Mandatory climate-related financial reporting: business implications of the draft legislation

The entities that will be subject to the proposed regime largely reflect the proposals in the Consultation Papers, except for the addition of a new 'asset owner' category (discussed further below).

The below table provides a snapshot showing the thresholds for coverage under the proposed regime and the phased timing for when those relevant entities must commence mandatory disclosure.

As seen from the above table, the proposed regime will apply where an entity meets any one (or more) of the following three categories:

• (Large entities) Entities that meet at least two of the following three criteria:
  • the consolidated revenue for the financial year of the entity and the entities it controls (if any) meets the relevant dollar threshold;
  • the value of the consolidated gross assets at the end of the financial year of the entity and the entities it controls (if any) meets the relevant dollar threshold; and
  • the number of employees for the entity and the entities it controls (if any) meets the relevant threshold at the end of the financial year.

The Draft Legislation clarifies that the value of consolidated revenue and consolidated gross assets, and the question of whether an entity controls another entity, are to be determined in accordance with accounting standards in force at the time. Additionally, when counting employees, part-time employees are counted as an appropriate fraction of a full-time employee.

• (NGER reporters) Entities with annual emissions reporting obligations under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act), being entities that are either a registered corporation under the NGER Act or required to make an application to be registered under s12(1) of the NGER Act (NGER Reporting Entities). The Draft Legislation has broadened this threshold by not limiting NGER Reporting Entities to those required to report under Chapter 2M of the Corporations Act and registered as a 'Controlling Corporation'; or
• (Asset owners) Asset owners with assets of $5 billion or more (including the entities they control).

Other than the new 'asset owner' category, these categories and thresholds largely reflect the proposals in the earlier Consultation Papers. One other deviation is that the Draft Legislation has broadened the entities to be captured under the proposed regime. The Consultation Papers referred to an intention that the scope of the proposed regime be confined to a subset of those entities that are already required to prepare annual financial reports and directors' reports under Chapter 2M of the Corporations Act (being disclosing entities, public companies, large proprietary companies, registered schemes, registrable superannuation entities and, in limited circumstances, small proprietary companies and small companies limited by guarantee). As currently drafted, the Draft Legislation appears to go beyond Chapter 2M reporting entities. For example, to capture unregistered schemes (to the extent they meet one or more of the above categories), which have not, historically, been subject to Chapter 2M reporting requirements. We hope, through submissions to government on this point, that the position will be clarified in the final legislation.

Small and medium-sized businesses, below the relevant thresholds and which are not NGER Reporting Entities, will not be subject to the proposed regime. However, the Draft Legislation provides the Minister with the broad discretionary power to determine lower thresholds (ie the consolidated revenue and number of employees criteria in the 'large entities' category, and the value of assets in the 'asset owner' category), which could be used to bring new entities that do not meet the existing thresholds into the ambit of the proposed regime. This flexibility to lower the thresholds was not foreshadowed in the Consultation Papers. To the extent the Minister exercises any such powers in the future, we consider that the Draft Legislation should place certain parameters around the exercise of that power (eg that any lowering of thresholds not take effect for at least 12 months, to give any new reporting entities an appropriate amount of time to prepare for mandatory climate reporting).

From a phasing perspective, the Draft Legislation now clarifies that the proposed regime will apply to an entity for their first financial year commencing on or after the relevant date.

• Group 1 entities will be required to commence reporting for financial years commencing between 1 July 2024 and 30 June 2026. For example, this will mean:
  • entities with a 30 June financial year end will be the first to commence reporting under the proposed regime in respect of their financial year commencing 1 July 2024 and ending 30 June 2025;
  • entities with a 30 September financial year end will report in respect of their financial year commencing 1 October 2024 and ending 30 September 2025; and
  • entities with a 31 December financial year end will report in respect of their financial year commencing 1 January 2025 and ending 31 December 2025.
• Group 2 entities will be required to commence reporting for financial years commencing between 1 July 2026 and 30 June 2027.
• Group 3 entities will be required to commence reporting for financial years commencing on or after 1 July 2027.

Treasury has welcomed feedback on pushing back the commencement date for Group 1 entities by six months, from 1 July 2024 to 1 January 2025. This would benefit entities with 30 June and 30 September financial year ends (as they would not be required to prepare their first sustainability report until 12 months after when they would initially be required to), but would have no impact for entities with, say, a 31 December or 31 March financial year end. In support of delaying the commencement date, we would advocate that entities be provided with as much time as possible from when the final legislation is released to when the proposed regime commences (to enable entities to clearly understand their obligations and prepare for reporting).

We understand that NGER Reporting Entities are also seeking clarification from Treasury as to the form of data to be reported under the proposed regime. The NGER Act will continue to operate alongside the proposed regime. An NGER Reporting Entity with, say, a 31 December financial year end will be reporting relevant emissions data under the NGER Act in relation to the year period ending 30 June, but then be required to report under the proposed regime in respect of the financial year ending 31 December. Given AASB's Exposure Draft ED SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information (Exposure Draft ASRS) provides that an entity may disclose information relevant to greenhouse gases as measured by applying relevant methodologies set out in the NGER Act (and supporting instruments), it is hoped entities will be able to leverage data sets in respect of Scope 1 and 2 GHG emissions across both regimes (rather than needing to prepare two sets of data). We understand entities are seeking clarification on this point through submissions to government.

The climate-related financial disclosures will be located in a new 'sustainability report'. This is a development on the second Consultation Paper and Exposure Draft ASRS, which proposed that disclosures would be contained within the financial and/or directors' report. The sustainability report is intended to be contained in an entity's annual report to be lodged with ASIC as part of the entity's annual reporting obligations. Importantly, the timing of lodgement of the sustainability report is to be consistent with the timing of lodgement of the remainder of the annual report.

The Exposure Draft ASRS (the final form of which the climate statements must comply with) states that material information can be included in an entity's climate-related financial disclosures by cross-reference. Unlike cross-referencing in a directors' report or financial report, which is provided for under ASIC Corporations (Directors' Report Relief) Instrument 2016/188, based on the Exposure Draft ASRS, it appears that cross-referencing for the purposes of climate-related financial disclosure may be made to 'another report published by the entity' rather than only to a document that 'accompanies' the directors' report and financial report. This ability to cross-reference reflects the proposals made in the second Consultation Paper where it was suggested that cross-referencing would reduce the length of the annual report, and addresses policy concerns raised by entities in earlier submissions to government. We would advocate for further clarification from Treasury on this point to clarify that entities can cross reference other reports or other sections within their annual report (such as the operating and financial review). This will be particularly important for Australian subsidiaries with foreign parent companies, as it would enable them to rely on disclosures made by the foreign parent (such as regarding a global approach to governance of climate risk, climate risk assessment and management).

The reporting requirements are to be streamlined for consolidated entities. The Draft Legislation provides that:

• where the accounting standards require the head entity of a consolidated group to prepare financial statements in relation to the consolidated entity; and
• the head entity prepares a sustainability report for the consolidated entity,

then all other entities within that consolidated group are not required to prepare a sustainability report (ie they can rely on the report prepared by the head entity).

In a similar vein, stakeholders have made, and continue to make, submissions to government advocating for a 'subsidiary exemption' for entities with a foreign parent entity required to report climate-related financial disclosures in other ISSB-aligned jurisdictions (including for clarification as to whether Australian subsidiaries can fulfil domestic compliance obligations by cross-referencing such disclosures made by their foreign parent).

The sustainability report will require a climate statement, any notes to the climate statement, any statements prescribed by regulation and a directors' declaration.

Climate statement

The climate statement will comprise the disclosures required by the AASB's ASRS. Whilst the ASRS is yet to be finalised, these are expected to include, for example:

• material climate risks and opportunities faced by the entity (if any);
• information relating to climate-related governance, strategy and risk management and metrics (including Scope 1 and Scope 2 GHG emissions) and targets (including any targets regarding Scopes 1, 2 and 3 GHG emissions) from the entity's first reporting year. Based on the AASB's Exposure Draft ASRS, location-based Scope 2 GHG emissions are to be disclosed from the entity's first reporting period and market-based Scope 2 GHG emissions from the entity's fourth reporting period; and
• the quantity of Scope 3 GHG emissions for the reporting period from the entity's second reporting year.

The Draft Legislation imports the definitions of Scope 1 and Scope 2 GHG emissions from the NGER Act and Scope 3 GHG emissions from the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard. These are broadly aligned with the equivalent definitions in the AASB's Exposure Draft ASRS. For many businesses, making these disclosures will be challenging where value chain emissions data is either lacking or unreliable.

Importantly, the Draft Legislation provides that if a Group 3 entity does not have any material climate risks or opportunities for the financial year, the entity’s climate statement need only include a statement to that effect, from 1 July 2027.

Prescribed statements, including non-climate sustainability disclosures

The Draft Legislation allows and anticipates future expansion of mandatory ESG reporting requirements. The core requirement of the regime is that reporting entities report in accordance with 'sustainability standards'. However, there is no definition limiting the meaning of 'sustainability standards' (eg it is not limited to the AASB's ASRS). The Draft Legislation also provides the Minister with the power to expand the sustainability report to include statements relating to other undefined 'environmental sustainability' matters beyond the standards. This power is consistent with the Government's proposal in the second Consultation Paper for the proposed regime to be adaptable to potential future reporting, eg nature-related financial disclosures—you can read our Insight on the Taskforce on Nature-related Financial Disclosures' (TNFD) recommendations here, which remain voluntary.

Directors' declaration

A directors' declaration will be required. Directors must make a declaration 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). For listed entities, it appears that the directors' declaration regarding the sustainability report is not required to be supported by any CEO and CFO declaration regarding the sustainability report (unlike a directors' declaration in relation to an entity's financial statements under s295A of the Corporations Act).

Boards have expressed concern with providing a declaration in the period before 'full' assurance of all climate disclosures is mandated in the Draft Legislation (which is from 1 July 2030 onwards). Although, as discussed below, audit requirements are expected to ramp up in the period from 1 July 2024 to 1 July 2030, directors will likely still be required to declare that all climate disclosures are in accordance with the Corporations Act for some financial years before 1 July 2030 without the benefit of auditors signing off on all of these disclosures. Given this gap, it may be that some entities voluntarily seek assurance of all climate disclosures before doing so becomes mandatory, to practically support the directors' declaration.