Climate reporting legislation passes Senate - reporting to commence from 1 January 2025

On 22 August 2024, the mandatory climate reporting bill was passed by the Senate, with the Bill expected to be passed in the government-controlled House of Representatives in the September sitting period. The landmark legislation will require certain organisations to make detailed disclosures about their climate-related risks and opportunities, commencing with the largest emitters and corporations from 1 January 2025.

What is required under the Climate Reporting regime?

We set out the key requirements of the Climate Reporting Legislation (Legislation).

WHO must report and WHEN

Mandatory climate reporting will cover those entities which are already required to prepare financial reports under Part 2M of the Corporations Act (reporting entities) and which meet certain size thresholds. Entities will be phased in according to three cohorts, which are set out below.

Charities registered with the Australian Charities and Not-for-Profit Commission (ACNC) are excluded from the regime, but other Not-for-Profits (NFPs) who meet the relevant size thresholds are required to report.

The Legislation also extends ASIC’s current powers of financial reporting relief to climate reporting.

Groups and phase-in dates

• Group 1 will report from the reporting period commencing 1 January 2025. Group 1 comprises:

1. Reporting entities which meet 2 out of 3 of the following criteria:
   • $500 million + consolidated revenue
   • $1 billion+ EOFY consolidated gross assets
   • 500+ employees
2. Reporting entities which are registered corporations under the NGER Act which are above the NGERs publication threshold

• Group 2 will report from the reporting period commencing 1 July 2026. Group 2 comprises:

1. Reporting entities which meet 2 out of 3 of the following criteria:
   • $200 million+ in consolidated revenue
   • $500 million+ in EOFY consolidated gross assets
   • 250+ employees
2. Reporting entities which are registered schemes, registrable superannuation entities or retail CCIVs where the value of assets at the end of the financial year (including entities it controls) is equal to or greater than $5 billion.
3. Reporting entities which are registered corporations under the NGER Act, regardless of publication threshold.

• Group 3 will report from the reporting period commencing 1 July 2027. Group 3 comprises:

Reporting entities which meet 2 out of 3 of the following criteria:

• $50 million+ in consolidated revenue
• $25 million+ in EOFY consolidated gross assets
• 100+ employees

Group 3 entities only need to report under AASB S2 if they determine they have material climate-related risks and opportunities. However, a statement of ‘no material climate-related risks and opportunities’ still needs to explain the reasoning for this conclusion and be subject to a director declaration and mandatory audit requirements.

WHERE will the disclosures be set out?

Disclosures are to be made annually in a separate Sustainability Report which sits within the Annual Report (the other ‘parts’ of the Annual Report being the Financial Report, Directors’ Report and Audit Report).

WHAT DISCLOSURES will be required?

Entities must disclose under the Australian Sustainability Reporting Standards (ASRS) Climate Standard, AASB S2, which is an Australian adaptation of the International Sustainability Standards Board (ISSB) climate standard, IFRS S2.

The ASRS and ISSB build on the Taskforce for Climate-related Financial Disclosure (TCFD) framework of governance, strategy, risk management and metrics and targets disclosures, but require more detailed and granular disclosures.

The ASRS are expected to be finalised by the Australian Accounting Standards Board (AASB) very shortly, following an extensive consultation process. As currently proposed (and expected to be passed), the ASRS include the mandatory climate standard (AASB S2), as well as a voluntary general sustainability standard, AASB S1 (aligned with IFRS S1). The Legislation only mandates the application of AASB S2 However, organisations can apply AASB S1 voluntarily to other non-climate sustainability disclosures (such as nature).

The original draft ASRS (ED SR1) issued for consultation in October 2023, proposed a number of deviations from the ISSB Standards (see the AICD article on ED SR1 here). Although in our view, not fatal, these amendments made the structure and ‘look and feel’ of the ASRS significantly different to the ISSB, prompting some concerns over comparability (especially for entities operating across multiple jurisdictions). In light of feedback, over recent months the AASB moved to abandon the vast majority of those originally- proposed deviations, such that the current draft AASB S2 makes only minor deviations from the ISSB Standards. Relevantly, the draft AASB S2 now deviates from IFRS S2 only in two respects:

• There is no requirement under the ASRS to refer to and consider the applicability of industry-based disclosure topics or metrics (as required under IFRS S2); and
• AASB S2 sets out some Not-for-Profit (NFP) clarifications, noting that NFPs which are not registered charities are captured by the regime. This deviation was necessary because IFRS S2 was drafted for investor-facing for-profit entities.

Directors’ Declaration

Critically, directors will be required to state whether, in their opinion, the Sustainability Report complies with the Legislation (including the ASRS).

However, as a transitional measure, for the first three years of the regime directors are only required to make a qualified Directors’ Declaration (Qualified Directors’ Declaration) whereby they affirm “whether, in the directors’ opinion, the entity has taken reasonable steps” to ensure compliance. After that, an unqualified Directors Declaration must be given.

WHAT ASSURANCE will be required?

Assurance over all climate disclosures will be mandatory from 1 July 2030, with the Auditing and Assurance Standards Board (AUASB) to set interim mandatory assurance requirements. The AUASB anticipates issuing a proposed assurance timetable for consultation shortly.

WHAT are the CONSEQUENCES OF NOT COMPLYING/ POOR COMPLIANCE?

The failure to keep and retain sustainability records and make the Sustainability Report publicly available after lodgement with ASIC will attract civil penalties or even gaol time.

Modified Liability regime

As a transitional measure, a fixed three-year regulator-only enforcement period (Modified liability) will apply, such that private litigation will be barred and only ASIC can bring civil proceedings for reporting in financial years commencing during the period 1 January 2025 to 31 December 2027.

The Modified Liability will apply to the following ‘Protected Statements’:

• all forward-looking climate disclosures made for the purpose of compliance with a Sustainability Standard or auditing standard for the first year of the regime (i.e. will apply to Group 1 entities only); and
• scope 3, scenario analysis and transition planning disclosures for the first three years of the regime’s operation.

Additionally, the Modified Liability will apply to:

• voluntary disclosures in Sustainability Reports, provided they are made in compliance with the Sustainability Standards, the Act or auditing standards; and
• a subsequent statement that is the same as the Protected Statement (or where any differences are limited to updates or corrections to the original Sustainability Report statement) which is made to comply with a Commonwealth law. This should cover continuous disclosure updates.

The Explanatory Memorandum states that the policy intent is to “ensure that during the transitional period, ASIC can undertake a role that promotes education about compliance with the new reporting regime and deter poor behaviours and reporting practices that are contrary to the objectives of the new reporting regime.”

The AICD has strongly advocated for proportionate liability settings to incentivise organisations to make fulsome disclosures in the early years of the regime, whilst organisations lift capacity and adjust to these new requirements. We are pleased to see the inclusion of this sensible Modified Liability provision in the legislation.

How has the Bill changed from its original form?

The legislation was passed by the Senate with only one material amendment to the original Bill introduced into Parliament in March 2024 (see AICD article on the Bill here).

The amendment, to secure cross bench support, sees the introduction of a requirement that organisations undertake at least two mandatory climate scenarios as part of their climate scenario analysis and resilience disclosures– one scenario must be consistent with keeping warming to 1.5 degrees, and another must be a ‘high warming’ scenario whereby warming ‘well exceeds’ 2 degrees.

What happens next?

As stated above, the AASB is due to issue the finalised ASRS shortly. The AUASB will also release a proposed assurance timetable for consultation and draft sustainability auditing standards. The latter will be an adaptation of the International Auditing and Assurance Standard Board Sustainability Assurance Standard, ISSA 5000.

The Government’s Sustainable Finance Roadmap stated that ASIC will be issuing guidance to assist organisations navigate the new reporting requirements.

The Treasury has also been tasked with issuing best practice transition planning guidance by the end of 2025, whilst the Council of Financial Regulators (CFR) will make recommendations to Government on how to address key sustainability data challenges.

More broadly, the Government has flagged that it is taking a ‘climate first, but not only’ approach, such that mandatory disclosures on other sustainability topics may brought in over time. It is possible that the next ‘cab off the rank’ will be nature and biodiversity given the September 2023 release of the Task-force for Nature-related Financial Disclosures (TNFD) (see the AICD article here) and Australia’s role in global negotiations around nature protection and repair (including hosting the first Global Nature Positive Summit in October 2024 in Sydney).

What is the AICD doing to help directors with mandatory climate reporting?

• Practice resources:
  • In October 2023, the AICD, as host of the Climate Governance Initiative (CGI) Australia and in collaboration with Deloitte and MinterEllison, released a Director’s Guide to Mandatory Climate Reporting to assist directors in preparing for this “generational change” in corporate reporting. This resource is currently being updated to reflect the latest developments, and will be available shortly.
  • On 16 August 2024, the AICD in collaboration with the Insurance Council of Australia and Herbert Smith Freehills released a resource on climate-target setting (whilst the ASRS do not require organisations to have climate targets, they require disclosure of certain information where such targets exist).
  • The AICD is also planning to release a transition planning resource in the first half of 2025.
• Webinars: Climate reporting has also featured in a number of webinars – watch the latest (June 2024) webinar here and AICD article summarising key insights.
• Education: Mandatory climate reporting is featured in Module 4 of the AICD’s climate short-course, and is briefly covered in the free eLearning course.