Australian Government Releases Draft Climate Disclosure Laws
In Short
The Situation: The Australian government has released its widely anticipated exposure draft legislation for the introduction of Australia's national mandatory climate-related financial disclosures regime.
The Result: The draft legislation, if enacted, will apply to Australian companies, financial institutions, superannuation funds, asset managers and other reporting entities who meet certain threshold requirements. It will amend Australia's existing financial reporting framework to create, for the first time, mandatory obligations for entities to prepare and disclose annual "sustainability reports", to have those reports audited by independent auditors and to maintain "sustainability records". Implementation of the regime is proposed to be phased in over three years, with obligations for entities falling within Group 1 commencing from as soon as 1 July 2024.
Looking Ahead: Consultation on the draft legislation will continue through 9 February 2024. One of the topics the government has invited comment on is whether amending the legislation to delay the commencement date to 1 January 2025 for entities falling within Group 1 would improve the quality of reporting during the transition year. Irrespective of the commencement date, it would be prudent for all entities operating in Australia, and their boards and management, to assess their obligations under the proposed regime and seek to implement policies and procedures to ensure compliance.
Proposed Introduction of the National Climate Disclosure Regime
The Australian government has released an exposure draft of the Treasury Laws Amendment Bill 2024: Climate-related financial disclosure (Cth) ("the Bill"). If enacted, the Bill will amend the Australian Securities and Investments Commission Act 2001 (Cth) and the Corporations Act 2001 (Cth) ("Corporations Act") and will mandate a national regime for climate-related disclosures for entities that meet certain threshold requirements.
Entities Subject to the Climate Disclosure Regime
It is proposed that all entities that lodge financial reports under Chapter 2M of the Corporations Act and meet certain thresholds (set out below), or have current emissions reporting obligations under the existing National Greenhouse and Energy Reporting Act 2007 (Cth) ("NGER Act"), will be required to comply with the regime. The implementation of the regime will, however, be progressively phased for different groups, as summarised below:
- Group 1 Entities—From 1 July 2024. These are entities (assessed including the entities they control) that: (i) meet at least two of the following three criteria at the end of the financial year: consolidated revenue of AUD$500M or more; consolidated gross assets of AUD$1B or more; 500 or more employees; or (ii) are currently registered corporations (or are required to register) under the NGER Act, and that meet a publication threshold in s 13(1) of the NGER Act.
- Group 2 Entities—From 1 July 2026. These are entities (assessed including the entities they control) that: (i) meet at least two of the following three criteria at the end of the financial year: consolidated revenue of AUD$200M or more; consolidated gross assets of AUD$500M or more; 250 or more employees; (ii) are currently registered corporations (or are required to register) under the NGER Act; or (iii) are asset owners where the value of assets (including assets of controlled entities) at the end of the financial year is equal to or greater than AUD$5B.
- All other entities meeting the reporting requirements—From 1 July 2027. These are all other entities that meet at least two of the following three criteria at the end of the financial year (assessed including the entities they control): consolidated revenue of AUD$50M or more; consolidated gross assets of AUD$25M or more; 100 or more employees.
Obligations Imposed on Entities Subject to the Regime
Entities subject to the regime will be required to:
- Prepare and disclose, for each financial year, a "sustainability report", which will form part of the entity's annual financial report;
- Have the sustainability report audited by the auditor of the financial report, supported by technical climate and sustainability experts where appropriate (save that a transitional arrangement will be in place until 30 June 2030); and
- Keep, and make available to regulators or persons entitled to inspect when requested, sustainability records that correctly explain and record the preparation of the sustainability report.
The sustainability report is to consist of the entity's "climate statements", the notes to the statements, a directors' declaration about the statements and the notes and any other matters concerning environmental sustainability prescribed by legislative instrument.
The climate statements must comply with the Australian Sustainability Reporting Standards ("ASRS"), as issued by the Australian Accounting Standards Board, which remain under development but seek to align with the global baseline set by the ISSB framework. The legislation requires that the climate statements, together with the notes to the statements, must together disclose:
- Material climate risks and opportunities the entity faces or has;
- Any metrics and targets of the entity related to climate that are required to be disclosed by the ASRS, including metrics and targets relating to scope 1, 3 and 3 emissions of greenhouse gases;
- Any governance policies of the entity related to either of the above matters that are required to be disclosed by the ASRS;
- The quantity of scope 3 emissions for the entity for any period specified by the ASRS or otherwise for the financial year; and
- Any governance or risk management processes, controls and procedures of the entity related to these matters.
From 1 July 2030, all entities required to prepare sustainability reports must have the sustainability report audited and obtain an auditor's report that meets the legislative requirements. Between 1 July 2024 and 30 June 2030, a transitional arrangement will be in place. This requires entities required to prepare sustainability reports to have the report "reviewed" (but not formally audited) by an auditor, but the review is only required to cover climate statements relating to scope 1 and 2 greenhouse gas emissions.
Consistent with the existing regime for the preparation of financial statements, entities that are part of a corporate group are permitted to prepare, and have audited or reviewed, a single sustainability report for the group.
Enforcement and Liability
The Bill creates numerous offences, with accompanying financial penalties, for noncompliance with the regime. ASIC will be the regulator responsible for enforcing compliance and will be empowered to issue directions to require compliance, as well as bring prosecutions through the courts.
A limited "safe harbour" has been proposed for the period from 1 July 2024 to 30 June 2027. During this period, no action, suit or proceeding can be brought against an entity in relation to a statement made in a sustainability report for the purpose of complying with a sustainability standard about scope 3 emissions or scenario analysis. This modified liability regime does not apply to statements made outside of sustainability reports, even if the same statement is also made in a sustainability report. Further, criminal proceedings arising from noncompliance can be brought, and ASIC is permitted to bring civil penalty proceedings, though it may only do so where it alleges a contravention of a Commonwealth law that has a fault element and it seeks either injunctive or declaratory relief only.
Three Key Takeaways
- The Bill confirms the government's intention to bring Australia's reporting regime for climate-related financial disclosures in line with other jurisdictions, including the European Union, United Kingdom, New Zealand and Japan, and is consistent with previous indications from the government about its intended framework for the national climate-related financial disclosure regime.
- The consultation process in relation to the Bill is expected to conclude in February 2024, and this may result in further changes being made to the draft prior to it being formally introduced into Parliament. Once this occurs, the draft Bill will need to pass both Houses of Parliament and receive Royal Assent before it comes into effect. It would be prudent to assume that this could occur as early as 1 July 2024 for Group 1 entities and to act accordingly.
- The release of the Bill confirms that all companies incorporated, or with related companies, in Australia should assess as soon as possible whether they are likely to be subject to the requirements of the regime and, if so, put in place policies and procedures to ensure compliance and mitigate against the risk of litigation for alleged noncompliance, either by the regulator or by private parties, including activist shareholders and class action plaintiffs.
