New climate-related financial disclosure requirements: Key points for clients

New mandatory climate-related financial disclosure obligations for large businesses and financial institutions will be introduced to the Corporations Act from July this year, following the release of draft legislation on 12 January 2024.

Summary

Entities that:

• are currently required to lodge financial reports under Chapter 2M of the Corporations Act (disclosing entities¹, public companies, large proprietary companies², registered schemes, and registrable superannuation entities) and
• meet certain size thresholds

will be required to produce an annual sustainability report, keep records for seven years and undergo auditing.

Entities that prepare financial reports on a consolidated basis may do the same for sustainability reports (s 292A(2)), and directors of controlled entities in the group will be obliged to provide any required information.

The annual sustainability report must be provided to members and may be included in the business of an AGM, and is mandatory for public companies. In our view, this is likely to be good practice for other entities as well.

Obligations are to be phased in over four years starting with very large entities.

Policy intention of new law

The new legislation intends to provide investors with greater transparency of the financial implications of an entity’s climate-related risks and plans, and to improve the quality and comparability of climate-related financial disclosures. The new law leverages the existing financial reporting regime under Chapter 2M of the Corporations Act.

Entities in scope

By the end of the phased application period, all entities that are required to produce financial reports under Chapter 2M are required to report if they also fall within one (or more) of the following three groups³:

Entities out of scope

Companies exempt from lodging financial reports under Chapter 2M are also exempt from sustainability reporting (s 285A).

What is to be disclosed?

Annual sustainability reports must be prepared in accordance with sustainability standards to be published by the Australian Accounting Standards Board (s296C(1)) prior to July 2024, which are based on international sustainability standards (Sustainability Standards). Draft standards can be found here. The key requirement is to provide a climate statement addressing:

• material climate related financial risks and opportunities (s 296D(1)(a)). "Materiality" of information is judged in relation to whether omitting, misstating or obscuring that information could reasonably be expected to influence decisions of primary users of general-purpose financial reports (ie. about the entity’s prospects);
• metrics and targets for scope 1, 2 and 3 emissions⁴ (s 296D(1)(b));
• any governance or risk management processes and procedures (s 296D(1)(c)); and
• quantity of scope 3 emissions (except that entities are exempt from reporting scope 3 emissions for the first year) (s 296D(1)(c) and s 296D(3)).

Directors' declaration

The sustainability report must also include a directors' declaration supported by a board resolution giving the directors' opinion on whether the statements in the report comply with the Sustainability Standards and the Corporations Act ((s 296A(6)).

Exemptions for small (Group 3) entities

Group 3 entities are exempt from an extensive report if they do not have material climate risks and opportunities to report in a given financial year (s 296B), though they have to make a statement to that effect. This will apply from 1 July 2027, when this group must start reporting.

Product disclosure

Generally, the prospectus and offer information for financial and superannuation products must inform people of their right to the most recent sustainability report.

Record keeping

Entities must keep records for seven years that correctly explain and record their preparation of the sustainability report (including all workings and calculations). Failure to comply is a strict liability offence (s 286A).

Audits

Auditing of climate disclosures will be phased - assurances of scope 1 and 2 emissions disclosures will commence from 1 July 2024 (s 301B) and full auditing from 1 July 2030 (s 301A). Auditing must be conducted by the auditor of the financial reports (with support from climate and sustainability experts) in accordance with new assurance standards to be published by the Auditing and Assurance Standards Board (which will mirror international assurance standards) (s 307AC). Existing auditor duties will extend to these new reports. New strict liability offences will apply.

Liability for sustainability reports

Between 1 July 2024 and 30 June 2027, entities will not be financially penalised for inaccuracies in relation to a statement in a sustainability report for the purpose of complying with a Sustainability Standard and which concerns scope 3 emissions or scenario analysis (s 1705B).

However, ASIC will be able to take action for misleading and deceptive conduct or where it seeks an injunction or declaration if ASIC considers that a statement in a sustainability report is incorrect, incomplete or misleading (eg. to amend an incorrect statement). Failure to comply with an ASIC direction may result in 60 penalty units (s 1705C).

Recommended actions

Since Group 1 and Group 2 entities are having to report first, some early work needs to be done to:

• understand the new requirements and ensure your Board is aware of their duties and liability in respect of the new reports
• consider the nature and size of your entity and confirm:
  • which grouping the entity belongs to; and
  • if in Group 1 or Group 2, determine and communicate the timetable for the first report.

Thereafter, you will need to:

• identify emissions/sustainability data and skills gaps, and
• obtain guidance, in consultation with your accounting and auditing advisers, regarding how and what to report, which is in the draft sustainability standards.

For more information on how the new disclosure requirements may impact your organisation, please contact a member of our team.

¹ The entity is a disclosing entity if: (1) any securities of the body (except interests in a managed investment scheme) are ED securities, or (2) if any interests in a managed investment scheme are ED securities, the undertaking to which the interests relate is a disclosing entity (s 111AC Corporations Act).

² A proprietary company is a large proprietary company for a financial year if the company satisfies at least two of the following criteria, unless prescribed otherwise by the regulations: (a) the consolidated revenue for the financial year (including for entities the company controls) is $25M, (b) the value of the consolidated gross assets at the end of the financial year (including for entities the company controls) is $12.5M or (3) the company and the entities it controls have 50 or more employees (s 45A(3)).

³ Source: https://treasury.gov.au/consultation/c2024-466491.

⁴ Scope 1 emissions are emissions made as a direct result of a company's "facility level" activities (eg. emissions from manufacturing processes). Scope 2 emissions are emissions made from the indirect consumption of energy at another facility (eg. purchased electricity). Scope 3 emissions cover all indirect emissions that a company is responsible for, up and down the value chain. They occur as a consequence of the activities of a facility, but from sources not owned or controlled by that facility's business (eg. emissions from products when customers use them).