Coming Soon: Mandatory Climate Disclosure Laws in Australia
In Short
The Development: On August 22, 2024, the Australian Senate passed the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 ("Bill").
The Context: The Bill, once it passes the final stage of lawmaking, will introduce a national mandatory climate-related financial reporting regime in Australia. Entities that meet stipulated thresholds will be required to make annual disclosures regarding various climate metrics and related matters.
Looking Ahead: The final steps prior to the Bill becoming law are for the House of Representatives to pass the Bill as amended by the Senate and for the Bill to receive Royal Assent. This is expected to occur within the coming weeks. Once this occurs, the regime will commence and be effective from as early as January 1, 2025, for entities operating in Australia.
The Australian climate-related disclosure regime will commence on January 1, 2025, with many entities required to comply with the regime's reporting requirements from that date and with phased implementation for other entities in 2026 and 2027. Reporting entities under the regime are required to lodge an audited "sustainability report" with their annual financial report to the Australian Securities and Investments Commission ("ASIC"). Sustainability reports are required to make a number of climate-related disclosures.
The Senate's Amendments
Although the key structure and the essential elements of the Bill, as outlined in our April 2024 Commentary, "Australia's Climate Disclosure Regime Moves Closer to Implementation Beginning 1 January 2025," have not been amended by the Senate, the Senate has made some amendments that focus on the scenario analysis requirement. Scenario analysis is a process for assessing possible outcomes of future events under conditions of uncertainty.
The draft standards released by the Australian Accounting Standards Board ("AASB") in October 2023 set out that scenario analysis must be undertaken by reporting entities to inform disclosures about the climate resilience of that entity's strategy and business model. The draft standards, which are expected to be finalized shortly, require reporting entities to disclose information about how and when such scenario analysis was carried out, including information about key inputs and assumptions. The sophistication of climate scenario analysis required will depend on the capacity and size of the reporting entity.
The Senate's amendments clarify that reporting entities, when scenario analysis is required, should, at a minimum, undertake two scenario analyses with the following parameters:
- A scenario analysis with a "high warming scenario," where the global average temperature increases 2.5°C or higher above pre-industrial levels; and
- A scenario analysis with a "low global warming scenario," where the global average temperature increases 1.5°C above pre-industrial levels.
The former scenario addresses a situation where more significant global temperature increases take place. The latter scenario addresses risks that may more imminently arise during the transition to a lower-carbon economy in Australia.
Next Steps
The final stage in the lawmaking process is for the Bill as amended by the Senate to be passed by the House of Representatives and thereafter receive Royal Assent. This is expected to occur within the coming weeks. Once this occurs, the Bill will become law.
In anticipation of these changes, entities should assess urgently whether they will need to report under the regime and, if so, their ability and preparedness to disclose climate-related risks in accordance with the Australian requirements as set out in the Bill and the AASB draft sustainability reporting standards. Further, companies and their directors and officers should consider and progress their internal and external verification processes and their assurance and audit resources and capabilities to ensure compliance with the regime's requirements.
While some of the analysis required by the Australian regime will be similar to that required by climate reporting regimes in other jurisdictions (such as the European Union), sustainability reports will be required to be in a form consistent with Australian law. In addition, there are unique requirements under the Australian regime for which companies may need to develop relevant policies and processes (for example, around the retention of sustainability records).
ASIC has indicated that it will release guidance for companies once the Bill receives Royal Assent. ASIC has also cautioned that it will be prepared to take enforcement action against companies where their climate change reporting is misleading or deceptive. Private plaintiffs are also expected to focus on complaints and claims once reporting becomes available. Importantly, in that respect, the Bill provides for limited grace periods for certain parts of the regime as it comes into force, as well as a modified liability regime for certain climate-related disclosures during a transition period. These aspects are explained in further detail in our April Commentary.
Three Key Takeaways
- All entities with operations in Australia should consider taking steps to assess whether they will be subject to the climate-related financial disclosures regime, as set out in the Bill, and, if so, their ability and preparedness to comply with the regime's requirements.
- Relatedly, entities likely to be subject to the regime should assess their current governance structures, processes, and policies for sustainability-related disclosures and consider whether they should be updated in light of the requirements of the Bill.
- Finally, close attention should be paid to the guidance to be released by ASIC in relation to compliance with the regime's requirements, particularly in light of ASIC's indication of its intention to take enforcement action to ensure compliance.
