There is no doubt that 2023 has been a significant year for climate law and policy reform, both in Australia and overseas. For Australian businesses, few reforms have been more noteworthy than the introduction of long-awaited changes to the Emissions Reduction Safeguard Mechanism, and the ongoing development of global and domestic climate, sustainability and nature-related risk disclosure standards.
Here, we recap on these key developments and what they mean for Australian businesses as we approach the end of the year.
Safeguard Mechanism reforms commence
Following months of consultation, 1 July 2023 saw the commencement of reforms to the Safeguard Mechanism established under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) and National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Cth).
Under the reforms, the baselines for designated large facilities will decline on a trajectory aligned with achieving Australia’s updated emission reduction targets of 43% below 2005 levels by 2030 and net zero by 2050. This decline rate is set at 4.9% per year to 2030 for most facilities, with particular trade-exposed facilities eligible to apply for a discounted rate.
Other important features of the reforms include the introduction of ‘Safeguard Mechanism Credits’ (SMCs), which facilities may automatically generate for below-baseline performance. These units can be banked on an unlimited basis until 2030, and may be traded and surrendered for compliance purposes, along with Australian Carbon Credit Units (ACCUs).
Although the reforms have commenced, there are a number of important elements of the scheme which are still under development , including the ‘international best practice benchmarks’ that the Government will apply for the purposes of setting baseline for new facilities, and the emissions intensity values of production variables that will be used for baseline calculations.
The reforms should prompt existing Safeguard Mechanism facilities - and those looking to develop emissions intensive new or expanded facilities - to consider opportunities to optimise on-site decarbonisation. Facilities should also consider the utility of a procurement strategy for ACCUs and SMCs - including opportunities to generate SMCs for below baseline performance in the near-term to support longer term compliance - and potential funding opportunities to support adaptation to the reforms, such as the Safeguard Transformation Stream of the Powering the Regions Fund.
ISSB launches sustainability and climate disclosure standards and Government consults on mandatory climate-risk disclosure framework
In June 2023, the International Sustainability Standards Board (ISSB) published its much anticipated first two global sustainability disclosure standards: ‘IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information’ (IFRS S1) and ‘ IFRS S2 Climate-related Disclosures’ (IFRS S2).
IFRS S1 requires companies to disclose information about their sustainability-related risks and opportunities that is useful to investors when making decisions about providing resources to these companies. Meanwhile, IFRS S2 requires disclosure of information specifically linked to climate-related risks and opportunities, and is designed to be used in conjunction with IFRS S1. Both standards adopt a similar structure to the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), with required disclosures centring around four pillars: governance, strategy, risk management, and metrics and targets.
While the standards will be effective for annual reporting periods beginning on or after 1 January 2024, a transitional relief provision in IFRS S1 allows entities to only disclose information on climate-related risks and opportunities under IFRS S2 for the first reporting period: in other words, entities will only need to apply IFRS S1 in so far as it is relevant to climate-related disclosures for the first year.
What does this mean for Australian companies? The standards themselves will not be mandatory for Australian businesses until codified under Australian law. However, this may not be far away, with the Australian Department of Treasury recently consulting on a framework for mandatory climate-related financial risk disclosures for Australian businesses that is proposed to align closely with IFRS S2.
In its most recent consultation paper released in June, the Government proposed a phased approach to disclosure obligations: the first group of entities - who would have obligations from 2024-25 onwards - are proposed to be certain types of large entities with reporting obligations under Chapter 2M of the Corporations Act. Significantly, entities required to report under Chapter 2M of the Corporations Act that are also ‘controlling corporations’ under the NGER Act and meet NGER publication thresholds will also be included in this first group. Obligations for smaller Corporations Act companies will commence from 2026-27, with obligations for smaller scale businesses applying from 2027-28 onwards. Controlling corporations who report under Chapter 2M of the Corporations Act and do not meet publication thresholds will also have obligations from 2027-28 onwards.
One important corollary of aligning the framework with IFRS S2 is the proposal that disclosure of material scope 3 emissions be required for all reporting entities from their second reporting year onwards. While some industry groups have raised concerns over the proposal for scope 3 reporting, citing challenges associated with calculating these emissions, others have supported this proposal but suggested that more guidance is needed on the materiality of scope 3 emissions. Other submitters have advocated that entities should be given more time before mandatory scope 3 disclosures are phased in.
Details about what information will need to be disclosed under the framework will be set out in standards which are currently under development by the Australian Accounting Standards Board (AASB). The AASB is expected to release an exposure draft of these standards in October for consultation, following publication of a position paper by Treasury.
Companies should review the requirements of IFRS S2, on the assumption that the Australian framework when finalised will largely align with these requirements. For entities who already report in accordance with TCFD recommendations, undertaking an analysis of gaps between current reporting and the requirements of the IFRS S2 may help to enhance their climate-related disclosures and prepare for mandatory reporting obligations to commence.
TNFD launches recommendations for nature-related risk management and disclosure
Beyond climate and sustainability disclosure frameworks, 2023 has also been a significant year for nature-related reporting, with the Taskforce on Nature-related Financial Disclosures (TNFD) launching its recommendations for nature-related risk management and disclosure on 18 September 2023 after two years of design and consultation. These recommendations are designed to be consistent with the TCFD and ISSB (among others) and again adopt the TCFD’s four-pillar framework.
One important feature of the TNFD’s recommendations is the ‘LEAP’ assessment approach, which provides a framework to assist organisations to assess their nature-related dependencies, impacts, risks and opportunities.
In the wake of the launch, the Australian Government published a report on the outcomes of a number of Australian case studies that tested the draft recommendations across different value chains, including critical mineral mining for producing clean energy technologies and natural gas extraction for industrial manufacturing (among others).
The report suggests a number of actions for Australian businesses looking to adopt the TNFD recommendations, including building their internal natural science capabilities; developing a stakeholder engagement strategy to help identify and assess nature-related risks and opportunities; seeking opportunities to promote First Nations People’s knowledge and land management practices; and creating a roadmap for preparing nature-related disclosures.
Although Australian businesses are not currently subject to mandatory nature-related disclosure requirements, as the report notes, the launch of the TNFD recommendations should prompt companies to evaluate whether nature-related risks and opportunities are material to their business activities and warrant disclosure to shareholders in accordance with the Corporations Act 2001 (Cth). Businesses should also monitor developments from the ISSB, who recently concluded consultations on potential future work priorities, including standards for biodiversity, ecosystems and ecosystem services. The ISSB is expected to announce its priorities in the first half of 2024.
Gilbert + Tobin will be publishing a detailed piece on the TNFD shortly. Keep your eye out on our website for details.