Australia's landmark climate reporting regime commences

Australia has now implemented a new mandatory climate reporting scheme.

The regime commenced on 1 January 2025 and will affect more than 6000 Australian entities (not limited to entities listed on the ASX), however political uncertainty hangs over the regime.

Change in legislation

The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth) (Bill) (passed on 17 September 2024) amended the Corporations Act 2001 (Cth) (Corporations Act) to phase-in the new climate-related financial reporting requirements for entities.

Sustainability Report

The new climate-related disclosure is to form part of an entity's annual reporting suite as a 'Sustainability Report', which will sit alongside the financial report, the director's report and audit report.

Who is required to report?

The new climate-related disclosure requirements apply to all companies required to provide audited annual financial reports to the Australian Securities and Investment Commission (ASIC) under Chapter 2M of the Corporations Act that meet specific size thresholds or have emission reporting obligations under Australia's existing National Greenhouse and Energy Reporting (NGER) scheme.

Mandatory climate-related financial disclosure is required for all public companies and large proprietary companies from 1 January 2025, otherwise referred to as 'Group 1' entities.

'Group 2' and 'Group 3' entities will become subject to the disclosure requirements over the phase-in period of the following two financial years.

Application to foreign and multinational corporate groups

Determining whether an entity is required to report may be complex when considering multinational corporate groups. For example, the mandatory climate reporting may apply to an entity with a holding company that is incorporated outside Australia or an entity incorporated outside Australia that is undertaking activities within Australia. Further complexity arises for group entities, as separate sustainability reports may be required for each subsidiary if that entity meets the threshold criteria set out above.

What must go into a Sustainability Report?

The Sustainability Report must include a climate statement, financial matters concerning environmental sustainability (and notes in respect of both) and a directors' declaration. The Sustainability Report must also be audited in line with the annual financial statement.  

ASIC released a draft Regulatory Guide on sustainability reporting in November 2024 and is expected to release the final Regulatory Guide in the first quarter of 2025. The draft Regulatory Guide largely summarises the key aspects of the new regime to assist those preparing the Sustainability Report.

The Australian Accounting Standards Board has set down the Australian Sustainability Reporting Standard AASB S2 Climate-related Disclosures, which will apply to all mandatory climate reporting. AASB S2 is closely aligned to the International Sustainability Standards Board's IFRS S2: Climate-related Disclosures, and provides entities with the relevant information which must be reported on. This includes:

• climate-related risks and opportunities
• climate-related metrics and targets including Scope 1, Scope 2 and Scope 3 greenhouse gas emissions
• governance, strategy and management of related risks and opportunities
• climate resilience.

The directors' declaration must state that, in the directors' opinion, the substantive provisions of the sustainability report are in accordance with the reporting requirements.  However, under transitionary arrangements for the first three years until 2028, the directors' declaration will only have to provide an opinion on whether the entity took reasonable steps to ensure the substantive provisions of the Sustainability Report are in accordance with the reporting requirements.

On 28 January 2025, the Australian Auditing and Assurance Board approved the adoption in Australia of international standard ISSA 5000: General Requirements for Sustainability Assurance Engagements with "Australianised" terms, as AUASB standard ASSA 5000. These assurance requirements will be phased in until an 'end state' of reasonable assurance of all climate disclosures from 1 July 2030.

It is proposed that a statutory review of the requirements will be conducted as soon as practicable after 1 July 2028.

Relief from compliance

Entities may apply to ASIC for relief from one or more of the climate-related disclosure requirements. Relief is entirely at ASIC's discretion and is prospective, not retrospective.

An application must be in writing and requires a resolution of the directors of the entity and the entity must demonstrate that by complying with the relevant obligations it would:

• make the sustainability report misleading;
• be inappropriate in the circumstances; or
• impose unreasonable burdens.

Key Issues for Directors  

If the Sustainability Report has not been completed, is not accurate or discloses only part of the truth, there are liability provisions in the Corporations Act that may apply. These include directors' duties, general disclosure obligations and misleading and deceptive conduct provisions.  ASIC also has the power to issue a direction to correct, complete or amend a Sustainability Report.

Further, in some instances strict liability offences apply, including failing to comply with the recordkeeping requirements under the Corporations Act, an ASIC direction or the audit requirements under the Corporations Act.

For the first three years of the phase-in period a temporary immunity to liability is to apply to 'protected' statements, which include disclosures relating to Scope 3 greenhouse gas emissions, scenario analysis and transition plans, unless a claim is made by ASIC. This is also referred to as 'modified liability settings'. The temporary immunity also applies to forward-looking statements made in the first year. This arrangement is extremely limited.

Following the phase-in period, all liability provisions will come into line with other liability provisions under the Corporations Act, which includes the following penalties that apply to an individual:

• maximum civil penalty of A$1.65 million
• If guilty of a criminal offence a maximum prison penalty of 15 years (or both a prison penalty and fine).

Political uncertainty

Australia's opposition Coalition parties have taken a strong stance against these climate disclosure laws, pledging to repeal them if they win the upcoming Australian federal election anticipated in May 2025.

Key takeaways

Australia's new mandatory climate-related financial reporting regime introduces significant and complex new disclosure obligations on reporting entities.

Multinational corporate groups will need to assess the interaction of this regime with their existing global sustainability reporting processes.  

Directors and officers of reporting entities will need to seek appropriate advice to meet these complex disclosure obligations. And contingency planning is required, keeping a close eye on potential future changes, including the potential for a repeal or watering down of the regime.

Authors

Nicholas Antonas | Partner | +61 3 8080 3578 | nantonas@tglaw.com.au

Emily Livingston | Senior Associate | +61 8 8236 1110 | elivingston@tglaw.com.au

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