Climate-related financial disclosure in Australia: Treasury commences second round of consultation

On 24 June 2023, Treasury released a revised Climate-related Financial Disclosure Consultation Paper (CFD Paper), which coincided with the release of the ISSB’s Sustainability Standards S1 and S2.

The CFD Paper builds on the Government’s discovery consultation process that occurred between 12 December 2022 and 17 February 2023. Based on submissions received during that consultation process, Treasury developed the revised CFD Paper with the stated purpose of seeking views on the Government’s proposed positions for the “detailed implementation and sequencing of standardised, internationally‑aligned requirements for disclosing climate‑related financial risks and opportunities in Australia.”

Businesses should understand what is being proposed by the Government in relation to climate-related disclosure, how these proposals may affect business operations, and what businesses need to do to participate in the consultation process and prepare for the inevitable mandatory reporting requirements.

Key highlights of the CFD Paper are:

• Reporting is proposed for large listed and unlisted companies and financial institutions
   
• Phased implementation over the next three reporting periods commencing in 2024/25
   
• Financial materiality is to be favoured over double materiality
   
• Specific requirements for scenario analysis are proposed, which are linked to the global temperature goal in the Climate Change Act 2023 (Cth)
   
• It is proposed that Scope 1, 2, and 3 emissions are to be reported, with a phased approach to scope 3 emissions
   
• Assurance of information reported is to be phased in as capacity is built in the assurance sector over the next three reporting periods commencing 2024/25
   
• It is proposed that a modified liability regime will be implemented to provide scope and time limited protection from civil claims relating to forward looking statements, scope 3 emissions disclosures, scenario analysis, and transition planning

We recommend that businesses should consider the proposals and plan for the implementation of the reporting regime contemplated in the CFD Paper.

Reporting entities

The CFD Paper proposes mandatory climate-related financial disclosure for all entities that meet prescribed size thresholds and that are required to lodge financial reports under Chapter 2M of the Corporations Act 2001 (Cth) (Corporations Act). The position is somewhat different from that advanced in the initial discovery consultation process with it now being broadened to cover both large listed and unlisted companies. 

The prescribed size thresholds relate to a company’s size, consolidated gross assets, and consolidated revenue. These criteria are set out in the table below.

In addition, mandatory climate-related financial disclosure is proposed for all entities that are required to report under Chapter 2M of the Corporations Act that are registered as a ‘Controlling Corporation’ reporting under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act). That means that even if a “Controlling Corporation” does not meet the size, consolidated gross assets, and consolidated revenue criteria, they would still need to report.

Phased implementation

It is proposed that mandatory disclosure of climate-related financial disclosure is implemented in a phased approach depending on a company’s size, consolidated gross assets, and consolidated revenue. The timeline will include 3 phases of implementation commencing in 2024/25 and culminating in 2027/28 with all reporting entities having mandatory climate-related financial disclosure. The phased implementation timetable is set out in the table below.

Table: Reporting entities and phased implementation timetable

Timing	Reporting entities
Group 1 2024-25 onwards	Entities required to report under Chapter 2M of the Corporations Act and that fulfill two of the three thresholds: Has over 500 employees;  The value of consolidated gross assets at the end of the financial year of the company and any entities it controls is $1 billion or more;  The consolidated revenue for the financial year of the company and any entities it controls is $500 million or more. AND Entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act and meet the NGER publication threshold.
Group 2 2026-27 onwards	Entities required to report under Chapter 2M of the Corporations Act and that fulfill two of the three thresholds: Has over 250 employees;  The value of consolidated gross assets at the end of the financial year of the company and any entities it controls is $500 million or more; The consolidated revenue for the financial year of the company and any entities it controls is $200 million or more. AND Entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act and meet the NGER publication threshold
Group 3 2027-28 onwards	Entities required to report under Chapter 2M of the Corporations Act and that fulfill two of the three thresholds: has over 100 employees;  The value of consolidated gross assets at the end of the financial year of the company and any entities it controls is $25 million or more;  The consolidated revenue for the financial year of the company and any entities it controls is $50 million or more.  AND Entities required to report under Chapter 2M of the Corporations Act that are a ‘controlling corporation’ under the NGER Act.

What information will need to be reported

The CFD Paper notes that the Australian Accounting Standards Board (AASB) will be developing Australian climate disclosure standards, and that it is expected that those standards will closely align with the requirements in IFRS S2 Climate-related Disclosures.

Since it is anticipated that the AASB will conduct a public consultation process as part of developing the Australian standards, the reporting content positions outlined in the CFD Paper are stated to be indicative and the content of those standards is not the focus of the CFD Paper.

Nevertheless, the CFD Paper provides some insights into what it is anticipated disclosure will look like. These aspects are considered below.

Materiality

The CFD Paper eschews double materiality in favour of the more parochial concept of financial materiality. The proposed position envisions that climate-related financial disclosure will be limited to reporting on financial materiality only, and non-financial external climate-related impacts of a company will not need to be reported.

In determining whether climate-related financial information is material the CFD Paper notes that the threshold question is whether omitting, misstating or obscuring that information could reasonably be expected to influence decisions that the primary users of general purpose financial reports (existing and potential investors, lenders and other creditors) make on the basis of the reports.  

Whilst the CFD Paper eschews double materiality, it does observe that “it is increasingly understood that climate-related risks (either transition or physical risks) would be material for most businesses”. The implication of this statement is that it is expected that the climate-related risk and opportunities will be financially material for most businesses.

Governance 

It is proposed that governance arrangements (including processes, controls and procedures to monitor and manage climate-related financial risks and opportunities) would need to be disclosed. The CFD Paper notes that it is expected that disclosures would include “information about how the company’s governance bodies are involved in overseeing and monitoring climate-related risks and opportunities, including an explanation of how this role is incorporated in company policy and procedures and whether (and how) climate-related performance metrics are factored into executive remuneration. This is considered an extension to existing remuneration-related disclosures under current annual reporting obligations.”

Strategy

The view taken in the CFD Paper is that primary users of general purpose financial reports should be able to understand a reporting entity’s strategy for identifying and addressing climate-related risks and opportunities.  It is noted in the CFD Paper that disclosures relating to an entity’s strategy would include information about: 

• the current and anticipated effects of risks and opportunities faced by the reporting entity (for the reporting period and over the short, medium and long term) on the entity’s:
  • business model and value chain
  • business strategy, decision-making (including any transition plan)
  •  financial position, financial performance and cash flows

• the climate resilience of its strategy and business model to both transition and physical risks. 

Scenario analysis 

The CFD Paper emphasises the need to report based on specific scenario analyses.  

It is proposed that reporting entities would initially use qualitative scenario analysis (at a minimum) to inform disclosures, moving to quantitative scenario analysis by end state. The CFD Paper notes that the level of sophistication of the scenario analysis adopted by a reporting entity should be proportionate to its experience, its exposure to climate-related risk, and the availability of supporting information such as methodologies and datasets. Whilst a phased in approach is proposed, it is expected that companies currently reporting quantitative scenario analysis would continue to do so.

This phased approach recognises that there are several reporting entities that have not built capability in reporting and that development of useable Australian-specific climate scenarios for the corporate sector is still in its infancy.

Also, it is proposed that reporting entities will be required to disclose their approach to the climate scenarios adopted, including methodology, limitations and critical assumptions. 

As part of the scenario analysis, it is proposed that reporting entities would be required to disclose climate resilience assessments against at least two possible future states, one of which must be consistent with the global temperature goal set out in the s 3 of Climate Change Act 2022. That goal is: 

(i)  holding the increase in the global average temperature to well below 2°C above pre‑industrial levels; and

(ii)  pursuing efforts to limit the temperature increase to 1.5°C above pre‑industrial levels

The CFD Paper does not prescribe the second future state against which resilience must be assessed but provides the scenario reflecting the Government’s commitment to reduce emissions by 43 per cent by 2030 and to net zero by 2050 as an example. 

Transition planning and Climate targets

Transition plans would need to be disclosed, including information about offsets, target setting and mitigation strategies. The CFD Paper adopts the policy of transparency such that if a transition plan is not available, this fact is reported. Therefore, it is not yet proposed that Transition planning is mandatory although the CFD Paper notes that as part of broader consultation on the Government’s Sustainable Finance Strategy later this year, Treasury will consider arrangements that could strengthen the development and disclosure of company transition plans.

It is also proposed that information about any climate-related targets (if they exist) and progress towards these targets would need to be disclosed. Reporting entities would also be required to disclose how their chosen target compares to the global temperature goal set out in the Climate Change Act 2022 and Australia’s nationally determined contribution.

Entities that have not developed or stated future targets could meet the disclosure requirement by noting this. However, it is expected that the proposed requirements will help encourage improvements in transition planning and target setting in the market, driven by investor demand.

Risks and opportunities 

The CFD Paper proposes that information about material climate-related risks and opportunities to a reporting entity’s business, as well as how the entity identifies, assesses and manages risk and opportunities would need to be disclosed.

Scope 1, 2, and 3 emissions

It is proposed that scope 1 and 2 emissions for the reporting period would need to be disclosed and accompanied by information that would enable investors to understand how the emissions profile was calculated. This includes information about the accounting framework, assumptions, methodology and approach to selecting and measuring input data.

The CFD Paper notes that gross scope 1 and 2 emissions (being total emissions before any eligible units and/or certificates have been accounted for) would need to be disclosed for the reporting period. Where a reporting entity is disclosing Australian-based emissions, these would need to be calculated consistent with methods set out in the NGER Scheme legislation.  

If an entity chooses to also disclose net scope 1 and 2 emissions (gross emissions after eligible units and certificates have been deducted), this would need to be accompanied by information that provides transparency to help users understand the nature (including the source and quality) of any units or certificates surrendered.

Reporting of scope 2 emissions (both location-based and market-based accounting methods) would be required by end state, using methods under NGER Scheme legislation. The proposed requirements would not prevent reporting entities from voluntarily dual-reporting scope 2 emissions prior to this time. 

In relation to scope 3 emissions, it is proposed that material scope 3 emissions would need to be reported by reporting entities from their second reporting year onwards. The CFD Paper notes that scope 3 emissions should incorporate material emissions both upstream and downstream from the reporting entity, consistent with a recognised emissions accounting framework (i.e. GHG Protocol) and drawing on Australia-specific emissions factors where relevant (i.e., National Greenhouse Accounts Factors).  

In determining what is material in this context, Treasury notes that materiality would have regard to the relative size of the emissions source. Reporting entities would also need to provide information about how they have determined the boundaries for material scope 3 estimation and what components of upstream and downstream value chain are represented in and excluded from this calculation. The framework used to guide scope 3 estimation should also be disclosed. 

Treasury expects that in the immediate term, most scope 3 disclosures would be estimates, reflecting information that is accessible at the time of disclosure. The proposed reporting requirement would take a proportional approach and as companies become more practiced in scope 3 estimation and available methodologies and data improve over time, scope 3 disclosures would be expected to improve.

Industry based metrics

It is proposed that by end state, reporting entities would be required to have regard to disclosing industry-based metrics, where there are well-established and understood metrics available for the reporting entity. These metrics would be subject to consultation with members of that sector so that reporting entities have had the opportunity to influence what metrics are most relevant to their business model.  

Where to report

It is proposed that climate-related disclosures would be published in a reporting entity’s annual report, with the requirement to comply with climate disclosure standards being incorporated into Part 2M.3 of the Corporations Act. Climate disclosures would then be required as part of both the directors’ report and the financial report required under that legislation.

The CFD Paper notes that for listed entities, climate disclosures would be required in the operating and financial review (OFR), within the directors’ report. The CFD Paper also notes in this regard that ASIC considers that the law currently requires an OFR to include a discussion of climate-related risk where it is a material risk that could affect the company’s achievement of its financial performance. 

Continuous disclosure 

It is proposed that climate-related disclosure obligations would extend to continuous disclosure and fundraising document obligations. The CFD Paper notes that ASIC has previously stated that depending on the circumstances, disclosure of climate-related risk may already be required by the law in contexts such as a prospectus or continuous disclosure announcement.

Assurance

The CFD Paper notes that assurance plays an important role in enhancing the credibility of climate disclosures, but highlights material gaps in the assurance industry to provide assurance services for mandatory financial related climate disclosure. Considering this, the proposed position advanced in the CFD Paper for climate disclosure assurance include: 

• a requirement for limited assurance, moving to reasonable assurance over time.

• reasonable assurance of scope 3 as a final step in scaling requirements.

• assurance would need to be provided against the Australian equivalent standards to the ISSB and Corporations Act/Corporations Regulations, in line with AUASB standards. 

• assurance to be carried out by a qualified and experienced independent provider (conducted or led by the financial auditor). 

A proposed assurance roadmap and timeline is included in the CFD Paper. This is replicated below.

The CFD Paper also notes that the International Auditing and Assurance Standards Board (IAASB) is working on a project to develop an overarching standard for assurance on sustainability reporting, which would address both limited and reasonable assurance, and is targeting July/August 2023 to release the exposure draft and aiming for final approval in late 2024. 

The CFD Paper notes that Treasury will continue to monitor progress of the IAASB’s assurance on sustainability reporting project and that its position is that to minimise compliance costs for entities that operate internationally, assurance should be aligned with IAASB standards as far as possible.

Group	Timeline
		2024-25	2025-26	2026-27	2027-28	2028-29	2029-30	2030-31
1	Limited assurance of Scope 1 and 2 emissions. Reasonable assurance of governance disclosures	Reasonable assurance scope 1 and 2 emissions. Limited assurance of scope 3 emissions, scenario analyssi and transition plans (specific requirements process/methodology/assumption assurance)	Reasonable assurance scope 1 and 3 emissions and othe climate disclosures. Limited assurance of scope 3 emissions, scenario analysis and transition plans (full quantitative assurance)	Reasonable assurance all climate disclosures
2			Limited assurance of scope 1 and 2 emissions Reasonable assurance of governance disclosures	Reasonable assurance of cope 1 and 2 emissions Limited assurance of scope 3 emissions, scenario analysis and transition plans (specific requirements – process/ methodology/assumption assurance)	Reasonable assuranceof scope 1 and 2 emissions and other climate disclosures Limited assurance of scope 3 emissions, scenario analysis and transition plans (full quantitative assurance)	Reasonable assurance all climate disclosures
3				Limited assurance of scope 1 and 2 emissions Reasonable assurance of governance disclosures	Reasonable assurance of scope 1 and 2 emissions Limited assurance of scope 3 emissions, scenario analysis and transition plans (specific requirements – process/ methodology/assumption assurance)	Reasonable assurance of scope 1 and 2 emissions and other climate disclosures Limited assurance of scope 3 emissions, scenario analysis and transition plans (full quantitative assurance)	Reasonable assurance all climate disclosures

 

Modified liability regime

A welcome proposal put forward in the CFD Paper is that climate-related financial disclosure requirements will be drafted as civil penalty provisions in the Corporations Act and that the application of misleading and deceptive conduct provisions to scope 3 emissions and forward-looking statements would be limited to regulator-only actions for a fixed period of three years. On that basis, disclosures would be protected under ss 1317S and 1318 of the Corporations Act affording protection to company officers and reporting entities in civil proceedings where they have acted honestly and ought fairly to be excused for the breach.

In addition it is proposed that elements of mandatory disclosure including scope 3 reporting, scenario analysis, and transition planning would be afforded time-limited (3 years) protection from misleading or deceptive conduct, false or misleading representations, and similar claims. However, this protection would only operate in respect of private litigants and would allow ASIC to take regulatory action.

Next steps

Treasury has invited submissions to be made up until 21 July 2023. See the Treasury’s consultation webpage for further details Climate-related financial disclosure: Second consultation | Treasury.gov.au.

Our ESG team has specialist environmental capabilities that can assist in planning for and implementing climate-related disclosure.

A copy of the CFD Paper can be founder here: https://treasury.gov.au/sites/default/files/2023-06/c2023-402245.pdf