Authored by Michael Mazengarb
On 27 March, Federal Treasurer Jim Chalmers introduced proposed legislation into the House of Representatives, that would establish Australia’s first mandatory climate reporting regime. The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 amends the Corporations Act 2001 (‘Corporations Act’) and the Australian Securities and Investments Commission Act 2001 to create the climate reporting regime. The Bill has been referred to a Senate committee which is due to report by 3 May.
The purpose of the mandatory climate disclosure regime is to compel reporting entities begin assessing and disclosing their exposures to material climate change-related risks and opportunities – with this information to sit alongside the annual general purpose financial statements they are already required to prepare.
In addition to establishing the mandatory climate disclosure regime, the amendments empower the Australian Accounting Standards Board (AASB) to create a set of sustainability reporting standards that reporting entities will need to satisfy to comply with the mandatory regime. In anticipation of the passage of the legislation, the AASB has produced an exposure draft of the Australian Sustainability Reporting Standards, that sets out the detail required to be included in the climate statements produced by reporting entities under the mandatory regime.
The AASB anticipates the release of a final set of standards in the second half of 2024, which will draw upon the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and the two IFRS Sustainability Disclosure Standards developed by the International Sustainability Standards Board – tailoring these international standards for the Australian regulatory context.
What’s required?
At their core, the proposed Australian Sustainability Reporting Standards will require reporting entities to make disclosures across four key areas:
Details of the governance processes, controls, and procedures an entity uses to monitor, manage, and oversee climate-related risks and opportunities.
The entity’s strategy for managing climate-related risks and opportunities, including those relevant to the entity’s business model and value-chain over the short, medium, and long-term.
The entity’s risk management processes to identify, assess, prioritise, and monitor climate-related risks and opportunities.
The entity’s Metrics and Targets for measuring and monitoring climate related risks, including an inventory of Scope 1, 2 and 3 greenhouse gas emissions.
Reporting entities will be required to assess their material exposures to future physical climate risks – including those impacts that may be created by a warming planet – and their material transitional risks – those created by new government policies, technological innovation and shifting consumer expectations as governments endeavour to meet the Paris Agreement’s ambition to keep global warming to below 1.5 degrees above pre-industrial levels.
Directors of reporting entities will be required to make a declaration that the substantive provisions of the sustainability report are in compliance with the Corporations Act and the Australian Sustainability Reporting Standards, even if the report says the entity has no material climate risks or opportunities.
However, in the first three years of the operation of the mandatory reporting regime, the director’s declaration amounts to a statement that, in the directors’ opinion, the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with this Act.'
All reporting entities will be required to keep sustainability records relating to years in which the entity has an obligation to prepare a sustainability report, including reports where the entity has no material climate-related risks or opportunities. Records must be kept for at least seven years.
To assess their resilience to these risks, the draft Australian Sustainability Reporting Standard envisions a requirement for entities to model the impacts of material climate risks and opportunities under at least two future scenarios. One of which must be aligned with the Australian Government’s current international commitments to limit global warming to 1.5 degrees and reaching net zero emissions by 2050.
To this point, an often-overlooked requirement of climate disclosures is the need to identify the material climate-related opportunities – the upside potential – that exists for entities under relevant climate scenarios. Some industries will benefit from a transition to a net zero emissions economy – such as those involved in clean energy, sustainable property, low emissions transport, and critical minerals producers and will be obliged to disclosure these material climate-related opportunities.
The preparation of climate disclosures can be complex for companies who have yet to begin assessing their climate-related risks. Even for companies that have already made voluntary disclosures in response to the TCFD recommendations, the added need to ensure compliance with new legislative obligations, and the forthcoming Australian Sustainability Reporting Standard, increases the onus on directors to ensure climate reports are a meaningful assessment of climate risks and opportunities.
Owl Advisory has the expertise and capabilities to support reporting entities comply with the new mandatory climate reporting regime, and to begin the process of preparing their first and future climate disclosures.
You can read the King & Wood Mallesons update on the proposed mandatory climate reporting legislation here – which includes details of the Bill, and the thresholds that determine when an entity will need to start producing its first climate disclosures.
Who is covered?
Other useful updates from KWM:
This publication is a joint publication from King & Wood Mallesons, and KWM Compliance Pty Ltd (ACN 672 547 027) trading as Owl Advisory by KWM. KWM Compliance Pty Ltd is a company wholly owned by the King & Wood Mallesons Australian partnership. KWM Compliance Pty Ltd provides non-legal compliance and governance risk advisory services for businesses. KWM Compliance Pty Ltd is not an incorporated legal practice and does not provide legal services. Laws concerning the provision of legal services do not apply to KWM Compliance Pty Ltd.