Mandatory climate-related financial disclosure bill introduced

Legislation for Australia’s mandatory climate-related financial disclosure (CRFD) regime was introduced into Parliament on the last sitting day before Easter. This is the next step in a process that began with Treasury policy consultations in December 2022 and June 2023 and continued with a short consultation on exposure draft legislation in January 2024. The Bill, called the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth) was immediately referred to the Senate Economics Committee, which will examine the legislation and report on 30 April 2024.

If passed, the legislation will mandate standardised CRFD for very large, large and medium listed and unlisted companies and funds to be included in a stand-alone ‘sustainability report’ forming part of the annual report. Reporting will likely commence for very large entities in the first financial year commencing on or after 1 January 2025, and be phased in for other affected entities by 2028.

Compared with the earlier exposure draft legislation, the Bill shifts approach on some key issues we raised in our January commentary. There are changes to the likely commencement date, the form of the directors’ declaration, the arrangements for audit and assurance, and the ‘modified liability’ arrangements that are intended to provide limited relief from private litigation for a three-year transitional period. However, there has been no change to the breadth of coverage of the regime, or to the Minister’s power to require additional environmental disclosures (such as nature-related disclosure) down the track.

What is required?

CRFD requires both record-keeping and reporting. It will add a new part to the entity’s annual report (alongside the financial report and the directors’ report) called the ‘sustainability report’ which includes climate statements required by the AASB’s sustainability standards, notes to the climate statements, other disclosures (if any) about environmental sustainability required by the Minister, and a directors’ declaration in the form required by the legislation.

Who is affected and when?

CRFD will apply to companies, disclosing entities, registered MISs, and RSEs that lodge annual reports with ASIC, and that are either subject to the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER), or above a specified size. The size is either or both of:

• two out of three (on a consolidated basis) of: (1) revenue of $50 million or more; (2) gross assets of $25 million or more; (3) 100 or more employees; or
• $5 billion or more in consolidated assets (this test is intended to capture large RSEs and registered MISs).

CRFD applies to existing reporting entities above this size, regardless of sector and whether or not the entity is listed.

The Bill provides for a phased implementation schedule, which will depend on when the legislation commences. If it commences before 2 December 2024, the ‘start date’ will be 1 January 2025, and very large entities (known as Group 1) will be required to report from their first financial year that commences between 1 January 2025 and 30 June 2026. Reporting will start for large entities and investment funds (Group 2) from their first financial year commencing between 1 July 2026 and 30 June 2027, and for medium entities (Group 3) from their first financial year commencing after 1 July 2027.

Group 1 comprises NGER reporters above the relevant threshold, and other entities that have two out of three (on a consolidated basis) of: (1) revenue of $500 million or more; (2) gross assets of $1 billion or more; (3) 500 or more employees. Group 2 comprises all other NGER reporters, entities (including CCIVs, trusts and funds) with assets of $5 billion or more, and other entities that have two out of three (on a consolidated basis) of: (1) revenue of $200 million or more; (2) gross assets of $500 million or more; (3) 250 or more employees. The rest fall into Group 3.

Corporate groups that prepare consolidated financial statements can choose to provide consolidated sustainability statements also.

What legal issues does the Bill raise?

In January we identified four significant policy issues to be addressed by Government in the legislation: the directors’ declarations, the ‘modified liability’ arrangements for the transition period, the application of CRFD to Group 3 entities, and the disclosure content. We also commented on the assurance gap and the arrangements for auditor and review of the sustainability report.

1. Directors’ declarations

The sustainability report must include a directors’ declaration, made by board resolution, in similar form to the one provided for financial reports. Directors must declare whether, in their opinion, the substantive provisions of the sustainability report are in accordance with the Act, including s 296C (which concerns compliance with the sustainability standards and any applicable Ministerial requirements) and s 296D (which concerns the completeness of disclosure about risks, opportunities, metrics, targets, governance, strategy, and risk-management).

As with any statement of opinion by directors, this declaration carries with it an implied representation that there is a reasonable basis for it. The practical challenge for directors will be in obtaining appropriate assurances, given Treasury’s earlier acknowledgement that the processes and systems for audit and review are still being developed. In fact, the Bill assumes that sustainability reports will not be fully audited before FY31.

To address this concern, the directors’ declaration is modified for financial years commencing during the three years starting on the start date (that is, in 2025, 2026 or 2027). In those years, the directors’ declaration will go to whether, in the directors’ opinion, the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Act.

2. Modified liability arrangements

The Treasurer’s second reading speech confirmed the Government’s intention to ‘provide limited relief from private litigation for a three-year transitional period’. But as the Treasurer went on to note, ‘ASIC can still take action for breaches of the reporting requirements during this period.’

This will be done through modified liability arrangements contained in the Bill’s transitional provisions.

The modified liability arrangements will apply to some statements – referred to as ‘protected statements’ – that appear in sustainability reports (and in some other forms of mandatory corporate disclosure) for financial years beginning in the first three years of the regime (that is, in 2025, 2026 or 2027). They work so that no ‘action, suit or proceeding lies against a person’ in relation to a protected statement unless it is ‘criminal in nature’ or is ‘brought by ASIC’. For this purpose, protected statements are statements about scope 3 greenhouse gas emissions (including financed emissions), scenario analysis, or a transition plan. For a more limited transitional period (financial years commencing in 2025), protected statements will also include all other forward-looking statements relating to climate. This additional measure, which was in response to submissions on the Exposure Draft Legislation, appears to acknowledge the need for more protection but does not go as far as many had hoped. The protection will have expired before Groups 2 and 3 begin reporting.

There appears to be no restriction on the remedies (including civil penalties) available to ASIC during the transition period, including against individual directors and officers who contravene ss 180, 344, 1308 or 1309 of the Corporations Act 2001 (Cth) in connection with the sustainability report.

3. Group 3 entities

Group 3 entities are smaller businesses (listed and unlisted) that file annual reports with ASIC, that are not NGER reporters, and that meet two of the three tests of: (1) consolidated revenue of $50 million or more; (2) consolidated gross assets of $25 million or more; (3) 100 or more employees. This is aligned to the thresholds for financial reporting by large proprietary companies that are currently contained in the Corporations Act.

Estimates differ as to how many entities will fall into Group 3. ASIC’s annual report for 2022-23 showed there were 29,242 entities required to produce financial reports last year, but some will likely fall below the threshold for sustainability reporting.

The Bill includes a limited concession for Group 3 entities that conclude (based on the materiality test in the sustainability standards) that they have no material climate-related risks or opportunities. They may include a statement to that effect, with an explanation of how they reached that conclusion, as the ‘climate statements’ component of their sustainability report. But they still must produce a sustainability report, and meet the sustainability record-keeping requirements and be able to substantiate their conclusion.

4. Content of disclosure

What goes in the disclosure will depend on two things. The first is the content of the sustainability standards currently being developed by the AASB. These include disclosures based on IFRS S2 Climate-related Disclosure and climate-related aspects of IRFS S1 General Requirements for Disclosure of Sustainability-related Financial Information (2023).

The second is any additional disclosure requirements imposed (from the outset, or later) by the Minister by separate legislative instrument. For example, the Minister may require a sustainability report to include ‘specified disclosures in relation to the preparation of the climate statements or anything included in the climate statements’, as well as ‘statements relating to financial matters concerning environmental sustainability’ and notes to those statements. The latter is intended to future proof the regime by allowing the Minister to require sustainability disclosure beyond climate without amending the Act.

5. Auditing and review requirements

The Bill provides for audit and review requirements to be phased in over seven years. It provides for the AUASB to make auditing standards that specify the extent to which sustainability reports for financial years commencing on or before 30 June 2030 must be either audited or reviewed or both. The statutory requirement to have the sustainability report ‘audited’ during this period is read as a requirement to have it audited or reviewed only to if and to the extent required by the standard. The Explanatory Memorandum states that this is ‘to account for the fact auditors will need an adjustment period to get used to complying with the new reporting standards’.

Next steps

The Bill has been referred to the Senate Economics Committee, which is due to report back at the end of April 2024.

If the legislation passes this year, the start date for the new CRFD regime will be 1 January 2025 and Group 1 entities with financial years commencing on or after that date will need to be prepared. This includes being ready to keep the sustainability records required by the Act, and to take reasonable steps (including by internal or external assurance) to ensure the disclosure in the sustainability report is compliant.

Our Board Advisory & Governance team and expert ESG lawyers are available to take you through the Bill and its practical implications. We will keep you updated as it progresses through the legislative process.