Climate-related financial disclosure reform: what you need to know

5 min read

There is a lot of confusion at the moment about climate-related financial disclosure.

This article is purposefully written to be short and to provide a practical and thought-provoking overview of the upcoming changes.

What is the reform?

Climate-related financial disclosure refers to reporting about how climate change could affect a company’s financial performance, operations, and sustainability.

According to Treasury, climate change could affect a company’s financial performance in many ways. For example, more frequent and severe weather events caused by climate change could damage a company’s assets and disrupt its operations. Assets or investments located in areas prone to natural disasters may also suffer devaluation.

The reform will see the introduction of new requirements for certain entities In Australia to disclose on certain climate-related matters. It is going to be implemented through changes to the Corporations Act 2001 (Cth), but is also reliant on new Australian Accounting Standards being released by the Australian Accounting Standards Board. The regime is predicted to impact around 20,000 Australian entities.

On 27 March 2024, the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 was introduced to Parliament. On 3 May 2024, the Senate Economics Legislation Committee recommended the Bill be passed.

It is unclear when the Bill will be passed.

But it is foreshadowed to have a commencement date of 1 January 2025.

Key change

The new legislation will require certain corporations (meeting certain thresholds) to prepare a new mandatory Sustainability Report alongside their financial statements. Financial accounts and Sustainability Reports need to be prepared in accordance with proposed new Australian Accounting Standards and the standards contain much of the detail about what has to be reported under the new regime.

The Sustainability Report will have two key elements:

1) climate statements; and

2) a directors’ report attesting to the climate statements having been prepared in accordance with the Corporations Act and applicable standards.

Corporate action should focus on these two areas.

Preparation for drafting climate statements

The climate statement must be prepared in accordance with Accounting Standards published by the Australian Accounting Standards Board. Those standards are anticipated to be finalised soon. Until then the Exposure Draft of the standards outlines what is required to be reported.

There are two main aspects of the Australian Sustainability Standards:

• Reporting on Scope 1, 2 and 3 emissions; and

• Reporting on governance, risk and management systems.

A lot of focus will understandably be in relation to data capture and collection for Scope 1, 2 and 3 emissions.

But it is equally, if not more important, to understand and put in place appropriate management systems to meet the governance and risk requirements to ensure accurate monitoring, data collection and reporting.

Preparing for the directors’ declaration

The directors’ declaration states whether, in the directors' opinion, the climate statements comply with the requirements of the Corporations Act and applicable Australian Accounting Board Standards. However, there is a modified declaration at the start of the scheme.

The Sustainability Report will need to be underpinned by formal assurance (like NGERs) in due course. Until then, it is highly recommended to institute voluntary assurance measures and/or legal verification of statements to avoid breaches of the Corporations Act in relation to false and misleading statements and other director offences.

Collecting data on emissions, energy use and supply chain emissions

Many large entities are collecting emissions and energy use data already.

Some organisations collect that data voluntarily in order to meet TFCD or ISSN standards.

Others, particularly large entities, already collect certain data in compliance with the National Greenhouse Gas and Energy Reporting Act 2007.

There will be consistency of definitions between NGERs and the new Corporations Act requirements.

But the main gap for most corporations will be collecting data on Scope 3 emissions.

Those Scope 3 Emissions

Scope 3 emissions are emissions are those that come from an entity’s supply chain. They have been estimated to account for 87% of emissions, and so reporting on Scope 3 emissions for the first time is a huge change.

There is a delayed reporting start for Scope 3 emissions data (compared to Scope 1 and Scope 2 emissions) for the first group of entities that need to comply with the scheme.

With regard to Scope 3 emissions, some of the questions that are emerging as challenges, and which might act as prompts for your business are:

• How do you actually measure Scope 3 emissions, particularly for novel situations?

• How far along the supply chain do you need to go to capture Scope 3 emissions from your suppliers?

• If you are a supplier (as opposed to an entity preparing a Sustainability Report) how do you provide data on emissions to your clients, specifically in what format and on what platform?

• What software or data systems might be or become available to help share data with multiple clients?

• What assurance or verification/validation processes do you have to ensure accurate reporting?

• How much budget and personnel time needs to be allocated (and when?) to implementing systems for reporting?

Appointing independent suitably qualified advisers will be able to help you work through these challenges.

Bespoke solutions

There is no “one size fits all” approach that can be applied to the task ahead.

Every entity is operationally different and has different risks and challenges.

Clients should consider developing bespoke solutions to ensure that the particular energy and emissions profile of your business is accurately reported on.

Next steps

Although it is contemplated that audit of the Sustainability Report will align with usual financial auditing processes (similar to NGER data auditing), there are several important preparatory matters where legal assistance may help your organisation to manage risk:

1) Advising on which Group category your organisation will fall into and when reporting obligations will commence and advising on what Group category(its) your customers fall into and what information they will likely require from you (and when);

2) Briefing your board and senior teams on the proposed changes to ensure that officers are sufficiently aware of the changes and can exercise due diligence in relation to the changes;

3) Advising on legal requirements under the new scheme and assisting you to undertake a gap analysis of existing arrangements against forthcoming requirements to understand where there may be gaps in existing management and governance arrangements in order to take action to close those gaps;

4) Legal review of management and governance policies and procedures to ensure legal compliance;

5) Legal review of commercial contracts with your clients and your suppliers (i.e. your supply chain contracts) to understand what is currently required under those contracts (and when) in terms of data collection and provision. As needed, provision of legal advice on variation or termination of contracts and entry into new or additional contracts (potentially novation, depending on arrangements), including negotiation of contracts to ensure provisions enable you to meet your legal obligations. To the extent that there may be problems with you being able to meet your contractual obligations, or your suppliers not being able to supply data in a timely manner, advice on dispute resolution options.

The legal stuff

This article is aimed to be high-level, practical and thought-provoking. It is not a detailed description of environmental law in Australia. You should always seek independent legal or other professional advice on specific cases and before acting or relying on any of the content. All the information in this article and on this website and any downloads are intended only to provide a summary and general overview on matters of interest. It is not intended to be comprehensive nor does it constitute legal advice or establish a lawyer - client relationship. Whilst attempts have been made to ensure that the content is current, Gabrielle Guthrie and Guthrie Legal do not guarantee its currency. Copyright 2024

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