As we approach the end of 2024, Australia's corporate landscape is on the brink of a major transformation with the passing of the Climate Reporting Act, part of the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024. This landmark legislation introduces significant changes to how businesses must report on climate-related financial risks and opportunities, setting the stage for a new era of corporate sustainability.
Overview of Schedule 4
After a few push backs after the first announcement draft, the new legislation had just been approved by the Senate on 22 August, 2024, and is now expected to receive final approval in the House of Representatives in September.
Schedule 4 of the Treasury Laws Amendment Act 2024 requires businesses that file financial reports under Chapter 2M of the Corporations Act, or those with emissions reporting duties under the NGER scheme, to disclose climate-related financial information. They must follow guidelines from the Australian Accounting Standards Board (AASB), and these rules will be phased in over four years.
These disclosures must be verified by an auditor, similar to financial report verification. The Australian Auditing and Assurance Standards Board (AUASB) will create specific standards for these checks. Companies need to report their exposure to major climate-related financial risks and opportunities, including their greenhouse gas emissions, climate plans, and governance as part of a new 'sustainability report' that adds to current financial reporting.
This schedule aims to provide a clear and consistent way for businesses, investors, regulators, and the public to understand the climate-related financial risks and opportunities of companies, aligning with international standards. All legal references in this section relate to the Corporations Act unless otherwise noted.
Now, let’s dive deeper…
Key Changes in Climate Reporting
The landmark legislation now requires a phased implementation of climate reporting:
- Large Companies (Group 1): Businesses with revenues above $500 million, assets exceeding $1 billion, or over 500 employees, must begin reporting from 1 January, 2025. This includes detailed disclosures on climate risks under scenarios where global temperatures exceed 2°C and where they are limited to 1.5°C.
- Medium-Sized Companies (Group 2): Companies with revenues over $200 million, assets above $500 million, or 250+ employees, will follow, with reporting starting on 1 July 2026.
- Smaller Companies: Those with revenues of $50 million+, assets of $25 million+, or 100+ employees, will start reporting on 1 July 2027.
This new approach aims to embed climate risk management into the core of corporate strategies, making it essential for businesses to not only recognise but actively manage and disclose their climate risks.
Mandatory Dual-Scenario Climate Disclosures
By mandating the reporting of climate risks under two distinct scenarios—one where global temperatures "well exceed" 2°C above pre-industrial levels, and another where the increase is limited to 1.5°C—businesses are being called to rigorously assess their exposure to climate risks and opportunities. This dual-scenario approach ensures that companies are not only aware of the potential impacts of climate change but are also strategically prepared to navigate these challenges. It’s no longer enough to simply acknowledge climate change as a risk; this legislation demands a deeper integration of climate considerations into corporate strategy.
Implications for Australian Businesses and Financial System
- Increased Compliance Requirements:
- Immediate Impact on Large Companies: Group 1 entities (the largest companies) will need to start reporting from 2025, meaning they must quickly establish governance, data collection, and reporting systems.
- Phased Implementation for Others: Smaller companies in Group 2 and other in-scope entities have more time, but they must begin preparing now to ensure they meet the standards by their respective deadlines in 2026 and 2027.
- Strategic Planning and Risk Management:
- Incorporation into Business Strategy: Companies will need to embed climate risk management into their broader business strategy, impacting decision-making processes at the highest levels.
- Ongoing Reporting Challenges: Businesses will face ongoing challenges in gathering and reporting data, particularly if they’ve been relying on a “wait and see” approach. This could lead to increased costs and the need for specialised expertise.
- Impact on Businesses Not Initially Included:
- Indirect Pressure: Even businesses not in the first group will feel the pressure as industry standards evolve. Clients, investors, and regulators may start demanding similar disclosures.
- Competitiveness: Those who start early may gain a competitive advantage by positioning themselves as more transparent and responsible, while latecomers could struggle to meet expectations and regulatory requirements.
In addition to climate reporting, the Treasury Laws Amendment Bill also aims to bolster Australia’s financial system against emerging global risks. This dual focus on sustainability and financial robustness is crucial for navigating the complexities of the global economy.
Assurance, Compliance, and Director’s Declaration
Starting July 1, 2030, all climate disclosures will require mandatory assurance. The Auditing and Assurance Standards Board (AUASB) will soon release a schedule and draft standards aligned with International Auditing and Assurance Standard Board's (IAASB) norms.
During the initial three-year transition period, directors will need to provide a "Qualified Directors' Declaration" to confirm that reasonable steps have been taken to meet the new reporting standards. After this period, a full, unqualified declaration will be required.
Failure to comply with these requirements, such as not retaining sustainability records or failing to make the Sustainability Report publicly available after lodging it with Australian Securities and Investments Commission (ASIC), could result in civil penalties or even imprisonment.
However, to ease this transition, the government has introduced a "Modified Liability" regime for the first three years. This regime limits enforcement actions to the ASIC only, protecting companies from private litigation over certain disclosures, such as Scope 3 emissions and scenario analysis. This approach aims to ease compliance while ensuring that sustainability records are maintained and publicly available.
Comparison with Other Countries:
Climate change poses major risks to the global financial system, including physical and transition risks. However, it also offers opportunities for entities to gain a competitive edge through energy efficiency and innovation. Enhanced disclosure is key for investors to identify these opportunities.
In this context, comparing Australia's approach to climate risk management and disclosure with that of other countries can provide valuable insights into how different nations are tackling these critical issues.
- United Kingdom:
- The UK introduced mandatory climate-related financial disclosures for large companies and financial institutions in April 2022, aligned with the Task Force on Climate-related Financial Disclosures (TCFD). The Australian approach is similarly stringent but is aligned with IFRS Sustainability Disclosure Standards, potentially offering greater global comparability.
- United States:
- The US has proposed rules from the Securities and Exchange Commission (SEC) to mandate climate-related disclosures, but these are not yet finalised. The US framework is expected to be broad but may face political and legal challenges. Australia’s law, being enacted, provides more certainty for businesses.
- European Union:
- The EU’s Corporate Sustainability Reporting Directive (CSRD) is one of the most comprehensive, requiring detailed sustainability disclosures from large and listed companies. Australia’s new law aligns closely with the EU's approach, focusing on consistency with international standards, but the EU’s framework may be more demanding due to its broader scope and depth.
Opportunities and Challenges
Strategic Advantages: Businesses that embrace these reporting requirements early can gain a competitive edge by positioning themselves as transparent and responsible. This can attract investors and clients who prioritise sustainability, while those who delay may face challenges meeting new expectations.
Preparedness: Early preparation is key. Understanding global trends and aligning with international standards can help businesses navigate the new regulations effectively and leverage them for long-term success.
How NetNada Can Support Your Transition
At NetNada, we are committed to helping businesses navigate this regulatory shift. Our expertise in sustainability and carbon accounting equips us to guide you through the new reporting requirements and beyond. We offer tailored solutions and support to ensure you meet and exceed these standards, positioning your business as a leader in sustainability.
Join Our Webinars and Training: To assist with the transition, we will be hosting webinars on climate reporting and encouraging participation in our NetNada Academy courses. Stay ahead of the curve and make sustainability a strength with our expert guidance.
Questions and Clarifications
If you are unsure of your organisations reporting requirements, check our FAQ’s here:
- How are employees counted?
Part-time employees count as a fraction of a full-time equivalent.
- How are consolidated revenue and assets calculated?
These are calculated according to the accounting rules in effect at the time.
- How is Assets Under Management (AUM) defined and calculated?
There is no single definition for AUM yet. More information is expected in future guidelines.
- Do all entities in a consolidated group need to provide climate-related financial disclosures?
No, if a consolidated group provides a single climate-related disclosure (called a "sustainability report" on the next page) that includes all group entities, individual entities do not need to submit separate reports.
- Must an Australian subsidiary prepare a sustainability report if the foreign parent does?
Yes, if the Australian subsidiary meets the reporting requirements under Chapter 2M of the Corporations Act 2001, it must prepare its own sustainability report, regardless of the parent company's report.
- Is a sustainability report needed if an entity is exempt from lodging financial reports under Chapter 2M?
No, entities that are exempt (like those registered with the ACNC or covered by ASIC relief) do not need to prepare a sustainability report.
- Are companies limited by guarantee required to provide disclosures?
Yes, if a company limited by guarantee has annual consolidated revenue of $1 million or more and meets other reporting criteria, it must prepare a sustainability report.
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