INTRODUCTION
The purpose of this Alert is to draw attention to the Consultation Paper CP 380 Sustainability reporting (consultation paper) and accompanying draft regulatory guide RG 000 Sustainability reporting (draft regulatory guidance) published by the Australian Securities and Investment Commission (ASIC) on 7 November 2024.
The consultation paper and draft regulatory guidance explains ASIC’s proposed interpretation of the sustainability reporting requirements under the Corporations Act 2001 (the Corporations Act, or the Act) and how they intend to administer and enforce the requirements of the Act as it relates to sustainability reporting. ASIC has made it clear that they expect entities to engage with the new sustainability reporting requirements and take steps to ensure they will be ready to comply with them as they are phased in.
Comments on the draft regulatory guidance close 19 December 2024, with the final version of the regulatory guidance expected to be issued by ASIC in Q1 2025.
This Alert is heavily based on the consultation paper and draft regulatory guidance. Certain additions/amendments have been made for clarity and/or inclusion of additional guidance. This is not an exhaustive list of all of the draft regulatory guidance, and does not replace reading the guidance itself.
BACKGROUND
Sustainability reporting requirements were introduced into the Corporations Act following the enactment of the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 in September 2024.
The Australian Sustainability Reporting Standard, AASB S2 Climate-related Disclosures (AASB S2), was made by the Australian Accounting Standards Board (AASB) for the purposes of the Corporation Act. The AASB also issued AASB S1 General Requirements for the Disclosure of Sustainability-related Financial Information (AASB S1) as a voluntary sustainability reporting standard.
This Alert does not cover the requirements of AASB S1 or AASB S2. For an understanding of the requirements of AASB S1 and AASB S2, please refer to our publication Unpacking Australian Sustainability Reporting.
In the draft regulatory guidance ASIC have used the term “sustainability-related information” to refer to all forms of information about sustainability. This term is not limited to sustainability-related financial information under AASB S1 or AASB S2 (the sustainability reporting standards) and may include sustainability-related information that is not relevant or useful for assessing the entity’s prospects. It may also include sustainability-related information disclosed under other sustainability reporting standards or frameworks.
By contrast, ASIC has used the term “sustainability-related financial disclosures” or “sustainability-related financial information” to refer to information disclosed under either AASB S1 or AASB S2. This is sustainability-related information that is relevant or useful for assessing the entity’s prospects including, cash flows, access to finance and cost of capital over the short, medium and long term.
This Alert uses the terms “sustainability-related information”, and “sustainability-related financial information” in the same way.
PREPARING THE SUSTAINABILITY REPORT
Asset owners test
The draft regulatory guidance has clarified how registrable superannuation entities (RSEs), registered schemes, and retail CCIVs should interpret whether they are obliged to prepare an annual sustainability report.
RSEs, registered schemes and retail CCIVs may be required to prepare a sustainability report for the financial year commencing from 1 July 2026 if the value of assets controlled at the end of the financial year of the entity, and the entities it controls, is equal to or greater than $5 billion.
The draft regulatory guidance clarifies that for retail CCIVs, the $5 billion threshold applies to the whole CCIV (that is, the sum of all assets under management in all sub-funds). In determining whether an entity controls another entity, Australian Accounting Standard AASB 10 Consolidated financial statements should be considered.
Stapled groups
In certain circumstances, a subsidiary that is part of a consolidated entity or an entity that is part of a stapled group is not be required to prepare a sustainability report. These circumstances are:
- a parent entity elects to prepare a sustainability report for the consolidated entity for the financial year and is also required by the Australian accounting standards to prepare financial statements for the consolidated entity for the financial year; or
- a stapled entity in the stapled group prepares a sustainability report on behalf of the stapled group relying on ASIC Corporations (Reporting by Stapled Entities) Instrument 2023/673.
Maintaining sustainability records
Under the Corporations Act, an entity that is required to prepare an annual sustainability report is also required to keep written sustainability records.
The draft regulatory guidance explains that this comprises documents and working papers that explain the methods, assumptions and evidence from which the sustainability report (apart from the directors’ declaration) are made up. The sustainability records should be available on request by ASIC, and will need to be provided to auditors promptly to support the auditor’s report on the sustainability report.
The nature of this documentation can be broad and may include:
- minutes of board or committee meetings;
- internal reports or analysis;
- reports commissioned by third parties, such as consultants or experts;
- greenhouse gas emissions inventories;
- source documentation and extracts from the general ledger evidencing climate-related impacts on the entity’s financial position, performance and cash flows for the reporting period;
- working papers or documents evidencing inputs for, and assumptions used in, the sustainability report; and
- any assessment undertaken for the purposes of making the statement under s296B(1) (conclusion of no climate-related risks or opportunities reasonably expected to affect an entity’s prospects).
The draft regulatory guidance has also reminded entities that as the sustainability reporting requirements crystallise at the end of the financial year balance date, entities should establish adequate systems to assess whether they may be required to prepare a sustainability report at the end of a financial year, even if they do not meet the sustainability reporting thresholds at the commencement of that financial year.
ASIC’s expectations of Directors’ duties
Consistent with the Corporations Act, directors have a positive duty to exercise their powers with the care and diligence that a reasonable person would exercise in the circumstances. In discharging these obligations, the draft regulatory guidance reiterates that directors should consider the extent that material climate-related physical and transition risks, like all other material risks, pose a foreseeable risk of harm to the interests of the entity.
As explained in the draft regulatory guidance, directors of entities preparing an annual sustainability report should:
- ensure that they are regularly informed about the extent that a climate- related risk or opportunity may be material to the reporting entity, and the extent that any such material risk or opportunity may reasonably affect the reporting entity’s prospects; and
- ensure that the reporting entity has adequate systems to identify, assess, monitor, prioritise, disclose and respond to any material climate-related risks and opportunities.
The draft regulatory guidance specifically explains that it is important that assessments about the extent that a climate- related risk or opportunity may be material to the reporting entity are not confined to the annual reporting season but are considered on an ongoing basis.
This is because timely and accurate information about material climate-related risks and opportunities (including any changes) will enable the board to make informed judgements about the extent of foreseeable harm to the interests of the reporting entity, as well as assist the reporting entity to comply with its sustainability reporting obligation.
Application of modified liability regime
The modified liability regime was one of the features of the legislation to support the transition to sustainability reporting. The legislation created a series of “protected statements”, for which no legal action other than criminal action, or action by ASIC, can be brought in relation to protected statements made in the sustainability report, or the auditor’s report on the sustainability report.
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Protected statement
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Statement is made in
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A statement relating to climate and, at the time it is made, is about the future.
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Sustainability reports or accompanying auditor’s reports prepared for financial years commencing between 1 January 2025 and 31 December 2025.
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Climate-related financial disclosures relating to:
- scope 3 greenhouse gas emissions;
- scenario analysis; and
- transition plans.
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Sustainability reports or accompanying auditor’s reports prepared for financial years commencing between 1 January 2025 and 31 December 2027.
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Importantly, the draft regulatory guidance clarifies that these modified liability settings only apply when the statement is required to be made under the Corporations Act or Commonwealth Law, and is:
(a) the same as a protected statement; or
(b) differs from a protected statement only in so far as it contains updates or corrections to the protected statement.
The modified liability settings do not extend to statements voluntarily made outside a sustainability report. For example, where a protected statement is reproduced, quoted, or summarised in an investor presentation or in promotional material, it will not be covered by the modified liability settings, unless disclosure is required under a Commonwealth law.
CONTENT REQUIRED IN THE SUSTAINABILITY REPORT
Forward-looking statements
Under the Corporations Act and the ASIC Act, some representations about future matters will be taken to be misleading unless there are reasonable grounds for making the representations, see s769C of the Corporations Act and s12BB of the ASIC Act.
The draft regulatory guidance clarifies ASIC’s expectation that all forward-looking information in climate statements must comply with Appendix D of AASB S2, which sets out both the fundamental and enhancing qualitative characteristics of useful climate-related financial information. These are:
- relevance and faithful representation (fundamental characteristics set out in Appendix D of AASB S2 at D4 to D15); and
- comparability, verifiability, timeliness, and understandability (enhancing characteristics set out in Appendix D of AASB S2 at D16 to D33).
The qualitative characteristics of useful climate-related information are an integral part of AASB S2 and have the same authority as the rest of the standard. Entities are required to comply with all of the requirements in Appendix D, as well as the other requirements of AASB S2, in order for an entity to be able to make an explicit and unreserved statement of compliance with AASB S2.
Statements of no financial risks or opportunities relating to climate
s296B(1) of the Corporations Act allows certain entities to lodge a sustainability report that states:
- that there are no material financial risks or opportunities relating to climate for the financial year; and
- an explanation of how the entity determined that it had no material financial risks or opportunities relating to climate for the financial year.
Entities may lodge a climate statement under s296B(1) if they satisfy all of the below criteria:
- the directors determine that there are no material financial risks or opportunities relating to climate for a financial year;
- the entity is in ‘Group 3’; and
- the entity is not a registered corporation under the NGER Act, an RSE, a registered scheme, or a retail CCIV (see s296B(1)).
The draft regulatory guidance clarifies that reporting entities that lodge a climate statement under s296B(1) must:
- assess, in accordance with AASB S2, whether there are any material financial risks or opportunities relating to climate for a financial year;
- undertake and document their assessment for each financial year that s296B(1) applies; and
- maintain adequate sustainability records to substantiate the assessment that the entity has no material financial risks or opportunities for a financial year.
Such entities should establish robust processes to continue to assess, in accordance with AASB S2, whether there are any material financial risks or opportunities relating to climate for the financial year. This will enable such entities to ensure that they meet their sustainability reporting obligations under s296A(1) of the Corporations Act for any subsequent financial year that their assessment, in accordance with AASB S2, identifies material financial risks and opportunities.
It should be noted that the concept of “material financial risks or opportunities relating to climate” is not part of AASB S2. AASB S2 instead uses the terminology of “climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects”. AASB S2.4 explains that climate-related risks and opportunities that could not reasonably be expected to affect an entity’s prospects are outside the scope of AASB S2.
Incorporating other reports by cross-reference
AASB S2 permits a reporting entity’s sustainability report to cross-reference to information in another document prepared by the reporting entity, if it complies with paragraphs 63 and B45–B47 of Appendix D of AASB S2. In these circumstances, the draft regulatory guidance states that reporting entity is strongly encouraged to lodge the other document with their sustainability report (if it has not already been lodged with ASIC).
Labelling of the sustainability report
Up until now, sustainability-related information has been included in corporate reporting under many names. This has historically included separate “Sustainability reports” or “ESG reports”, or subsections as part of the annual report with similar titles.
The Corporations Act now establishes a precise statutory meaning of the term “sustainability report” under s9 of the Corporations Act. Consequently, ASIC’s draft regulatory guidance states that the sustainability report (required under s292A of the Corporations Act) should be distinguished from other reports that may have also, due to historical market practice in Australia, been labelled as ‘sustainability reports’. This all includes voluntary sustainability-related information that may have been provided with the annual report, published on an entity’s website or released publicly by some other means (e.g. ASX market announcements).
ASIC has therefore proposed specific guidance regarding the labelling of the wide variety of reports and disclosures that deal with sustainability-related information.
Table 4: ASIC draft recommendation for the labelling of reports or statements containing sustainability-related financial information
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Name
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Usage
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Sustainability report
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Refers exclusively to a statutory sustainability report prepared under s292A of the Corporations Act.
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Climate statements
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Refers exclusively to the climate statements prepared under s296A(1)(a)
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Voluntary sustainability statements
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Voluntary application of some or all of AASB S1, containing sustainability-related financial information on topics other than climate-related financial information.
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Voluntary climate statements
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Voluntary application of some or all of AASB S2. These may be for entities that do not have an obligation under the Corporations Act.
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The draft regulatory guidance additionally states:
“Entities that prepare sustainability-related information under other reporting standards or frameworks should clearly distinguish this information from sustainability-related financial information prepared under AASB S1 or AASB S2.”
This is likely to impact entities that currently prepare sustainability reports using more than one sustainability reporting framework (e.g. TCFD Framework, GRI standards, TNFD Framework).
SUSTAINABILITY-RELATED FINANCIAL DISCLOSURES OUTSIDE THE SUSTAINABILITY REPORT
The draft regulatory guidance establishes an expectation that all entities, including those that are not currently required to prepare an annual sustainability report, should consider and be informed by the sustainability standards (AASB S1 and AASB S2) when preparing climate-related financial information, and other sustainability-related financial information for users outside the sustainability report. This may apply to:
- disclosures in annual reports, including the OFR for listed entities;
- disclosure documents under Chapter 6D of the Corporations Act (e.g. prospectuses);
- PDSs under Pt 7.9 of the Corporations Act;
- investor presentations, including for AGMs and annual member meetings; and
- any other market disclosures directed to investors.
The draft regulatory guidance notes that entities that consider, and are informed by, AASB S1 and AASB S2 reduce the risk that disclosures may be misleading or deceptive.
It additionally specifies that reporting entities should ensure any climate-related financial information selectively used or reproduced outside the sustainability report adheres to the principles of Appendix D of AASB S2.
Specific guidance for OFRs
The nature of disclosures in scope of AASB S1 and AASB S2 are the sustainability-related or climate-related risks and opportunities that could reasonably be expected to affect an entity’s cashflows, access to finance, or cost of capital over the short, medium, or long term time horizons.
The purpose of the OFR is to provide information that members of the listed entity would reasonably require to make an informed assessment of the operations, the financial position, and the business strategies, and prospects for future financial years, of the entity.
Therefore, it is likely that there may be some overlap between the climate-related risks and opportunities disclosed in the sustainability report, and the business strategies and prospects for future years of the listed entity expected to be disclosed in the OFR.
For listed entities also required to prepare an OFR under s299A of the Corporations Act, the draft regulatory guidance additionally notes:
- Listed entities must disclose sustainability-related financial information, including climate-related financial information if it would be reasonably required by members in making an informed assessment of the entity’s operations, financial position, business strategies and prospects for future financial years.
- These disclosures should consider, and be informed by, AASB S2 for climate-related financial information, and AASB S1 for sustainability-related financial information.
- The sustainability report cannot form part of the OFR. The OFR plays an important and expanded role in situating the specific climate-related financial information disclosed in the sustainability report within the broader context of the listed entity’s corporate strategy (including risks and opportunities) and prospects for future financial years.
Specific guidance for s710 prospectuses
Issues must disclose sustainability-related financial information in a s710 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 positions and performance, profits and losses and prospects of the entity issuing the securities.
The draft regulatory guidance notes that the issuer:
- should consider and be informed by the sustainability standards (AASB S1 and AASB S2) when preparing climate-related financial information, and other sustainability-related financial information in the prospectus;
- should consider disclosing sustainability-related financial information in the body of the prospectus itself;
- should consider providing an overarching narrative and analysis in the investment overview section; and
- should consider disclosing sustainability-related financial information in the business model and investment sections of the prospectus.
ASIC'S ADMINISTRATION OF THE SUSTAINABILITY REPORTING REQUIREMENTS
ASIC’s general approach to sustainability reporting and audit relief.
The draft regulatory guidance outlines ASIC’s considerations when assessing whether to grant relief from the sustainability reporting requirements under Ch 2M.
In particular, the draft regulatory guidance makes it clear that ASIC will not necessarily grant sustainability reporting relief merely because an entity has been granted, or has the benefit or, comparable financial reporting relief. Specific reasons that are unlikely to justify relief from sustainability reporting requirements include:
- an entity that meets the s292A reporting thresholds is privately owned, closely held by only a small number of members, or has limited known external users; or
- those who need the information that would be set out in a sustainability report already have access to it; or
- the ordinary costs of complying with an entity’s sustainability reporting obligations constitutes an unreasonable burden.
It is expected that entities will implement sustainability reporting processes that enable the entity to meet its reporting deadlines under the Corporations Act, including ensuring the external auditor has sufficient time to complete the audit. The draft regulatory guidance states that ASIC will only grant an extension of time to lodge a sustainability report in rare circumstances. This is consistent with their approach to financial reporting.
The guidance also reminds entities that applications for relief from the sustainability reporting requirements must be submitted prior to the deadline for lodging the sustainability report, as the relief powers are prospective only.
| Legislative instruments granting relief |
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Type of entity
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ASIC instrument
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Stapled entities
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ASIC Corporations (Reporting by Stapled Entities) Instrument 2023/673 provides relief to facilitate the preparation of consolidated or combined financial reports by stapled entities.
The extension of the relief to sustainability reporting allows the stapled entity to prepare a sustainability report that includes climate-related financial disclosures on behalf of all the members of the stapled group. The relief applies where the sustainability report is prepared as if all the members in the stapled group are a single entity.
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Listed disclosing entities
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ASIC Corporations (Electronic Lodgement of Financial Reports) Instrument 2016/181 allows entities listed on ASX, NSX, SIM VSE or SSX to lodge annual reports electronically with the relevant market operator without lodging separate reports with ASIC.
The relief also applies to the lodgement of sustainability reports.
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Interaction with existing ASIC relief from preparing a financial report
Entities that currently rely on relief from the requirement to prepare a financial report under a legislative instrument are not required to prepare a sustainability report. However, if the legislative instrument provides a different kind of relief (e.g. deferral of obligations to report for a financial year), the sustainability reporting requirements will continue to apply unless relief in relation to those requirements is also granted.
RESPONDING TO ASIC'S CONSULTATION
The comment period on the draft regulatory guidance close 19 December 2024.
Grant Thornton is preparing a response to the consultation paper. We encourage all stakeholders to participate in direct feedback to ASIC, but Grant Thornton is interested in the thoughts of stakeholders who do not wish to contact ASIC 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, please consider contacting us at sustainability.reporting@au.gt.com.
