On 22 August 2024, the Senate passed the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Bill), bringing the highly anticipated climate-related financial disclosure regime one step closer to enactment. The Bill was first introduced to the House of Representatives on 27 March 2024. Schedule 4 to the Bill amends the Corporations Act 2001 (Cth) (Corporations Act) to include climate-related financial disclosure as part of a new annual sustainability report, in addition to the existing obligations to prepare annual financial reports under Chapter 2M of the Corporations Act.
The Senate passed the Bill with only minor amendment to Schedule 4 in relation to scenario analysis disclosure requirements. The Bill will go back to the House of Representatives for a vote on this amendment before it is enacted. In light of the government’s support for the Bill in the Senate, the Bill as passed by the Senate is likely to be the legislation ultimately enacted, with the regime commencing from 1 January 2025.
In this Article, we set out the amendments made by the Senate and provide a comprehensive overview of the key elements of the Bill as passed by the Senate. We also set out other related developments in Australia and internationally, and what businesses can start doing to prepare for developing reporting requirements.
Key takeaways:
The Bill as passed by the Senate is substantially the same as when first introduced to parliament and likely to be the form of the legislation enacted (subject to the House of Representative’s final consideration). The only amendment passed has been in respect of scenario analysis disclosure requiring two temperature target scenarios.
The other amendments tabled by the Opposition, the Greens and Independent Senator Pocock in relation to removing Scope 3 emissions and Group 3 reporting entities, reducing the scope and timeframe of the limited liability scheme, and removing transition plans as a protected statement, respectively, were not passed by the Senate.
The regime is therefore still on-track to commence from 1 January 2025, with in-scope entities progressively phased-in for reporting obligations up to 1 July 2027. All other elements of the Bill, as outlined in our previous Knowledge Insight , and set out in further detail below, will apply when the Bill is enacted. This may be in the House of Representatives’ next Sitting week in September, and certainly within the next few months.
Consultation in respect of the draft Australian Accounting Standards Board’s (AASB ) Australian Sustainability Reporting Standards (ASRS ) Auditing and Assurance Standards Board’s (AUASB ) accounting standards has concluded. The final versions of the AASB and AUASB standards are expected to be released in the coming months, following the enactment of the climate-related disclosure regime. At its most recent meeting on 27 August , the AASB confirmed that its final review of the standards will occur after the passage of the Bill.
What happened in the Senate?
The Bill was read twice in the Senate, with amendments circulated by the Australian Government, Australian Greens, the Opposition and an Independent senator. Only the amendment circulated by the Australian Government was passed.
Requirements for scenario analysis disclosures introduced
The government has amended section 296D (Climate statement disclosure) to incorporate requirements for scenario analysis disclosures. Scenario analysis is a process for identifying and assessing a range of potential outcomes of future events under conditions of uncertainty - particularly relevant in the context of climate change.
The International Sustainability Standards Board (ISSB) climate-related disclosure standards (ISSB Standards) and the draft ASRS set out that scenario analysis must be undertaken to inform disclosures about the climate resilience of an entity’s strategy and business model to both transition and physical climate-related risks.
The draft ASRS expand on the ISSB Standards to specify that where an entity is required to prepare climate-related financial disclosures, it shall disclose its climate resilience assessments against at least two relevant possible future states, one of which must reflect a low average global temperature outcome, consistent with the most ambitious global temperature goal set out in the Climate Change Act 2022 (Cth) (s 3).
The amendment to section 296D includes two new subsections:
(2A) sets out when the scenario analysis must be carried out as part of disclosures that relate to the climate resilience of the entity’s strategy and its business model; and
(2B) requires that at least the following two scenarios be used when scenario analysis is carried out:
(i) the increase in the global average temperature well exceeds the increase mentioned in subparagraph 3(a)(i) of the Climate Change Act 2022 (being 2C above pre-industrial levels); and
(ii) the increase in the global average temperature is limited to the increase mentioned in subparagraph 3(a)(ii) of that Act (being 1.5C above pre-industrial levels).
For the purpose of the higher warming scenario prescribed by subsection 296D(2B)(i), the Supplementary Explanatory Memorandum notes that an increase of 2.5C or higher would be considered to ‘well exceed’ 2C.
As climate statements will need to be prepared in accordance with the ASRS (see s 296A and 296D of the Bill), which already prescribes the requirement of scenario analysis addressing temperature targets, this amendment does not substantively change the scope of the disclosure requirements under the Bill. However, the introduction of the higher warming target (of well above 2C) is a more stringent disclosure requirement than proposed under the draft ASRS.
Other proposed amendments
Australian Greens
There were additional amendments proposed by the Australian Greens to amend subsection 1707D(3)(a)(i) to reduce the immunity period for private litigation from 3 years to 12 months, and to amend subsection 1707D(1) to limit the scope of immunity to “loss or damage suffered as a result of conduct that is misleading or deceptive, or likely to mislead or deceive”. These amendments were circulated in the Senate, however, were voted against by a 23-vote majority.
Independent Senator Pocock
Independent Senator, David Pocock , circulated amendments to omit subsection 1707D(3)(b)(iii), to remove a transition plan from the meaning of a protected statement in respect of the limited immunity for statements for the first three years of the reporting regime. This amendment was voted against in the Senate by a 20-vote majority.
The Opposition
On behalf of the Opposition, Senator Hume circulated two amendments (available here and ):
(1) to omit subsection 296D(1)(b)(iii) to remove the requirement to report on metrics and targets relating to scope 3 greenhouse gas emissions (including financed emissions); and
(2) to amend subsection 292A(3)(a) to (c) to remove group 3 reporting entities.
Both amendments proposed by the Opposition were voted against by a 9-vote majority.
What does the Bill as passed by the Senate look like?
In light of the government’s support in the Senate, it is expected that the version of the Bill passed by the Senate will be the version ultimately assented to and enacted in the near future. The below therefore sets out what will be the requirements of the new reporting regime from 1 January 2025.
Who will be required to report, and when?
Entities that are required to prepare annual financial reports under Chapter 2M of the Corporations Act, and meet certain thresholds, will also be required to prepare sustainability reports (section 292A). The largest entities (Group 1) will be required to submit sustainability reports for their financial years commencing from 1 January 2025, while other in-scope entities (Groups 2 and 3) will be phased into reporting obligations over three ‘transitional periods’ (section 1707B):
Table 1
* Part-time employees are to be included as an appropriate fraction of a full-time equivalent employee.
** NGER reporting entities are corporations registered under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) at the end of the financial year, or corporations required to make an application to be registered under subs 12(1) of the NGER Act for the financial year.
Asset owners, as captured in Group 2 if above the threshold, will include registered schemes, registrable superannuation entities and retail corporate collective investment vehicles (section 292A(6)).
Companies that are limited by guarantee, with a consolidated annual revenue of $1 million or more and which meet the sustainability reporting thresholds will also be required to prepare a sustainability report (section 285A).
Consolidated reporting
An entity that is required to prepare a financial statement on a consolidated basis for a corporate group may elect to prepare a sustainability report for the consolidated entity (as the parent entity) (section 292A(2)).
Which entities will not be required to report?
The Explanatory Memorandum to the Bill confirms that any entity that is exempt from lodging a financial report under Chapter 2M of the Corporations Act will not be required to prepare a sustainability report. These exempt entities include:
small entities and asset owners that do not meet the thresholds outlined in Table 1 (unless they are a NGER reporting entity):
entities exempted from financial reporting by an ASIC class order or individual entity exemption;
charities registered with the Australian Charities and Not-for-profits Commission; and
exempt public authorities (as defined in Section 9 of the Corporations Act).
What will sustainability reports be required to include?
A sustainability report will need to contain the following (s 296A):
(1) the climate statement for the year, including any notes made in relation to the statement;(2) any statements prescribed by the regulations for the year, including any notes made in relation to the statement; and(3) a directors’ declaration that the statements comply with the requirements (once enacted) under the Corporations Act.
Climate statement
Pursuant to section 296D(1) of the Bill, climate statements for a financial year, and any notes made in relation to the climate statement, will need to disclose the following:
any material climate-related financial risks or opportunities;
any metrics and targets relating to climate that are required to be disclosed by the ASRS, including Scope 1, 2 and 3 greenhouse gas (GHG ) emissions (and financed emissions); and
any information about the governance, strategy or risk management by the entity in relation to the climate risks, opportunities, metrics and targets.
The climate statement will need to be prepared in accordance with the ASRS developed by the AASB. The AASB released an Exposure Draft of these standards (draft ASRS) in October 2023. The draft sustainability standards align as far as possible with the ISSB IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures (ISSB sustainability standards). The AASB has indicated that the final ASRS will be released after the passage of the Bill.
In respect of climate statements, the draft ASRS provide for the following:
entities will be required to use all reasonable and supportable information that is available to them at the reporting date;
entities will not be required to disclose exact data or detailed information for Scope 3 emissions reporting that cannot be easily provided by their customers or suppliers;
entities will only be required to disclose Scope 3 emissions from their second reporting year onwards. This can comprise information gathered from public disclosures made by other entities, including entities in the reporting entity’s supply chain, in the previous year;
entities will not be required to disclose information that is commercially sensitive.
Pursuant to subsection 296D(2A) and (2B), where the sustainability standards require the disclosure of a scenario analysis, or information derived from or about a scenario analysis, the scenario analysis must be carried out using the two temperature scenarios set out above.
(a) Definition of GHG emissions
The definition of Scope 1, 2 and 3 GHG emissions align with the definition given in the draft sustainability standards and the ISSB sustainability standards:
Scope 1 emissions: direct GHG emissions that occur from sources that are owned or controlled by the entity;
Scope 2 emissions: indirect GHG emissions from the generation of purchased or acquired electricity, steam, heating or cooling consumed by the entity; and
Scope 3 emissions: indirect GHG emissions (not included in Scope 2 GHG emissions) that occur in the value chain of an entity, including both upstream and downstream emissions.
Disclosures in relation to Scope 3 GHG emissions are to include details of financed emissions. Financed emissions are the portion of greenhouse gas emissions of an investee or counterparty attributed to the loans and investments made by an entity to the investee or counterparty.
(b) Statement about there being no climate risks or opportunities (Group 3 entities)
Section 296B provides that a Group 3 entity, which does not have any material climate-related financial risks or opportunities, may submit a statement to this effect in their sustainability report. The provision of this statement, and an explanation in support, will replace the requirement to submit a climate statement for the entity.
Entities should refer to the ASRS to understand whether a climate-related financial risk or opportunity is material or not. This proposed ‘exemption’ to the climate statement requirements applies only to Group 3 entities, which are not NGER reporting entities.
Directors’ declarations
Section 296A(6) requires a declaration by the directors to whether, in the directors’ opinion , the substantive provisions of the sustainability report are in accordance with the Corporations Act, and specifically whether they are in compliance with the sustainability standards and the climate statement disclosure standards (subsections 296C and 296D).
The substantive provisions of a sustainability report are anything required to be included in the report under subsection 296A(1), other than the directors’ declaration. The declaration must be made in accordance with a resolution of the directors, dated accordingly to when the declaration was made and signed by a director.
For the first three years of the reporting regime, there will be a transitional period, whereby directors will be permitted to only declare that the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Corporations Act (s 1707C).
Procedural requirements for sustainability reports
Lodgment, distribution and publication requirements
Sustainability reports will need to be lodged with ASIC in accordance with section 319 of the Corporations Act - within 3 months after the end of the financial year.
A company that is limited by guarantee and required to prepare a sustainability report for a financial year, must send a copy of the report to each member who has made an election to receive the sustainability report for that financial year by the earlier of 21 days before the next AGM after the end of the financial year or 4 months after the end of the financial year (section 316A(3)).
An entity required to prepare a sustainability report, but which is not required to provide a copy to its members, must ensure the report is publicly available on its website from the day on which the report is lodged with ASIC (section 316B(1)). An offence for non-compliance with this publication requirement is an offence of strict liability.
Record-keeping
In-scope entities will need to keep written sustainability records that accurately explain and record the entity’s preparation of the substantive provisions of the sustainability report. Sustainability records are defined as the documents and working papers needed to explain the methods, assumptions and evidence from which the substantive provisions of sustainability reports are made from (see section 286A and section 9 definitions).
These records must be kept for 7 years (section 286A(2)). Where records are kept outside of Australia, sufficient written information to support the substantive provisions of the report must be kept within Australia (section 289A).
Directions from ASIC for insufficient statements
If ASIC considers that a statement made by an entity in a sustainability report is incorrect, incomplete or misleading in any way, under section 296E, ASIC may direct the entity to explain, correct, complete or provide further information in relation to the statement. Where ASIC directs the entity to correct, complete or amend the statement, the entity will publish the updated statement or provide to any specified persons noted in the direction. ASIC will also publish a notice on its website for any direction given to an entity.
It is an offence of strict liability not to comply with a direction from ASIC within the specified time or, if not specified, a reasonable time, attracting a maximum penalty of 60 penalty units ($18,780 as of July 2023). Notably, the application of strict liability preserves the defence of honest and reasonable mistake of fact.
Assurance and auditing requirements for sustainability reports
Section 301A directs that sustainability reports will be subject to mandatory audit requirements, in accordance with the AUASB auditing standards (section 307AB). The auditing requirements will be introduced on a phased-in basis. Auditors of sustainability reports will have the same obligations as an auditor of a financial report under the Corporations Act.
Assurance and auditing of reports before 1 July 2030
For financial years commencing before 1 July 2030, section 1707E directs the AUASB to make standards that specify the extent of, and provide for the process for, auditing and reviewing sustainability reports.
An auditor who reviews the sustainability report must report to members on whether the auditor became aware of any matter in the course of the review that would make the auditor believe that the sustainability report does not comply with the requirements for sustainability reports under the Corporations Act. The auditor’s report will need to include any statements or disclosures required by the AUASB auditing standards (see section 1707F).
The Explanatory Memorandum to the Bill indicates that the sustainability report will initially only be required to be reviewed or audited to the extent required by AUASB auditing standards. Over time, it is anticipated that these standards will evolve in terms of both the extent and level to which disclosures in the sustainability report will need to be assured. The Consultation Paper on the draft AUASB auditing standards proposes a progressive assurance phasing-in regime from 1 July 2024 to 1 July 2030 onwards.
Assurance and auditing of reports from 1 July 2030
From 1 July 2030, the permanent assurance and auditing requirements in the Bill will commence. Entities required to prepare a sustainability report will be required to have the report audited in accordance with Division 3 of the Corporations Act and obtain an auditor’s report (section 301A). An auditor conducting an audit of a sustainability report will need to form an opinion about whether the report is in accordance with the Corporations Act (including the sustainability standards and climate statement disclosures), whether the auditor has been given all information, and whether the entity that prepared the report has kept sustainability records sufficient to enable the sustainability report to be prepared and audited (section 307AA). The auditor’s report must describe any defect or irregularity in the sustainability report, or any deficiency, failure or shortcoming in respect of the matters referred to in section 307AA. Working papers for an audit of a sustainability report must be retained for 7 years (section 307B).
Limited immunity for statements in sustainability reporting
Under Section 1707D, liability for misleading and deceptive, and other, conduct in relation to the most uncertain aspects of a climate statement will be temporarily protected (Protected Statement) for a period of three years. A Protected Statement is a statement made in:
a sustainability report, for the first three financial years of the regime; or
an auditors’ report of an audit or review of a sustainability report made within the first three financial years of the regime; and
about any of the following:
Scope 3 GHG emissions (including financed emissions);
scenario analysis; or
a transition plan.
Protected Statements also include any forward-looking statements related to climate, if they are made in sustainability reports, or auditors’ reports of sustainability reports, within the first 12 months of the regime.
Any action, suit or proceeding in respect of a Protected Statement will only be permitted to be brought against a reporting entity if it is criminal in nature or brought by ASIC (section 1707D(2)).
Looking forward and preparing to report
The Senate has agreed to a third reading of the Bill, which means that the Bill, as passed by the Senate, will go back to the House of Representatives for consideration in respect of the minor amendments made. This will likely occur in the upcoming sitting weeks commencing on 9 September or 8 October 2024.
The Bill is only one step away from enactment and this final consideration by the House of Representatives is unlikely to result in any further amendment.
Businesses should therefore start preparing for the incoming reporting obligations by:
reviewing the climate-related disclosure requirements (as set out above) and how they will apply to their entity;
identifying what climate-related risks and opportunities are impacting their entity, and how they are being managed; and
identifying any gaps between the draft ASRS and the entity’s current approach to climate governance, strategy, risk management, metric and targets (including scenario analysis).
Other key developments in Australia and internationally
Proposal for Net Zero Economy Authority passes the Senate
Australia is also one step closer to establishing the Net Zero Economy Authority (Authority) with the Net Zero Economy Authority Bill 2024 passing the Senate on 22 August 2024. The legislation is expected to receive final approval when the Parliament sits again in the week commencing 9 September 2024.
The Authority is a key component of the Australian Government’s Future Made in Australia plan, introduced as part of the 2024-25 Budget (for further details see our Knowledge Insight ). Once established, the Authority will facilitate Australia’s economic transformation to net zero by ensuring Australia’s regions and workers are supported through and ultimately benefit from the net-zero energy transition. Specifically, as outlined in the Explanatory Memorandum to the Bill, the Authority will:
facilitate public and private sector participation and investment in GHG emissions reduction and net zero transformation initiatives in Australia;
support workers impacted by the net zero transformation to transition to new opportunities;
coordinate net zero efforts across government and key stakeholders and facilitate the achievement of Australia’s GHG emissions reduction targets; and
develop community understanding, confidence and engagement with the net zero transformation.
ASIC Corporate Plan
On 22 August, ASIC released its 2024-25 Corporate Plan (ASIC Plan), identifying ASIC’s key priorities for the next 12 months and beyond. Notably, the ASIC Plan identifies ASIC’s top five strategic priorities for 2024-2028 - the second of which is addressing financial system climate change risk . Within this climate-aligned strategic priority, ASIC identifies as its key areas of focus:
supporting the introduction of mandatory climate-related financial disclosure: including by establishing a new team to develop regulatory guidance, assess applications for relief and supervise compliance with the new reporting obligations;
deterring greenwashing and sustainable finance misconduct: including by undertaking ongoing surveillance activity and taking enforcement action, where necessary;
supporting sustainability and energy transition: by supporting fair and efficient carbon markets and products through effective licensing and supervision, including updating policies on regulating carbon-based financial products to provide clarity on disclosure.
examining how insurers are responding to customers in the context of climate change: by reviewing how general insurers are handling customer complaints and responding to recommendations from previous reviews about their handling of claims following severe weather events.
The ASIC Plan emphasises that climate change risk is a top priority for one of Australia’s largest regulators and a significant area of ongoing focus. We have already seen ASIC crack-down on greenwashing behaviour, securing its first three successful verdicts in the Federal Court of Australia, including a pecuniary penalty of over $11 million against Mercer Super. We anticipate similar enforcement, supervision and surveillance in respect of the forthcoming climate-related financial disclosure.
Adoption of the EU Corporate Sustainability Due Diligence Directive
Solidifying the global trend towards more stringent reporting requirements in respect of sustainability, including climate change, the European Union Corporate Sustainability Due Diligence Directive (CSDDD) entered into force on 25 July 2024. The CSDDD introduces mandatory human rights and environmental due diligence requirements for large EU and non-EU companies.
After a phased implementation, the CSDDD will apply to EU companies with more than 1,000 employees and a global net turnover above EUR 450 million and non-EU companies with a net turnover within in the EU of more than EUR 450 million (for two consecutive financial years). In-scope companies will be required to take various steps to identify, prevent, mitigate and remediate adverse human rights and environmental impacts within their own operations, as well as the operations of their subsidiaries and business partners in their value chain. Member States have until 26 July 2026 to transpose the CSDDD obligations into national laws.
All companies should consider whether any part of their operations may be captured and any steps that need to be taken to improve their supply chain visibility, enhance stakeholder engagement or implement a climate transition plan in accordance with the CSDDD. The adoption of the CSDDD also has the potential to path the way for comparable reporting requirements globally and for Australia in the future.