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Mandatory climate reporting laws - be prepared, the significant changes are quickly approaching

Following the recently proposed legislation by the Federal Government to introduce mandatory climate reporting and disclosures, ASIC have strongly advised companies to prepare for the incoming changes.

Under the draft legislation, a new mandatory climate reporting and disclosure regime will be phased in over time from 1 January 2025, across three groups of businesses (measured by size). The changes will eventually require over 6,000 entities, including those who hold an Australian Financial Services License, to comply with the new reporting regime. Whilst most small and medium businesses will not have any direct climate reporting requirements, many will form part of the supply chains of larger businesses, and may need to engage with climate reporting considerations.

This article will outline the proposed reporting requirements and provide guidance for businesses who will soon need to consider the implications of these changes. It also outlines the benefits and opportunities that may flow from increased transparency under the new regime.

Cooper Smith, Maddocks Lawyer

Overview of the proposed changes

On 27 March 2024, Treasury released a proposed bill in relation to climate reporting[1] which, if enacted, will mean that from 1 January 2025, climate-related financial disclosures will be mandated for a range of Australian business and rolled out gradually over time. Under the proposed changes, if an entity is required to lodge reports under Chapter 2M of the Corporations Act[2] and meets thresholds specified by the Bill, or is required to report under the National Greenhouse and Energy Reporting Act[3], they will need to disclose information about climate related risks and opportunities in a 'sustainability report' to be contained in their annual financial report.

The government is currently undertaking consultation concerning the changes, with new accounting and assurance standards to apply to the regime after being developed by national accounting and auditing bodies.

Prior to 2030, it is expected that sustainability reports will only be reviewed or audited to a limited extent, however, these standards will evolve, and reports must be audited from 1 July 2030, and include an audit opinion.

What information will need to be disclosed?

From the first year of reporting, mandated entities will need to provide:
 

  • a 'sustainability report / climate statement', which discloses information relating to:
    • the governance of, strategy and risk management concerning material climate related risks and opportunities for the financial year;
    • climate related metrics and targets, including those concerning:
      • 'Scope 1' greenhouse gas emissions: which are emissions directly released from the entity's activities; and
      • 'Scope 2' emissions: which are emissions indirectly released by virtue of the entity's energy consumption;
  • notes to the climate statement; and
  • a directors' declaration that the climate statement and notes comply with the Corporations Act and any applicable sustainability standards.

From the second year of mandated reporting, entities will also need to disclose their 'Scope 3' emissions, being emissions that occur up or down an entity's supply chain, as well as emissions associated with their financing or investment activities. At this stage, 'Scope 3' disclosures will only require businesses to disclose information that is available at the reporting date without undue cost or effort.

What entities will be exempt from disclosure?

Most small and medium businesses (those who are below the relevant thresholds) and registered charities will be excluded from the regime. Further, entities that are exempt from lodging financial reports under the Corporations Act will be exempt from making their own disclosures, and can rely on reports prepared by a parent entity (if relevant).

However, ASIC has warned that exempt entities may still be indirectly impacted. For example, exempt small businesses that form part of the supply chain of larger businesses may need to engage with climate reporting considerations over time given that, for example, 'Scope 3' emissions of mandated entities will often include the emissions of small business suppliers.

What entities must report and what are the proposed thresholds?

The proposed amendments will create three separate groups of entities that will be required to make disclosures, which are categorised as 'Group 1', 'Group 2' and 'Group 3' entities.

Entities that will be captured and need to commence mandatory disclosures are as follows: 
 

  • entities that report under Chapter 2M of the Corporations Act (2M Reporting Entities) and fall into one of the three proposed groups (outlined in the below table);
  • all entities that are registered under the NGER Act (NGER Reporting Entities) - entities above the NGER publication threshold will be classified as 'Group 1' entities, whilst the remaining NGER Reporting Entities will be 'Group 2' entities; and
  • entities that have $5 billion (or more) assets under management - to be classified as 'Group 2' entities.
Reporting Groups Commencement date 2M Reporting Entities: (Note: Two of the three thresholds below must be satisfied) NGER Reporting Entities Asset Value Threshold
Consolidated revenue Consolidated gross assets[4] Full-time Employees[5]
Group 1 1 January 2025 $500 million or more $1 Billion or more 500 or more Entities above the NGER publication threshold[6] N/A
Group 2 1 July 2026 $200 million or more $500 million or more 250 or more All other entities registered under the NGER Act $5 billion (or more) assets under management
Group 3 1 July 2027 $50 million or more $25 million or more 100 or more N/A N/A

What are the benefits and opportunities?

ASIC has emphasised the possible benefits of the new requirements, suggesting that disclosing entities will benefit from greater visibility of physical and transitional risks to their business, along with being able to identify climate-related opportunities concerning other entities in their value chain.

Increased monitoring of emissions and compliance with the new disclosure requirements will support businesses in managing their climate related risks and opportunities, whilst allowing them to gain a competitive edge. Notably, entities that adopt innovative and resource efficient solutions to improve their operational efficiency will reduce their annual energy expenses. Further, the increased focus on ESG requirements and global shift to 'net zero' will ensure that these concerns only become more pronounced over time. ASIC chair Joe Longo has noted that, ''doing this now will allow the best transition - and it will provide a surer foundation for a more profitable business - because a compliant business is a profitable business."

How should businesses prepare for the new regime?

Businesses need to consider the proposed changes to determine which group they fall into and if, or when they will be required to provide climate disclosures under the new regime. Business will need to also consider the type of information that they may need to provide, and how they propose to obtain such information. For example, organisational and structural changes, such as evaluating and adapting governance frameworks, internal responsibilities and systems may be necessary for businesses whose current structures do not support the incoming requirements.

It is expected that from 1 January 2025, businesses will need to provide assurances in relation to compliance with 'Scope 1' and 'Scope 2' reporting, whilst annual sustainability reports will need to be audited from 2030 onwards.

Accordingly, businesses should remain aware and informed of the regime and its evolution, with further details regarding new accounting and assurance standards to be provided in the coming months. 

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

Order related document packages

[1]Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Bill).

[2]Corporations Act 2001 (Cth) (Corporations Act).

[3]National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act).

[4]Consolidated assets to be as at EOFY.

[5]Employees also as at EOFY.

[6]See section 13(1)(A) of the NGER Act.

 

Lawyer in Profile

Alisha Wright
Alisha Wright
Associate
+61 3 9258 3007
alisha.wright@maddocks.com.au

Qualifications: BCom, LLB (Hons), Monash University

Alisha is a member of Maddocks Commercial team. She assists her clients in a variety of commercial matters.

Alisha has experience in:

  • development structuring,
  • business structuring,
  • shareholder and partnership agreements,
  • distribution arrangements, and
  • general commercial advice.

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