Treasury proposes phased approach to mandatory sustainability reporting from 1 July 2024

Samantha Sing Key
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There have been some recent developments in the Australian market in relation to mandatory sustainability reporting, which is likely to significantly impact most companies required to prepare general purpose financial reports.

On 27 June 2023, Treasury released a public consultation paper outlining the proposed implementation of mandatory climate-related disclosures in Australia. The current proposal would require climate-related disclosures for ALL entities (subject to size thresholds) required to prepare annual reports under the Corporations Act, including private and public unlisted companies, beginning as early as 1 July 2024. It is additionally proposed it will be required to have these disclosures audited.

This is not the final legislation and amendments may be made following the completion of the consultation stage. The information below is based on the current proposed consultation and is therefore subject to change.

Treasury has proposed a phased approach to the reporting requirements. The first group required to report on financial years commencing on or after 1 July 2024 is expected to affect a significant number of private companies, including a large number of previously grandfathered entities. 

Proposed timeline of mandatory reporting

Any two of the three criteria satisfied:

Employees (FTE)

Consolidated gross assets

Consolidated revenue

Mandatory reporting begins

Group 1 >500 >$1BN AUD >$500M AUD FY 2025
Group 2 >250 >$500M AUD >$200M AUD FY 2027
Group 3 >100 >$25M AUD >$50M AUD FY 2028

Content of mandatory disclosures

At this stage, the Australian reporting standard for climate-related disclosures will be substantially aligned to the newly released international standard IFRS S2 Climate-related Disclosures. The Australian Accounting Standards Board (AASB) has indicated the Australian version of IFRS S2 is likely to be adjusted for applicability to not-for-profit as well as for-profit entities. We expect a draft of the Australian version will be available later this year. 

The IFRS sustainability disclosure standards (released 26 June 2023) are expected to be widely adopted internationally. IFRS S2 incorporates some of the most commonly used sustainability reporting standards in the market including the Taskforce on Climate-Related Financial Disclosures (TCFD). The required disclosures in IFRS 2 are detailed and goes well beyond of the scope of purely financial information.

The core elements of the disclosures can be broadly summarised under 4 pillars:

  • Governance: how the entity monitors climate-related risks and opportunities;
  • Strategy: the anticipated impact of climate-related risks on business model, value chain, financial position and performance, including climate scenario analysis;
  • Risk management: the processes used to identify, assess, and manage climate-related risks and opportunities;
  • Metrics & Targets: disclosure of climate-related metrics, including Scope 1 – 3 greenhouse gas emissions, and progress towards any targets the entity has set.

The disclosures require businesses to assess the impact of physical risks (e.g. increased natural disasters), as well as transition risks (arising from moving to a lower-carbon economy) on their current and future financial position and performance.

Other disclosures that may be unfamiliar include:

  • Scope 1 – 3 greenhouse gas emissions: this describes the sources of emissions expressed in kilotonnes of carbon dioxide equivalence.
    • Scope 1: direct emissions from sources owned or controlled by the entity
    • Scope 2: indirect emissions from the generation of purchased or acquired energy (electricity, steam, heating or cooling) consumed by the entity
    • Scope 3: indirect emissions from the entity’s value chain, including upstream and downstream emissions
  • Climate scenario analysis: this involves considering the resilience of the current business into the future, should different climate change scenarios occur (e.g. global warming increases by 2 degrees Celsius above pre-industrial levels)

Proposed timeline of audit requirements

Below is a summary of the proposed assurance requirements for the climate-related disclosures:

*Greenhouse gas emissions

Type of disclosure

Year 1

Year 2

Year 3

Year 4 onwards

Governance Audit Audit Audit Audit
Strategy, Risk management, Metrics & Targets (qualitative) - - Audit Audit
Climate scenario analysis - - Review Audit
Climate-related target transition plans - - Review Audit
Scope 1 & 2 GHG emissions* Review Audit Audit Audit
Scope 3 GHG emissions* Review Review Review Audit

Personal liability risks for Directors

Directors must be conscious that many aspects of climate-related disclosures are inherently forward-looking. Under the Corporations Act, forward-looking statements made without reasonable grounds may be taken to be misleading. This is a higher level of liability faced by Directors in overseas jurisdictions including USA, UK and Canada.

To avoid personal liability, Directors need to actively ensure the content of climate-related disclosures can be substantiated. A USA-style safe harbour protection for directors in relation to climate-disclosures is not proposed. However, Treasury have proposed a modified liability approach:

  • making climate-related disclosures a civil penalty provision; and
  • limiting the application of misleading and deceptive conduct provisions to ASIC-initiated action only for the period 1 July 2024 – 30 June 2027. 

Next steps

The consultation period is open to the public until 21 July 2023. If you would like to read the full paper or submit a response to the consultation, it is available here.

If you would like to have a conversation about preparing for mandatory climate-related disclosures, please reach out to our ESG and sustainability leaders or your Grant Thornton contact.  

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