Key climate reporting developments unveiled

The International Sustainability Standards Board (ISSB) has released its new sustainability standards and the Commonwealth Treasury has released its long-awaited follow-up consultation to introduce mandatory climate-related disclosures in Australia for reporting periods commencing 1 July 2024.

On 27 June 2023 the Australian Government released for consultation, the proposed design for Australia’s mandatory climate reporting framework. Under the proposal, the first mandatory disclosures based on the International Sustainability Standards Board (ISSB) standards would commence for large entities from the 2024/2025 reporting period.

This is the second consultation on Australia’s proposed mandatory climate reporting framework, with the first consultation taking place in December 2022 (First Climate Consultation). The AICD’s submission to the First Climate Consultation can be found here. The Government released its consultation the day after the ISSB issued its finalised sustainability and climate reporting standards IFRS S1 and S2. The latter is proposed to provide the content for Australian disclosures.

What is the Government proposing on Mandatory Climate Reporting?

• WHO is proposed to be covered? A 3-tiered approach is proposed, depending on organisational size. Proposed timings are:
  • Cohort 1 (for 2024/2025 reporting periods): Reporting Entities (those required to report under Part 2M of the Corporations Act being Disclosing Entities, Public companies, registered schemes and large private companies) who are National Greenhouse and Energy Reporting Scheme (NGERS) “controlling corporations” which meet the NGER publication threshold; and Reporting Entities that fulfill two of the following three thresholds: (1) over 500 employees; (2) $1 billion+ in consolidated gross assets; (3) $500 million+ consolidated annual revenue.
  • Cohort 2 (for 2026/2027 reporting periods): Reporting Entities that fulfill two of the following three thresholds: (1) over 250 employees; (2) $500 million+ in consolidated gross assets; (3) $200 million+ consolidated annual revenue.
  • Cohort 3 (for 2027/2028 reporting periods):  Reporting Entities who are NGERS controlling corporations; and Reporting Entities that fulfill two of the following three thresholds: (1) over 100 employees; (2) $25 million+ in consolidated gross assets; (3) $50 million+ consolidated annual revenue.
    
    NB -For all cohorts, as drafted, the current proposal does not capture charities registered with the Australian Charities and Not-for-Profits Commission (ACNC).
     
• WHEN will mandatory reporting commence? The initial cohort of reporting entities will be required to disclose for reporting periods commencing 1 July 2024, with Cohort 2 disclosing for reporting periods from 1 July 2026, and Cohort 3 disclosing for reporting periods commencing 1 July 2027.
• WHERE will the disclosures be set out? The Government has proposed that climate disclosures be set out in the Annual Report, with some proposed formatting suggestions to improve readability. For listed entities, this will be in the Operating and Financial Review (OFR) within the Directors’ Report. Listed Entities are also given the option of reporting ‘metrics and targets’ standards in a separate report, provided it is referenced in the Directors’ report.
• WHAT will mandatory reporting require? Disclosure requirements are based on the ISSB’s climate-reporting standard (IFRS S2) the content of which is discussed further below, as adopted and/or modified by the Australian Accounting Standards Board (AASB). The Government has provided an overview of what disclosures they propose to include initially - namely governance, identification and management of climate risks and opportunities, transition plans, qualitative scenario analysis and scope 1 and 2 emissions. It is also proposed that entities will only be required to disclose material Scope 3 emissions from their second reporting year onwards. The Government also proposes to phase in assurance requirements, starting with limited assurance over scope 1 and 2 disclosures and reasonable assurance over governance disclosures for Cohort 1 entities in the reporting period commencing 1 July 2024.
• WHAT are the consequences for not complying/poor compliance? The Government proposes to introduce civil penalty provisions into the Corporations Act, so that a failure to disclose, or inadequate disclosure, would attract a civil penalty. The Government proposes that enforcement for misleading or deceptive conduct or “similar claims” in respect of scope 3 emission disclosures or select forward -looking disclosures (being scenario analysis and transition planning) will be limited to regulator-only actions for a fixed period of three years.

Where do the ISSB standards fit in?

As stated above, the Government is proposing that the content of disclosures is based on the ISSB climate standard, IFRS S2 as adopted by the AASB.  IFRS S2 was finalised on 26 June 2023, following an extensive consultation process. Key elements of S2 include:

• Require disclosure under the Taskforce for Climate Related Financial Disclosure (TCFD) topics of governance, strategy, risk management and metrics and targets, although in a more granular manner than under the TCFD.
• Require disclosure of the current impact of climate change risks and opportunities on the business, and the current actions taken to manage these:  includes disclosure of scope 1, 2 and 3 emissions, financed emissions, the amount and percentage of assets and business activities vulnerable to climate risks and aligned to climate opportunities, capital deployment towards climate risk and opportunities, internal carbon prices and remuneration linked to climate.
• Require disclosure of anticipated future impacts of climate change risks and opportunities on the business, and the planned actions to manage these: including disclosure of the anticipated changes to the business model and resource allocation, anticipated change to the business’ financial position and performance in the short, medium and long term, scenario analysis, and the disclosure of transition plans and climate targets.

For those that are familiar with the Draft IFRS S2 from March 2022 (Exposure Draft), we note that the finalised IFRS S2 issued on 26 June 2023 made a number of amendments from the Exposure draft, relevantly:

• Insertion of a commercially sensitive information exemption for climate opportunities: The ISSB permits organisations not to disclose information about a climate opportunity where that information is commercially sensitive and is not publicly available.
• Proportionality: For certain disclosures subject to high levels of outcome or measurement uncertainty, the ISSB has stated that disclosure is required only of “reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort.”
• Industry-related metrics: Organisations are no longer required to apply the Sustainability Accounting Standards Board (SASB)  industry-based metrics, but are still required to refer to, and consider, their applicability.
• Relief in the organisation’s first reporting period: Organisations could choose not to disclose their Scope 3 emissions in their first reporting period. Organisations are also relieved from the requirement to disclose comparative information in their first reporting period.