Mandatory climate reporting – second consultation period underway to shape the final regime

On 27 June 2023, the Australian Treasury released a second consultation paper setting out the key elements of the Government's proposed climate-related financial risks disclosure regime.

Treasury is seeking submissions by 21 July 2023, with exposure draft legislation expected to be released later this year.

Who would need to report on climate-related financial risks – and when?

The consultation paper proposes that the following entities will be required to comply with the new mandatory reporting requirements.

What climate information must be reported?

The Australian Accounting Standards Board (AASB) will be responsible for developing Australian climate disclosure standards, which are envisaged to closely align to the requirements in IFRS S2 Climate-related Disclosures, the final form of which was released by the International Sustainability Standards Board on 26 June 2023.

The AASB is expected to conduct a public consultation process and to be in a position to release the Australian climate-related disclosure standards in Q2 2024, so that the disclosure regime would be in place for the start of FY24-25.

While, in recent years, many leading Australian companies have voluntarily adopted reporting in accordance with the voluntary framework published by the Taskforce for Climate-related Financial Disclosure (TCFD), the Government's proposal for mandatory reporting will require a step change even for a number of these companies.

For example, the disclosure regime will require reporting on the following additional information:

• the reporting entity's governance of climate-related risks and opportunities;
• additional, more granular information around how the reporting entity is directly responding to risks and opportunities, including changes to its business model;
• the reporting entity's emission reduction targets and use of carbon offsets;
• input parameters which the reporting entity uses to identify risks (for example, data sources, the scope of operations covered and the detail used in assumptions);
• the reporting entity's Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions; and
• how the climate-related targets which the reporting entity has set compare with those targets set in the latest international agreement on climate change and whether the targets have been validated by a third party.

This will require significant investment by companies to enable them to report climate information to a level of specificity and detail beyond anything that has been seen before in Australia. It also raises concerns about capacity for companies to obtain independent assurance of their disclosures (see below).

In recognition of the significance of the changes required, the consultation paper proposes a phased introduction of the enhanced disclosure requirements, as follows.

Where and how often climate disclosures will be made

Climate disclosures would be published in a reporting entity’s annual report, and Part 2M.3 of the Corporations Act would be modified to reflect this. The disclosures will be included as part of both the directors’ report and the financial report, with an index table indicating where the relevant climate disclosure requirements (ie., governance, strategy, risk management, metrics and targets) are located. Listed entities may report the proposed "metrics and targets" standards in a separate report that is referenced in the directors’ report.

The inclusion of the disclosure regime in Part 2M.3 of the Corporations Act means that it will be subject to the liability regime in that Part (see below).

Continuous disclosure and fundraising documents

The consultation paper notes that climate-related disclosure obligations would extend to continuous disclosure and fundraising document obligations under existing legal principles, and no modifications to or exclusions from those obligations are proposed. ASIC has previously noted that, depending on the circumstances, climate-related risk disclosure may already be required by law, for example within a prospectus or continuous disclosure announcement.

Level and nature of assurance

In recognition of the need to develop skills, capacity and processes to provide assurance, the proposed policy parameters for the level of assurance required for climate disclosures are:

• a requirement for "limited assurance", moving to "reasonable assurance" over time.
• reasonable assurance of Scope 3 emissions as a final step in scaling requirements.
• assurance to be provided against the Australian equivalent standards to the ISSB and Corporations Act and Regulations, in line with Auditing and Assurance Standards Board (AUASB) standards.
• assurance to be carried out by a qualified and experienced independent provider (conducted or led by the financial auditor).

Further consultation on areas that extend beyond climate disclosure assurance will be conducted by the AUASB, after the release of draft international sustainability assurance standards, the exposure draft for which is expected to be released this month.

Liability regime for climate-related financial disclosures

Many commentators have argued for significant modifications to the liability regime which currently applies to financial statements prepared by entities under Chapter 2M.3 of the Corporations Act and other financial forecasts, to recognise the unique characteristics of the climate-related financial disclosures required under the regime.

The consultation proposes only limited modifications.