INTRODUCTION
The purpose of this Alert is to draw attention to the Climate-related financial disclosure: exposure draft legislation consultation (Draft Legislation) published by the Australian Treasury on 12 January 2024. This draft legislation follows Treasury’s second consultation paper on the subject (June 2023).
The draft legislation proposes amendments to the Corporations Act 2001 (Cth) (Corporations Act) and related legislation. The amendments set out new climate-related financial reporting requirements for entities, leveraging the existing financial reporting regime defined by Chapter 2M of the Corporations Act. The amendments require a new ‘sustainability report’ that will form part of the annual financial report.
The sustainability report will be prepared in compliance with the Australian Sustainability Reporting Standards (ASRS) issued by the Australian Accounting Standards Board (AASB). The ASRS are currently at exposure draft stage.
The sustainability report will also be subject to mandatory assurance requirements which are phased in over time. There is a requirement for limited assurance over the disclosures of scope 1 and scope 2 greenhouse gas emissions for financial years commencing on or after 1 July 2024, followed by reasonable assurance over the sustainability report for financial years commencing on or after 1 July 2030.
The Government’s policy position is that it is committed to improving the quality of climate-related financial disclosures, providing Australians and investors with greater transparency and more comparable information about an entity’s exposure to climate-related financial risks and opportunities and climate-related plans and strategies. The Draft Legislation is also intended to support regulators to assess and manage systemic risks to the financial system as a result of climate change and efforts taken to mitigate its effects, support Australia’s reputation as an attractive destination for international capital, and help draw the investment required for the transition to net zero. The requirement to prepare a sustainability report will bring Australia in line with other jurisdictions, including the EU, UK, New Zealand and Japan.
Comments on the draft legislation close on 9 February 2024.
Subject to the legislation being enacted by the Parliament and receiving Royal Assent by the end of June 2024, the legislation will be in force for financial years commencing on or after 1 July 2024.
This document is heavily based on the policy statement and explanatory materials accompanying the Draft Legislation. Certain additions/amendments have been made for clarity and/or inclusion of additional guidance.
OVERVIEW
The policy statement and explanatory materials outline the Government’s policy positions related to:
- the scope of the reform (including entities covered);
- the content required in reports;
- the location of reporting;
- assurance requirements for disclosures; and
- the application of liability for disclosures.
The draft legislation to enact mandatory climate-related financial disclosures will be effected through amendments to the Corporations Act and related legislation.
Detailed sustainability and assurance standards will be made and maintained by the Australian Accounting Standards Board (AASB) and the Australian Auditing and Assurance Standards Board (AUASB).
SUMMARY OF DRAFT LEGISLATION
The amendments set out new climate-related financial reporting requirements for entities, leveraging the existing financial reporting regime under Chapter 2M of the Corporations Act. Part 2M.3 addresses financial reporting, including who must prepare annual financial reports and the contents of those annual financial reports.
The amendments include a new ‘sustainability report’ for a financial year, which entities will be required to prepare in addition to financial statements, notes to financial statements and directors’ declaration which form part of an annual financial report.
The sustainability report for a financial year will consist of:
- the climate statement for the year;
- notes to the climate statement;
- any statements prescribed by the regulations for the year; and
- the directors’ declaration about the compliance of the statements with the relevant sustainability standards.
The climate statements are required to be prepared in compliance with the Australian Sustainability Reporting Standards (ASRS) issued by the AASB.
A phased-in approach will apply to the obligation to prepare a sustainability report, starting with a relatively limited group of very large entities that expands to apply to progressively smaller entities. The metrics utilised to determine the year in which entities are required to commence climate reporting are: consolidated gross assets, consolidated revenue and employee thresholds, consistent with metrics identified in the Corporations Act and Corporations Regulations 2001 (the Regulations) for large proprietary companies. The individual thresholds do not align with the definition of a ‘large proprietary company’.
DETAILS OF DRAFT LEGISLATION
Scope of reform
Entities in scope
Large entities that are required to prepare and lodge annual reports under Chapter 2M of the Corporations Act will be required to prepare a sustainability report, with the requirements phased in over time based on the scale of the consolidated entity. Listed and unlisted companies and financial institutions as well as registrable superannuation entities, registered investment schemes and corporate collective investment vehicles (CCIVs) are covered by the legislation.
Large entities are defined using size thresholds equivalent to the existing Large Proprietary Company definition, noting that this threshold will apply to both listed and unlisted companies.
Asset owners (such as registrable superannuation entities and registered schemes) will be considered large if funds under management are more than $5 billion.
Where entities are subject to both the annual reporting requirements under the Corporations Act and emissions reporting obligations under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act), they will be required to disclose information about climate-related risks and opportunities regardless of size.
Entities that are exempt from lodging financial reports under Chapter 2M of the Corporations Act, including where exemptions have been made through Australian Securities and Investment Commission (ASIC) class orders or where the entity is registered with the Australian Charities and Not-for-profits Commission, will not be required to prepare a sustainability report under the Draft Legislation.
Phasing of reporting obligations
Entities subject to mandatory climate-related financial disclosure will be phased in three groups, over a four year period, as set out in the table below.
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The consolidated assets and FTE employees of the consolidated entity are calculated as at the end of the financial year.
To determine whether an entity controls another entity in relation to sustainability reports, reference is made to the accounting standards (i.e. AASB 10 Consolidated Financial Statements). Consolidated revenue and consolidated gross assets must also be calculated in accordance with the accounting standards in force at the relevant time.
Consolidated reporting
If an entity is required to prepare financial statements on a consolidated basis, the group head is the only entity that must prepare a sustainability report and it must be prepared as if the consolidated entity is a single entity – i.e. on a consolidated basis.
Content of the Sustainability Report
Structure
An annual sustainability report consists of:
- the climate statement for the year;
- notes to the climate statement;
- any statements prescribed by the regulations for the year; and
- the directors’ declaration about the compliance of the statements with the relevant sustainability standards.
Reporting framework
The climate statement of a sustainability report must be prepared in compliance with the ASRS as issued by the AASB.
The climate statement must include the following disclosures for the financial year, as required by the ASRS:
- material climate-related financial risks and opportunities the entity faces;
- metrics and targets of the entity related to climate, including scope 1, 2 and 3 emissions of greenhouse gas (note the 1 year delay in scope 3 emissions); and
- governance or risk management processes, controls and procedures of the entity related to these matters.
The ASRS are currently at exposure draft stage. Refer to SRA 2024-1 Australian Sustainability Reporting Standards Exposure Draft for a high level summary of the disclosure requirements in the ASRS and how they compare to the international IFRS Sustainability Disclosure Standards.
The requirement to disclose the quantity of scope 3 emissions does not apply to the first year an entity is required to prepare a sustainability report.
Lack of material climate-related financial risks or opportunities for a financial year
If an entity in Group 3 determines that it does not have material climate risks or opportunities for the financial year, the entity’s climate statement will only include a statement to that effect, made in accordance with the ASRS.
However, in our view, it would be quite unusual in practice for such a situation to occur in compliance with the ASRS. Such a statement could likely only be made where an entity undertook an appropriately defined and resourced project to identify the risks and opportunities to which the entity is exposed, which would then be subject to limited assurance procedures of an auditor. The ability to make such a statement should not be seen by directors as an option to ‘reduce the impact’ of the reporting regime.
Directors’ declaration
The directors’ declaration is a declaration by the directors of their opinion on whether the statements are in accordance with the Corporations Act, including in compliance with the ASRS. These declarations must be made with a resolution of the directors, dated, and signed.
Location, timing & report disclosure
Location & timing
The sustainability report will form a discrete report required as part of annual financial reporting obligations and be contained in an entity’s annual report.
Entities should include an index table within their annual report that enables users to easily navigate the climate disclosures.
The timing of annual report lodgement, including for those required to lodge with ASIC, will stay consistent with current requirements under section 319 of the Corporations Act.
Report disclosure
Alongside the requirements to provide the financial report, directors’ report and auditor’s report for a financial year to members, the reporting entity must also provide the sustainability report to members.
An entity must make its sustainability report publicly available on its website the day after the report is lodged with ASIC if it is required to prepare such a report and not required to provide this report to its members.
Similar to financial reports, directors’ reports and auditor’s reports, the directors of a public company that is required to hold an AGM must also present the sustainability report before the AGM.
The prospectus for continuously quoted securities or a product disclosure statement relating to a managed investment scheme that is an ED security must inform people of their right to obtain a copy of the most recently lodged sustainability report if the body has lodged a sustainability report with ASIC.
The contents of an offer information statement for the issue of a body’s securities must include a copy of the most recent sustainability report prepared.
Annual financial reporting requirements for companies, registered schemes and disclosing entities apply to a retail CCIV in relation to each of its sub-funds as if the requirement were a requirement to report to members of the sub-fund for the year.
Assurance requirements
The Draft Legislation requires:
- limited assurance over Scope 1 & 2 greenhouse gas emissions for financial years commencing on or between 1 July 2024 until 30 June 2030;
- reasonable assurance of the sustainability report for financial years commencing on or after 1 July 2030; and
- the same responsibilities and regulatory requirements of the auditor in relation to the audit of the financial report are extended to also cover the audit of the sustainability report.
The sustainability report would be audited by the registered company auditor supported by climate and sustainability experts where appropriate.
The AUASB will develop assurance standards in line with the final ISSA 5000 General Requirements for Sustainability Assurance Engagements (currently at exposure draft stage). The draft legislation states that the standard must be issued before 1 July 2024.
Liability for disclosures
The Draft Legislation modifies existing liabilities and offences that apply generally to corporate reporting for a transitional period.
This limited immunity applies to statements in sustainability reports prepared for financial years commencing between 1 July 2024 and 30 June 2027.
No action, suit or proceeding (collectively ‘legal action’) is able to be brought against a person or entity in relation to the following disclosures made in those sustainability reports:
- disclosures of Scope 3 greenhouse gas emissions; and
- disclosures in relation to climate-scenario analysis.
The most common legal actions likely to be affected are proceedings for misleading or deceptive conduct. During the transitional period, only ASIC will be able to take action for misleading and deceptive conduct in relation to these types of disclosures. However, this does not prevent criminal proceedings.
This protection does not apply to legal actions that are civil actions brought by ASIC relating to contraventions of provisions with a fault element and/or where the remedy sought by ASIC is an injunction or declaration. The policy intention is to ensure that during the transitional period, ASIC can undertake a role that promotes education about compliance with the new reporting regime and deter behaviour and reporting practice that is contrary to the policy position.
If ASIC considers that a statement an entity makes in a sustainability report for a financial year commencing between 1 July 2024 and 30 June 2027 is incorrect, incomplete or misleading in any way, ASIC may:
- direct the entity to confirm to ASIC that the statement is correct or complete;
- explain the statement to ASIC; and
- correct, complete or amend the statement in accordance with the direction.
The entity must comply with that direction. The penalty for a failure to comply with such direction is 60 penalty units.
RESPONDING TO TREASURY’S CONSULTATION
The Draft Legislation has a 30 day comment period closing 9 February 2024.
Grant Thornton is preparing a response to the Draft Legislation. We encourage all stakeholders to participate in direct feedback to Treasury, but Grant Thornton is interested in the thoughts of stakeholders who do not wish to contact Treasury directly on this matter.
If you have any feedback that you would wish for inclusion in a submission, but do not wish to submit directly to Treasury, please consider contacting us at sustainability.reporting@au.gt.com.
FURTHER INFORMATION
If you wish to discuss any of the information included in this Sustainability Reporting Alert, please get in touch with your local Grant Thornton Australia contact or a member of the Sustainability Reporting team at sustainability.reporting@au.gt.com.
