantly without due consultative processes (for example, expansion to nature or other environmental matters). The Explanatory Memorandum to the Bill states that the ‘legislative instrument would be subject to disallowance and sunset after 10 years and will therefore be subject to appropriate Parliamentary scrutiny’.

What are the implications of voluntarily including broader sustainability information in the “sustainability report”?

Entities can voluntarily disclose information in the sustainability report that is not legally required, but that the entity nonetheless considers relevant to sustainability (for example, information about an entity’s nature, first nations or diversity strategy and performance).

The Explanatory Memorandum provides that this information must be clearly distinguished as a ‘separate voluntary statement’ and state that it is not included in the statements or notes because of a requirement of the legislation. This may cause considerable complexity for those seeking to embark on broader sustainability reporting in their Annual Report, and may drive companies to treat their mandatory climate disclosures quite separately.

Relief from disclosing certain information in the sustainability report

Based on the draft Australian Sustainability Reporting Standards, we expect that entities will be relieved from disclosing information in the sustainability report if:

• that information is commercially sensitive; or
• disclosing that information requires undue cost or effort.

While these carveouts are acknowledged in the Explanatory Memorandum to the Bill, we expect that there will be a high standard for entities to rely on them in practice. In particular the relief from disclosing information that requires undue cost or effort is unlikely to be meaningful for larger entities, which we understand are likely to be considered to have the necessary resources available to them for fulsome compliance.

Assurance: what are the audit requirements for sustainability reports?

The Bill makes the sustainability report subject to mandatory audit requirements, in accordance with the accounting standards.

Auditing and assurance of the report before 1 July 2030

Before 1 July 2030, the Bill provides that the audit and assurance requirements will be phased in, in accordance with standards to be developed by the Auditing and Assurance Standards Board (AUASB). The AUASB must make those auditing standards and specify the extent to which sustainability reports for financial years commencing on or before 30 June 2030 must be audited and/or reviewed.

On 20 March 2024, the AUASB released a consultation paper to gather feedback on a potential assurance pathway. The AUASB intends to develop assurance standards in line with the International Auditing and Assurance Standards Board’s final standard over sustainability information, and may provide supplementary standards (or guidance) for an Australian context.

Although not a formal proposal, the consultation paper provides a possible phasing model to facilitate feedback (see table below for Group 1 entities). As the consultation paper was released before the delay in commencement of the sustainability reporting regime was announced, the ‘reporting year’ will need to be amended to reflect a 1 January 2025 commencement date.

Auditing and assurance of the report from 1 July 2030

From 1 July 2030, the permanent audit requirements in the Bill will commence. The Explanatory Memorandum notes that over time, the AUASB standards are expected to evolve in terms of both the extent and level to which disclosures in the sustainability report will need to be assured, reverting to the enduring provisions from 1 July 2030.

Under the ‘enduring’ provisions, an auditor must report to members on whether the auditor is of the opinion that the sustainability report is in accordance with the Corporations Act, including:

• subsection 296A(2) or 296B(1) (contents of climate 26 statements);
• section 296C (compliance with sustainability standards etc.); and
• section 296D (climate statement disclosures).

If the auditor is not of that opinion, the auditor’s report must say why. The auditor’s report must also describe any defect or irregularity and deficiencies, failures or shortcomings that may have arisen if they were not given the information, explanation and assistance necessary to complete the audit.

Records: what documents are needed for sustainability reporting?

An entity required to prepare a sustainability report will be required to keep records that correctly explain and record its “preparation of the substantive provisions in the sustainability report” for 7 years. These sustainability records include documents and working papers that explain the methods, assumptions and evidence from which the substantive provisions are prepared.

There is also a requirement to notify ASIC of the place in Australia where the records are kept. This notification is only required in the first year of reporting, or if the same or new information is kept in another place for the first time. 

Failing to maintain sustainability records for 7 years is both a fault-based offence (with a maximum penalty of two years imprisonment) and a strict liability offence (with a maximum penalty of 60 penalty units).

Enforcement: ASIC directions, protections for reporting entities

Disclosures in the sustainability report will be subject to the existing liability regime under the Corporations Act including misleading and deceptive conduct, director’s duties, auditing and continuous disclosure obligations.

ASIC’s directions

Where ASIC considers a statement is incorrect, incomplete, or misleading in anyway, it can direct companies to confirm, amend, explain, correct, complete or amend the statement (and / or to produce information or documents that could substantiate or support the statement).

In the context of current trends for activist complaints directly to ASIC, we expect that “requests for intervention” to the regulator will become commonplace, arguing for ASIC to exercise these directions powers.

ASIC is required to publish on its website notice of its directions to a company to correct, complete or amend a statement in a sustainability report (because, for instance, ASIC thinks it is misleading).

It will be important for companies to stress test whether its climate-related statements have a reasonable basis, and whether this can be evidenced, to protect against ASIC inquiries and consequential public corrections.

What modifications to the liability regime are in the Bill?

The Bill has broadened the scope of the modified liability regime which will apply for financial years commencing during the three years from the start date (i.e. the day after the Bill receives Royal Assent) for the following areas:

• Scope 3 greenhouse gas emissions (including financed emissions);
• scenario analysis in the sustainability report; or
• a ‘transition plan’ within the meaning of the sustainability standards.

The protection is also extended to cover all forward-looking statements related to climate and made for the purpose of complying with sustainability standards, if they are made in sustainability reports for financial years commencing within the first 12 months of the start date (i.e. the day after the Bill receives Royal Assent).

However, this protection only applies to a protected statement made within the sustainability report or statements required under a Commonwealth law that are “substantively protected statements” (for example, a reproduction of a protected statement in a Product Disclosure Statement). Our expectation is that this would also extend to continuous disclosure as set out in s 674 of the Corporations Act. Unhelpfully it does not appear to extend to disclosures on website, investor presentations, or other voluntary disclosures.

During this time, only ASIC will be able to take action for misleading and deceptive conduct.

Where to from here?

Now is the time for entities to track through the scale of uplift required for compliance and dust off their ‘sustainability reporting readiness’ agenda.

Conducting a ‘gap analysis’ of how the entity’s current governance, risk, strategy, metrics and targets arrangements and disclosures stack up against the Australian Sustainability Reporting Standards requirements and the Bill is a helpful starting point to identify what action needs to be taken to get to a point where the entity will be able to prepare a fully compliance sustainability report when the requirements commence.

It will also be important to have the right people involved and a multi-disciplinary working group could be key to a smooth transition to climate reporting.

With the delayed auditing and assurance requirements, we are actively helping companies to prepare the governance processes, reporting and verification procedures, and content to be ready for compliance (and peace of mind…) come 2025.