It's nearly here: how businesses can prepare for mandatory climate-related financial reporting

Yes. The Government's initial consultation focused on phasing in disclosure requirements by targeting large listed entities and financial institutions. However, it is now clear that large unlisted entities that report under Chapter 2M will also be captured by the proposed regime. This will include large Australian subsidiaries of foreign (listed and unlisted) parent companies, where the subsidiary is required to prepare financial reports under Chapter 2M.

This shift in focus is consistent with developments in other jurisdictions, including the United Kingdom, and reflects the desire for comparable and transparent disclosures across all larger businesses regardless of their nature or sector. Like listed entities, large unlisted entities are expected to have more resources to respond to new reporting requirements, which will allow smaller entities to benefit from emerging market practices.

For large unlisted entities that are not currently voluntarily reporting against the recommendations of the Taskforce on Climate Related Financial Disclosures (TCFD Recommendations) (or a similar international framework), significant and expedited uplift may be required to meet the reporting requirements, particularly for entities that will qualify as Group 1 entities.

Yes. Given the widespread adoption of voluntary climate reporting by many Australian entities, we may see a number of entities voluntarily choose to report in alignment with the ISSB Climate Standard (and, when available, the AASB adaptation of that standard). Other entities may consider taking a stepping-stone approach and partially aligning their reporting with the ISSB Climate Standard in their FY24 reporting.

Early adoption may be favourably viewed by climate data consumers, including investors, and may also offer the benefit of enhancing organisational and auditor capability, and organisational data collection and governance, in advance of the requirements becoming mandatory. Some organisations have expressed concern in relation to the additional burden that will be placed on reporting entities during the annual reporting season. We expect that organisations who choose to early adopt may benefit from incrementally addressing the reporting requirements over time, minimising the additional burden faced upon the commencement of their mandatory reporting period.

However, early adopters will need to balance these potential benefits with potential risks, including the risks of misleading and deceptive conduct (particularly given the modified liability regime does not commence until 1 July 2024).

Entities that do not report under Chapter 2M and/or do not meet the prescribed size thresholds will not be subject to the new regime.

Nevertheless, they may choose to voluntarily disclose climate-related information in either full or partial alignment with the new regime. Voluntary climate reporting has emerged as a global practice for many entities. Voluntary reporting may be motivated by, for example:

• fulfilling other risk disclosure requirements, eg the requirement to make disclosures with respect to material risks in operating and financial reviews and prospectuses;
• meeting increasing investor and counterparty expectations in relation to climate-related data availability (including entities that require third-party data to make scope 3 emissions disclosures under the mandatory disclosure regime);
• fulfilling investment mandates; and
• for multinational companies, aligning domestic reporting with the ISSB Climate Standard, on the theory that that standard is likely to establish a global baseline for climate-related financial reporting.

The information required to be disclosed under the regime will be set out in detailed domestic standards to be developed by AASB.² The standards are intended to be aligned, as far as practicable, with the ISSB Climate Standard (which is, in turn, based on the TCFD Recommendations). The AASB is expected to consult on the standards in the second half of 2023.

All reporting content (except scope 1 and 2 emissions disclosures) will be subject to the existing concept of 'financial materiality' as it applies in Australia, and which aligns with the position on materiality adopted by the ISSB Climate Standard. This means climate-related financial information would be material if 'omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial reports (existing and potential investors, lenders and other creditors) make on the basis of the reports'.

Consistent with international standards, climate-related financial information will be required to be disclosed in relation to the four-pillar core content framework, including:

• Governance: governance processes, controls and procedures used to monitor and manage climate-related financial risks and opportunities.
• Strategy: the entity's strategy for identifying and addressing climate-related risks and opportunities, including with reference to qualitative and, later, quantitative scenario analysis, climate resilience assessments and transition plans (including information about offsets, target setting and mitigation strategies).
• Risk and opportunities: material climate-related risks and opportunities to the entity's business, and how these will be identified, assessed and managed by the entity.
• Metrics and targets: any climate-related targets and progress toward those targets, including scope 1 and 2 emissions for the reporting period (with disclosure of material scope 3 emissions also required from an entity's second reporting year onwards).

All reporting entities will be required to disclose gross scope 1 and 2 emissions for the reporting period. Australian-based scope 1 and 2 emissions must be calculated consistently with the methodologies set out in the NGER Scheme legislation. Treasury has indicated that further guidance will be provided to account for emissions from agricultural sources or land use, land use change and forestry, for which the NGER Scheme legislation does not currently provide methodologies for emissions accounting.

All reporting entities will be required to disclose material scope 3 emissions from their second reporting year onwards.

The domestic standards to be developed by AASB will describe the requirements for scope 3 emissions disclosures. The Consultation Paper notes that scope 3 emissions disclosures should include 'material' emissions both upstream and downstream from the reporting entity and be accounted for consistently with a recognised emission accounting framework (such as the GHG Protocol) and be informed by domestic emission factors where relevant (such as the National Greenhouse Accounts Factors). Additionally, information should be provided in relation to the determination of boundaries for material scope 3 emissions and the extent to which upstream and downstream value chains are represented in calculations.

Scope 3 emissions disclosures could be in relation to any one-year period that ended up to 12 months prior to the current reporting period, which reflects that, particularly in relation to financed emissions, reporting entities may be reliant on data inputs on emissions from other entities.

To align with existing corporate reporting practices, climate-related financial disclosures will be required to be published in an entity's annual report (within the directors' report and financial report, as appropriate). However, some flexibility will be provided for listed entities to disclose certain content in a separate report, such as a sustainability report, provided the separate report is referenced in the directors' report.

We understand that it is not intended that disclosures be included within an entity's half-year report.

Yes. Many entities captured by the new regime are already required to publish their annual financial report—which will include the new climate disclosures (eg large proprietary companies, listed companies and registered investment schemes are currently obliged to make their financial report available to members by publishing it on their website or sending it directly to members). For any entity subject to the new regime that is not already required to publish its financial report, the new regime will impose a requirement on that entity to make its climate disclosures publicly available.

Climate disclosure assurance means that reporting will be subject to external audit processes to enhance accuracy and credibility of disclosures, consistent with domestic assurance standards.

The domestic assurance requirements are expected to be aligned with international standards being developed by the International Auditing and Assurance Standards Board. For example, an assessment of the calculation methodologies used for emissions reporting, or the process of determining an entity's transition plan. It is proposed that financial auditors lead this assurance work, supported by climate and sustainability experts, when required. We expect the requirements will allow entities to use their existing audit firm to undertake this assurance exercise (rather than needing to engage a second audit firm).

The Consultation Paper sets out the following preferred policy parameters for climate disclosure assurance:

• a requirement for 'limited assurance', moving to 'reasonable assurance' over time;
• 'reasonable assurance' of scope 3 as a final step in scaling requirements;
• assurance would need to be provided against the Australian equivalent standards to the ISSB Climate Standard and Corporations Act, and associated regulations, in line with Australian Auditing and Assurance Standards Board standards; and
• assurance to be carried out by a qualified and experienced independent provider (conducted or led by the financial auditor).

2026-27

Limited Assurance of scope 1 and 2 emissions.

Reasonable assurance of governance disclosures.

2027-28

Reasonable assurance scope 1 and 2 emissions.

Limited assurance of scope 3 emissions, scenario analysis and transition plans (specific requirements—process/ methodology/assumption assurance).

2028-29

Reasonable assurance scope 1 and 2 emissions and other climate disclosures.

Limited assurance of scope 3 emissions, scenario analysis and transition plans (full quantitative assurance).

2029-onwards

Reasonable assurance all climate disclosures.

2027-28

Limited Assurance of scope 1 and 2 emissions.

Reasonable assurance of governance disclosures.

2028-29

Reasonable assurance scope 1 and 2 emissions.

Limited assurance of scope 3 emissions, scenario analysis and transition plans (specific requirements—process/ methodology/assumption assurance).

2029-30

Reasonable assurance scope 1 and 2 emissions and other climate disclosures.

Limited assurance of scope 3 emissions, scenario analysis and transition plans (full quantitative assurance).

2030-onwards

Reasonable assurance all climate disclosures.

The Consultation Paper proposes that the obligation to make climate-related disclosures will be drafted as civil penalty provisions in the Corporations Act, although it is unclear how high the maximum civil penalty for non-compliance will be. Additionally, ASIC will be able to issue infringement notices for non-compliance with the new regime. The new requirements will operate alongside existing legal frameworks, including directors’ duties, misleading representation provisions and current reporting requirements.

It is currently unclear what the implications will be for the directors' declaration required under section 295(4) of the Corporations Act and, for listed entities, the CEO and CFO declarations under section 295A of the Corporations Act. These provisions require declarations that (among other things) the financial statements for the financial year give a 'true and fair view' of the company's financial position and performance. For example, will directors and, for listed entities, the CEO and CFO, be required to give these declarations in respect of items that have not been the subject of assurance (whether limited or reasonable assurance) and in respect of forward-looking statements? It will be important to understand what climate disclosures are required in the financial statements and directors report, versus other areas of the annual report.

Continuous disclosure obligations will continue to apply in their current form. Accordingly, for disclosing entities, to the extent a climate disclosure is included in an annual report and there is a 'material' change in that information (for the purposes of Listing Rule 3.1), the disclosing entity will be required to update the market immediately (rather than waiting to update those climate disclosures in the next annual report).

Listed and unlisted entities will also need to be mindful that climate disclosures continue to be accurate and not misleading or deceptive (subject to the modified liability regime noted below). When making climate-related disclosures, entities should remain diligent in relation to heightened greenwashing (and bluewashing) risks, defined as misleading or deceptive representations as regards an entity's sustainability, environmental or climate credentials. Both ASIC and the ACCC have announced greenwashing as enforcement priorities for FY23, and civil penalty proceedings have already been commenced against a number of companies for alleged greenwashing. We expect this to remain a regulatory focus as mandatory climate-related disclosures are implemented. See our previous Insight for more detail on greenwashing-related regulatory interventions.

To balance concerns (to an extent) around potential increased liability and threats of private actions against reporting entities, a time and scope-limited modification of liability settings is proposed. Certain reporting requirements (disclosures of scope 3 emissions, and forward-looking statements such as those made as to scenario analysis and transition planning) would be afforded protection from private actions for misleading or deceptive conduct, false or misleading representations, and similar claims, for three years from commencement of the regime (ie three years from 1 July 2024). The modified liability regime will only apply to limit claims by private litigants. ASIC (and presumably other regulators such as the ACCC) will still be able to take action, including during the modified liability period.

The Consultation Paper does not make clear whether the three-year period will fall away on 1 July 2028 (such that disclosures made in relation to FY2028 will be made outside the exemption). It is also unclear whether the exemption will act only as a temporary stay on private actions, or if the exemption will prevent private litigants raising at any time a claim as to disclosures made during those three years (including after the period elapses).

Regardless, the three-year protection will be of greatest benefit to Group 1 entities, who will be subject to the obligation to report throughout the three-year period. Group 2 and 3 entities, who are likely to be smaller and, in some cases, less well resourced, will benefit from, at most, two years and one year of protection respectively. We expect this to be an issue that industry will raise with the Government in submissions.

The Consultation Paper suggests that the protection will only apply to the extent that scope 3 and forward-looking statements are made for the purposes of fulfilling the mandatory disclosure regime. Organisations will need to be careful to structure their annual reporting so as to make certain that relevant disclosures are protected (for example, by ensuring that references to scope 3 emissions, transition plans and targets are all listed in the mandatory disclosure index table within the annual report).

The domestic standards are intended to be aligned, as far as practicable, with the ISSB Climate Standard (which is, in turn, based on the TCFD Recommendations). This is intended to minimise costs for multinational companies that trigger reporting in Australia. It is also designed to ensure that Australia's regime remains credible in global capital markets by facilitating comparability and transparency across climate-related financial information.

Areas within the Australian standards that may differ from the ISSB Climate Standard include:

• limiting disclosure to 'material' scope 3 emissions (rather than capturing all scope 3 emissions);
• scenario analysis, in that the Government has indicated that it intends to require organisations to carry out scenario analysis in accordance with a 1.5 degree scenario; and
• a requirement to report Australian scope 1 and 2 emissions in accordance with NGER Scheme methodologies, rather than the GHG Protocol.

The NGER Act will continue to operate alongside the domestic reporting regime and entities should continue to comply with their existing obligations under that legislative framework. Although the NGER Act has a wide remit, capturing almost 900 entities, there are smaller entities that will be required to report climate-related financial information for the first time under the proposed regime. The NGER Act will also inform a number of components of the regime, including scope 1 and 2 emissions accounting methodologies.

Notably, some NGER reporting entities may find that they are required to disclose scope 1 and 2 emissions data earlier than they are accustomed to, if their annual reports are typically released before the annual NGER reporting date of 31 October.

All disclosures are aimed at providing decision-useful information to investors and other stakeholders, and the disclosures that entities will be required to make under the proposed mandatory regime should complement those made under existing requirements.

The AASB has already made clear that material climate-related risks may warrant disclosure in financial statements: for example, via notes to financial statements. Further, the International Accounting Standards Board (IASB) is exploring whether and how companies' financial statements can better provide information about climate-related risks. The IASB may amend IASB Standards (on which Australian accounting standards are based), and/or provide further guidance on how climate-related risks should be reflected in financial statements.

This highlights the importance of entities ensuring that climate-related disclosures in annual reports are aligned with, and do not contradict or cast doubt on the accuracy of, financial statements. For example, if scenario analysis carried out under the new mandatory reporting regime identifies a material risk of asset impairment, it should be asked: does this impairment need to be reflected in the financial statements?

To achieve effective integration between mandatory climate disclosure, and other disclosures such as financial statements, organisations will need to build (or continue to build) cross-functional engagement between finance, legal, annual reporting, governance and ESG teams.

The Federal Government is currently focused on mandating the disclosure of climate-related financial risks and opportunities. However, consistent with the increasing global focus on nature-related risks and opportunities, the Consultation Paper highlights the need to implement a regulatory framework that is workable for potential future reporting in other areas, such as nature and biodiversity.

This is consistent with the ISSB's agreed approach to explore incremental enhancements that complement the ISSB Climate Standard, including in relation to natural ecosystems (with the Recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD Recommendations) to be considered as part of the design process), and human capital matters, such as the just transition, modern slavery and rights of Indigenous Peoples.