Mandatory climate-related financial reporting is here: guidance for reporting entities

Entities which are required to prepare a financial report under Chapter 2M of the Corporations Act, and meet the below criteria:

Entities that are required to prepare a financial report under Chapter 2M of the Corporations Act and meet at least two of three of the below criteria:

Entities that are exempt entirely from lodging financial reports under Chapter 2M of the Corporations Act are not required to prepare sustainability reports. This includes small and medium-sized businesses and asset owners that fall below all of the size thresholds, and that are not NGER reporters, which will not be subject to the regime.

This also includes entities that are exempt in full from Chapter 2M financial reporting due to an ASIC class order or individual entity exemption. Charities registered with the Australian Charities and Not-for-profits Commission and public authorities exempt under s9 of the Corporations Act are also excluded from reporting under the regime.

In addition, the reporting requirements are to be streamlined for consolidated entities. The Act provides that:

1. where the accounting standards require the parent entity of a consolidated group to prepare financial statements in relation to the consolidated entity; and
2. the parent entity elects to prepare a sustainability report for the consolidated entity (ie a sustainability report prepared in accordance with the Corporations Act, based on the CRFD regime),

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 parent entity).

ASIC has also granted some concessions from the sustainability reporting obligations, via legislative instrument, for stapled entities and disclosing entities. Stapled entities are now allowed to lodge one sustainability report that includes climate-related financial disclosures on behalf of all the members of the stapled group.

From a phasing perspective, the Act mandates that the regime will apply to an entity for its first financial year commencing on or after the relevant date.

1. Group 1 entities will be required to start reporting for financial years commencing on or after 1 January 2025. This will mean:
1. Entities with a 31 December financial year end will be the first to commence reporting under the regime, in respect of their financial year commencing 1 January 2025 and ending 31 December 2025.
2. Entities with a 31 March financial year end will report in respect of their financial year commencing 1 April 2025 and ending 31 March 2026.
3. Entities with a 30 June financial year end will report in respect of their financial year commencing 1 July 2025 and ending 30 June 2026.
4. Entities with a 30 September financial year end will report in respect of their financial year commencing 1 October 2025 and ending 30 September 2026.
2. Group 2 entities will be required to start reporting for financial years commencing on or after 1 July 2026.
3. Group 3 entities will be required to start reporting for financial years commencing on or after 1 July 2027.

The NGER Act is continuing to operate alongside the regime, and serves a very different purpose. That is, whereas mandatory climate reporting is designed to inform financial stakeholders of the impact of climate risks and opportunities on entities, the NGER Act informs government policy on greenhouse gas (GHG) emissions and assists Australia to meet its international emissions reporting obligations.

AASB S2 will require disclosure of GHG emissions that are measured in alignment with the IFRS S2 hierarchy, which allows reporting entities to adopt different methodologies from those in the GHG Protocol if required by local authorities or listing exchanges. This represents a change from the initial version of the CRFD regime from October 2023, which required entities to prioritise relevant methodologies for calculating GHG emissions in accordance with NGER methodologies.

The climate-related financial disclosures are to be located in a new 'sustainability report'. While we expect most entities will embed their sustainability report within their annual report, ASIC has stated that reporting entities may prepare a standalone sustainability report that only contains the climate-related financial information required under the Corporations Act and AASB S2 (RG 280.93). That is, it does not need to be a report embedded within the annual report.

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. 

AASB S2 (with which the climate statements must comply) states that material information can be included in an entity's climate-related financial disclosures by cross-reference. Entities should consider existing content within their annual report, and whether the new sustainability report can (and should) cross-reference to those disclosures for the purposes of satisfying any relevant AASB S2 standards—eg climate-related governance, strategy or risk disclosures located elsewhere in the annual report. ASIC suggests a clear index may assist to identify the location of the climate-related financial information. The regulator also noted it would be helpful if sustainability reports contain a prominent description explaining that the climate-related financial information is required under s292 of the Corporations Act and AASB S2.

To promote transparency and accessibility, ASIC encourages reporting entities to lodge cross-referenced standalone documents with their sustainability report, if these cross-referenced documents have not already been lodged with ASIC (RG 280.87). However, it has clarified that AASB S2 does not permit a reporting entity’s sustainability report to cross-reference to information in a report prepared by another entity (RG 280.86).

AASB S2 requires cross-referenced information to meet specific criteria to be included in an entity's disclosures. These requirements ensure that the cross-referenced information is available on the same terms and at the same time as the climate-related financial disclosures, does not compromise understandability, includes a precise reference to the specified part of the report, and explains how to access the cross-referenced report. (See our Insight on the ASIC reporting guide for further practical guidance on labelling and cross-referencing).

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

Importantly, only 'material' information is required to be disclosed. Information is defined as material 'if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports, which include financial statements and climate-related financial disclosures'.[2]

AASB S2 does not prescribe any quantitative thresholds for materiality or pre-determine what would be material in a particular situation—rather, it states that judgements on what information is material are specific to an entity.

Climate statement

The climate statement will comprise the disclosures required by AASB S2. These are expected to include:

• material climate-related financial risks and opportunities faced by the entity (if any);
• Scope 1, 2 and 3 GHG emissions and any associated reduction targets;
• any information about governance of, strategy of or risk management by the entity in relation to these risks, opportunities, metrics and targets; and
• an assessment of the entity's resilience to climate-related changes, using scenario analysis.

For many businesses, making these disclosures will be challenging where value chain emissions data is unavailable, lacking or unreliable. Recognising these difficulties, AASB S2 requires entities preparing sustainability reports to only utilise all reasonable and supportable information available to them as of the reporting date, provided it can be obtained without undue cost or effort. Accordingly, when reporting Scope 3 GHG emissions, entities are not expected to provide exact data or detailed information that is unduly difficult or costly to obtain from other entities along its supply chain. ASIC has clarified that reporting entities are permitted to use estimation in measuring Scope 3 GHG emissions, and can use primary or secondary data or a combination, noting that accuracy of estimation may improve over time (RG 280.103 to 106).

Despite the difficulties in reporting, the requirement to account for Scope 3 emissions aligns with the approach taken by the majority of reporting jurisdictions globally. Entities are required to begin disclosing Scope 3 emissions in their second reporting year. 

Scenario analysis will also be required to be carried out and reported against, for at least the following two scenarios:

• the increase in the global average temperature well exceeds the increase referred to in s3(a)(i) of the Climate Change Act 2022 (Cth) (the Climate Change Act) (being an increase well below 2°C above pre‑industrial levels). According to the explanatory materials, a 2.5°C or greater scenario would satisfy this requirement. ASIC has stated there is a risk that reporting entities will not be compliant if they use a climate scenario based on an increase that is less than 2.5°C; and
• the increase in the global average temperature is limited to the increase referred to in s3(a)(ii) of the Climate Change Act (being an increase of 1.5°C above pre‑industrial levels).

ASIC also provides additional guidance on the intent of the scenario analysis requirements, being: 'to ensure that users have the benefit of information about the reporting entity’s climate resilience and material financial risks and opportunities relating to climate that are informed by a scenario that: (a) contemplates rapid global decarbonisation in the near term (lower global warming scenario); and (b) contemplates more pronounced climate impacts over the medium to long term' (RG 280.100).

According to AASB S2, entities are not required to disclose commercially sensitive information about climate-related opportunities, ensuring they can protect economic interests. However, reliance on these exemptions requires the entity to disclose this and periodically reassess at each reporting date to determine whether the information continues to qualify for the exemption.

Climate statement notes

The notes accompanying a climate statement are required to be comprehensive and include:

• any disclosure required by the regulations concerning the preparation or content of the climate statement;
• any notes required by AASB S2 that relate to the preparation or content of the climate statement, or other matters concerning environment sustainability; and
• any notes containing other information necessary to ensure that the climate statement and notes together meet the relevant requirements of the Act.

As at the date of this Insight, there are no relevant regulations and AASB S2 does not require any climate statement notes.

Directors' declaration

The Act introduces a transition period for directors' declarations for the first three years under the CRFD regime. During this period, directors are required to make a qualified declaration that, 'in their opinion, the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Corporations Act'.[3]

However, for financial years commencing on and from 1 January 2028, directors will face a higher standard, requiring a more definitive declaration that, 'in their opinion, the substantive provisions in the sustainability report are in accordance with the Corporations Act' (removing the 'reasonable steps' qualification).

For listed entities, the directors' declaration regarding the sustainability report is not required to be supported by any CEO or CFO declaration regarding the sustainability report (unlike a directors' declaration in relation to an entity's financial statements under s 295A of the Corporations Act).

Entities and boards have expressed concern about directors being required to provide a declaration in the period before 'full' assurance and auditor sign-off on all climate disclosures is mandated (which is from an entity's fourth sustainability report, onwards[4]). Given this gap, it may be that some entities voluntarily seek 'top up' assurance before doing so becomes mandatory, to provide practical support to the board in making the directors' declaration. We are also speaking with clients regarding other ways management can support the board to make its declaration (such as via an uplift in governance and verification procedures).

For more detail regarding implications for directors and their duties, see our overview of the ASIC guidance.

Potential future inclusion of non-climate sustainability disclosures

The Act grants the Minister the authority to expand the sustainability report to include statements and accompanying notes relating to other 'environmental sustainability' matters that are not currently defined by the sustainability standards. This power is consistent with the Government's proposal in the second Consultation Paper for the regime to be adaptable to potential future reporting, such as nature-related financial disclosures—see our Insight on the Taskforce on Nature-related Financial Disclosures' recommendations, which remain voluntary.

Key issues for Australian subsidiaries in multinational groups

ASIC has specifically addressed whether a foreign parent can voluntarily undertake consolidated reporting for the whole corporate group: 'Australian subsidiaries (of the foreign parent) that are reporting entities must still prepare an individual sustainability report under s292A', as 'the foreign parent is not a Ch 2M entity'.[5]

Some of the main themes multinational clients with local subsidiaries are grappling with include:

• the Australian subsidiary potentially leading the global group as the first entity required to prepare climate-related financial disclosures on a mandatory basis;
• disclosures regarding governance and strategy at the Australian subsidiary level where the local entity is a 'strategy taker' rather than 'strategy maker';
• challenges preparing scenario analysis at the Australian subsidiary level, when this type of analysis has typically been done at a global level to date and based on different global warming scenarios;
• despite there being thematic similarities, differences between Australian reporting requirements and requirements in other jurisdictions (although this issue may abate over time as other jurisdictions converge around ISSB standards); and
• how to leverage global group data and reporting content, while meeting the domestic requirements for tailored disclosures at the Australian subsidiary level, with materiality applied by reference to the Australian subsidiary (rather than the global group).

Another issue for local subsidiaries is the limited guidance available on how ASIC will approach individual applications for relief from the regime. ASIC has recently given more information on two of the three threshold tests an entity will be required to meet in order for a relief application to be successful:

• Inappropriate in the circumstances: ASIC has noted that this precondition is unlikely to be satisfied merely on the basis that: an entity is privately owned, closely held by only a small number of members or has limited known external users; or users of the climate-related financial information already have access to it. ASIC's view is this precondition will normally only apply where there is an anomaly in the law, or where compliance with the law gives rise to consequences not intended by the legislature.
• Impose an unreasonable burden: ASIC noted that the relevant burden needs to be 'disproportionate to the value of the disclosure for users of the sustainability report'. An applicant operating its business on an ordinary commercial basis (including incurring costs to prepare a sustainability report, obtain expert assistance, obtain an audit and maintain sustainability records) is unlikely to satisfy ASIC that the administrative costs of compliance alone would impose an unreasonable burden.

For more detail, see our overview of the ASIC guidance.