Feds Release Draft Sustainability Reporting Legislation

The Federal Government introduced draft legislation to Parliament last week proposing to establish a regime that requires corporate entities to meet sustainability reporting thresholds.

Following two rounds of consultation, the Treasury Laws Amendment (Financial Market Infrastructure
and Other Measures) Bill 2024 will, if passed, require companies to prepare an annual ‘sustainability report’ for every financial year in which it satisfies the sustainability reporting thresholds set out in the Bill.

This will include climate-related financial risks and opportunities, including greenhouse gas emissions, risk management, emissions reductions targets, and governance framework.

These requirements will be included in a company’s publicly available ‘sustainability report’, with the exact requirements still being developed by the Australian Accounting Standards Board (ASSB).

How might the regime effect HVIA members?

Implementation dates will be staggered depending on company revenue, assets and employee numbers – as well as whether the entity has reporting obligations under the National Greenhouse and Energy Reporting Act (NGERA) 2007 (based on thresholds around carbon dioxide emissions, energy production and energy consumption).

‘Large’ companies will need to make disclosures from financial years beginning on or after January 1, 2025. This effectively means companies with December 31, 2025 year ends will report first, and the first mandatory reporting date for June 30 year ends will now be June 30, 2026 not June 30, 2025.

Large companies are defined as having at least two of the following characteristics: consolidated revenue of $500 million or more; consolidated gross assets of $1 billion or more; and 500 employees or more – or is a registered corporation and meets the reporting thresholds under the NGERA.

The next tier of companies will be required to begin reporting from July 1, 2026. These include corporate entities that fulfil at least two of the following characteristics: consolidated revenue of $200 million or more; consolidated gross assets of $500 million or more; and 250 employees or more – or is a registered corporation under the NGERA.

The final group of companies (consolidated revenue of $50 million or more; consolidated gross assets of $25 million or more; and 100 employees or more – or is a registered corporation under the NGERA) will commence reporting from July 1, 2027.

ACNC-registered charities and (most) SMEs are excluded from the proposed new regime. Where an entity is not generally required to report under Chapter 2M of the Corporations Act (companies that are not disclosing entities or companies limited by guarantee), or does not meet the threshold tests, they are not required to prepare a sustainability report for a financial year.

However, in a recent note Casey Guilmartin, an Associate with law firm White & Case in Melbourne, points out the inclusion of NGERA reporting entities within groups one and two will likely capture smaller entities that do not meet any of the other sustainability reporting thresholds.

“This may present challenges for some smaller NGERA entities that need to comply with the proposed sustainability reporting requirements from 1 July 2024,” he adds.

What does a climate statement need to disclose?

Guilmartin says the reporting entity’s climate statement and notes must disclose the following:

• Any material climate risks and opportunities the entity has for the financial year (if any), as established in accordance with the sustainability standards;
• Any climate change-metrics and targets that are required to be disclosed by the sustainability standards, including metrics and targets relating to scope 1, 2 and 3 emissions of greenhouse gases;
• Any of the entity’s governance policies related to climate risk and opportunities and any climate metrics and targets of the entity (if any) that are required to be disclosed by the sustainability standards; an
• The entity’s greenhouse gas emissions for the entity for any period specified by a sustainability standard, or otherwise for a financial year.

Critically, the statement must include a directors’ declaration which provides: an explicit and unreserved statement of compliance with international sustainability reporting standards; and whether, in the directors’ opinion, the climate statements, the statements relating to matters concerning environmental sustainability (if required), and the notes to the climate statements are in accordance with the Act.

Group 3 entities whose climate statements report that they do not have material climate-related risks and opportunities will not need to prepare climate statements and notes and director’s declarations in the manner above.

Transitional arrangements for scope 3 emissions

To reduce the initial reporting burden for reporting entities, Guilmartin notes the Draft Bill proposes that sustainability reports are exempt from the obligation to report scope 3 greenhouse gas emissions for the first reporting period.

“Notably, this protection does not apply to statements about scope 3 emissions made outside the sustainability report, nor does it apply to criminal proceedings or to certain civil proceedings brought by the Australian Securities and Investments Commission,” he adds.

Liability framework and auditing

Guilmartin says climate disclosures will be subject to the existing liability framework under the Corporations Act 2001 and Australian Securities and Investments Commission Act 2001 including: director’s duties, misleading and deceptive conduct provisions, auditing and assurance, and general disclosure obligations.

“Annual sustainability reports are proposed to be audited in accordance with auditing standards, although the financial years prior to 1 July 2030 the auditor is only required to review and report on climate statements relating to scope 1 and 2 emissions of greenhouse gases. These reviews must also be conducted in accordance with auditing standards,” he says.

Why is the government pursuing this?

The international mandatory climate-related reporting regime set up by the International Sustainability Standards Board (ISSB) has seen countries adopt similarly aligned reporting frameworks.

On top of this, there has been an investor-driven push to understand businesses exposure to climate risks. Groups like the Task Force on Climate-Related Financial Disclosures, as well as investment companies like BlackRock, want to have transparency on high sustainability-related risks.

As such, the Australian Government is seeking to provide greater information and clarity to investors and incentivise investment in the net-zero transformation.