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Over the past several years, there has been a seismic shift in shareholder and stakeholder expectations as to how businesses manage climate risk along with increasing pressure for companies to provide a higher degree of transparency in relation to how they manage their climate risks and opportunities.
At a global level, the International Sustainability Standards Board released the global sustainability standards relating to climate disclosure (IFRS 1 and IFRS 2) (Global Sustainability Standards). Following the release of the global ISSB Standards, the Federal Government passed landmark mandatory climate reporting legislation in September 2024 as Schedule 4 of the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 (Climate Reporting Regime) and the Act commences on 1 January 2025.
This article outlines the key elements of the Climate Reporting Regime and includes 10 action items for in-house lawyers to help their business be well prepared for reporting under the Climate Reporting Regime.
How can in-house counsels help their companies prepare for mandatory climate reporting?
In-house lawyers play a vital role in helping their company engage with, and navigate, the complexities of mandatory climate reporting requirements while managing the associated legal risks and opportunities. This includes:
In practice, this could mean facilitating a gap analysis, creating a climate-reporting implementation roadmap, reviewing reporting boundaries, assessing the implications for contractual arrangements, and implementing enhanced governance and verification practices.
What do I need to know about mandatory climate reporting?
The Climate Reporting Regime, which requires in-scope entities to disclose their climate-related plans, financial risks and opportunities as set out in the Australian Sustainability Reporting Standards (ASRS) issued by the Australian Accounting Standards Board (AASB).
On 20 September 2024, the AASB approved the final versions of the ASRS:
AASB S1 (voluntary standard) and AASB S2 (mandatory standard) are aligned internationally to the Global Sustainability Standards issued by the ISSB, being IFRS S1: General requirements for disclosure of sustainability-related financial information and IFRS S2: Climate-related disclosures, with minimal variations.
How do I identify whether my business is required to report?
An entity is required to report under the Climate Reporting Regime) if it meets the following criteria:
When does mandatory climate reporting commence?
The commencement date for the Act is 1 January 2025 however reporting by in-scope entities is phased-in and the commencement date for reporting for in-scope entities depends on whether the in-scope entity falls within Group 1, Group 2 or Group 3 under the Climate Reporting Regime and the relevant financial year for that entity.
Group 1 Entities1 will be the first to report under the Climate Reporting Regime. For example, the first reporting date for a Group 1 entity with a financial year commencing on 1 July, the first sustainability report will need to be prepared for the year ending 30 June 2026.
Group 2 Entities2 and Group 3 Entities3 must report for financial years commencing on or after 1 July 2026 and 1 July 2027, respectively.
What does my organisation need to report on?
The Climate Reporting Regime requires in-scope entities to disclose their climate-related plans, financial risks and opportunities in accordance with the ASRS.
Sustainability report
In-scope entities will be required to prepare a sustainability report as part of their annual report which will include:
ASIC Guidance on the Climate Reporting Regime
ASIC will be responsible for administering the Climate Reporting Regime and has communicated that it will issue regulatory guidance and support the implementation of the regime. This will include a regulatory guide on addressing its approach to relief from the obligations, and interaction of the regime with existing legal and regulatory requirements.
ASIC also plans to provide resources on its website for preparers and users of Sustainability Reports. In this regard, ASIC has established a dedicated “sustainability reporting page” in relation to the Climate Reporting Regime and how ASIC will administer the regime.
ASIC has further advised that it will take a pragmatic approach to the supervision and enforcement of the regime.
Transition Period: Modified Liability Regime
The Climate Reporting Regime includes a modified liability regime which applies to certain “protected statements” in the Sustainability Report. Disclosures relating to Scope 3 emissions, scenario analysis and transition planning disclosures will be subject to regulator-only enforcement for a period of three years from the commencement of the climate reporting regime.
All forward-looking climate disclosures will also be subject to regulator-only enforcement for the first year from the commencement of the Climate Reporting Regime.
In addition, modified liability applies to voluntary disclosures in the Sustainability Report, provided they are made in compliance with the Climate Reporting Regime or sustainability auditing standards and any 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.
Is external assurance required for climate-related financial disclosures?
The AUASB issued exposure draft ED 02/04 Proposed Australian Standard on Sustainability Assurance ASSA 5010 Timeline for Audits and Reviews of Information in Sustainability Reports under the Corporations Act in September 2024 and submissions close on 16 November 2024 (Assurance Exposure Draft).
The Assurance Exposure Draft outlines the proposed assurance phasing model which aligns with the requirement in the Act for an ‘end state’ of reasonable assurance of all climate disclosures made from years commencing 1 July 2030 onwards.
It is expected that the AASB will issue a final standard by December 2024.
What types of entities are exempt?
An entity is not required to report under the Climate Reporting Regime if:
10 Ways In-house Counsel Can Help Their Organisation Prepare for Climate Reporting
Understand how the Climate Reporting Regime applies to your business (work out if your business falls within Group 1, Group 2 or Group 3) and identify when your business will be required to commence reporting.
Conduct a gap analysis now by examining your organisation’s current climate-related reporting compared to what is required by the standards set out in the ASRS.
Develop a clear climate strategy and transition plan. Determine the impact of climate reporting on the business model, value chains, contractual relationships.
Leverage relationships across the business to bring together a core team who will be responsible for coordinating the preparation of the Sustainability Report.
Identify any changes required to the existing governance structure in order to comply with the disclosure requirements including processes to address risk management and verification to support accurate reporting.
Regularly review and enhance your organisation’s climate reporting processes and compliance with the Climate Reporting Regime.
Implement a process for identification and prioritisation of risks and opportunities.
Following the introduction of the Climate Change Act 2022 and Australia becoming a signatory to the Paris Agreement, consider developing a net zero transition plan (even though this is not currently mandatory).
Create an implementation plan which set out the key action points to “close any gaps” following the gap analysis and ensure compliance with the Climate Reporting Regime.
Develop a detailed strategy for communicating climate information to investors and stakeholders prior to finalising the Sustainability Report.
Regularly monitor guidance issued by ASIC as it is responsible for overseeing the sustainability reporting framework set out in the Act and the ASRS.
It is imperative that in-house counsels start preparing now for climate reporting, as it takes a considerable amount of time for stakeholders to understand the requirements of the Climate Reporting Regime, and then implement the relevant changes to governance and disclosure frameworks.
By implementing the key action points outlined above, in-house counsel can help ensure their organisation will be well-prepared to meet their climate reporting requirements and position themselves positively with respect to their climate reporting credentials.
1Group 1 entities are those entities which meets two out of three of size criteria: consolidated revenue >$500 million or more, $1 billion or more of consolidated assets and >500 employees or it is an NGER Reporter).
2Group 2 entities are those entities which meet two out of three size criteria: consolidated revenue >$200 million or more, $500 million or more of consolidated assets and >250 employees or it is an NGER Reporter).
3Group 3 entities are those entities which meet two out of three size criteria: consolidated revenue >$50 million or more, $25 million or more of consolidated assets and >100 employees or it is an NGER Reporter).