Mandatory climate-related financial reporting

A guide for boards: ESG governance and reporting

by Jillian Button, Hannah Biggins, Victoria Costa, Tiana Macleod and Alexander Batsis · 26 March 2024

Boards should be taking steps now to understand the implications of the proposed mandatory climate-related financial reporting regime for their organisations. The proposed regime represents a significant shift in corporate reporting. For many companies, mandatory climate-related financial reporting will mean navigating new and unfamiliar territory. Boards will play an essential role in overseeing management to ensure their organisations respond appropriately and adequately to climate-related risks and opportunities.

The proposed regime

The Australian Government has committed to implementing standardised, internationally aligned mandatory climate-related financial disclosure requirements for large listed and unlisted entities. Such disclosures are intended to provide comparable, transparent and decision-useful information to stakeholders.

This information assists stakeholders to understand and assess:

the climate-related financial risks and opportunities faced for reporting entities,
how entities manage, plan for and adapt to these risks and opportunities. (See our Insight for further details on the proposed regime.)

Reporting entities will be required to provide relevant disclosures in a new 'sustainability report'. The sustainability report will form part of an entity's annual reporting obligations, and may be contained in an entity's annual report.

The proposed regime will be implemented principally under the Corporations Act 2001 (Cth) (the Corporations Act). Similar to the directors' declaration currently provided as part of the company's financial report, directors will be required to make a declaration regarding the sustainability report. Based on the current draft legislation, directors will be required to declare that (among other things), in their opinion, any statements in the sustainability report are in accordance with the Corporations Act (eg that they are compliant with the sustainability standards etc). Additionally directors must exercise their duty of care and diligence when reviewing and approving the sustainability report.

Given the interaction of these requirements and duties with the proposed regime, and with the first cohort of reporting entities expected to commence reporting for annual reporting periods commencing on or after 1 July 2024 (subject to the Government delaying the commencement date), boards should be taking steps now to understand the implications of the proposed regime for their organisations.

We recommend that boards:

keep informed of the company's climate risks and opportunities, and ensure they (and/or relevant board committees) are equipped with appropriate sustainability related skills to be in a position to guide company management on these matters;
ensure these matters are embedded in the company's broader strategy and that there are effective risk and governance frameworks in place to monitor, assess and manage these risks and to prepare for compliance (including appropriate verification and sign off procedures for climate related financial disclosures);
seek information and training, whether from management or external advisers, regarding the proposed regime, including to understand how the organisation will furnish the board with sufficient information to sign off on the directors' declaration;
test and challenge management, including in relation to any key concerns for the company and material work to be undertaken in order to prepare;
set and articulate clear roles, responsibilities and accountabilities for management in relation to climate;
support management to develop understanding, build internal capacity and capabilities, including to seek external advice or services where required (such as legal advice or early engagement with auditors on evolving assurance requirements); and
seek regular reports from management as to progress in line with the company's strategy.

Boards should also consider how the regime will interface with other relevant laws and obligations, including prohibitions on false or misleading statements and misleading or deceptive conduct, and other regulatory requirements.

Failure to comply with the proposed regime may attract civil penalties under the Corporations Act. Additionally, the Australian Securities and Investments Commission (ASIC) can issue infringement notices for non-compliance.

When making climate-related financial disclosures, boards should be aware of the heightened risk of greenwashing claims. Both ASIC and the Australian Competition and Consumer Commission (the ACCC) have announced greenwashing as an enforcement priority for FY24, and civil penalty proceedings have already commenced against several companies for alleged greenwashing. Importantly, ASIC has specifically warned that its future cases may move beyond claims of misleading or deceptive conduct, including by potentially pursuing claims relating to a breach of directors' duties in connection with a company's greenwashing-related conduct.

For directors in particular, there may also be concerns about the proposed requirement that directors provide an (unqualified) declaration in respect of all statements in the sustainability report, in the absence of full assurance of climate disclosures, and potential legal liability risks if such disclosures are later found to be incorrect.

The proposed regime may also present wider business risks, including:

operational risk that may arise from inadequate internal processes to comply with the regime;
strategic risk that may arise from disclosures unearthing inadequate management of climate-related risks and opportunities; and
reputational damage that may arise from disclosures revealing net zero targets or strategies which are out of step with peers.

As noted above, directors should focus on discharging their duties regarding climate-related risks and opportunities, including their duty of care and diligence, when reviewing and approving climate-related financial disclosures and relatedly, when signing their directors' declaration giving an opinion on whether the statements and notes are in accordance with the Corporations Act and sustainability standards.

Have we undertaken a gap analysis to identify differences between current reporting practices and likely disclosures under the proposed regime?
Are our existing climate-related risk and governance structures and practices appropriate as we move towards the proposed regime?
Have we engaged with external providers where necessary, for example, to understand and comply with external assurance requirements in relation to our climate-related financial disclosures?
What judgment calls will need to be made in determining the nature and scope of disclosures, and what governance arrangements are in place for those judgment calls?