On 21 July 2023, the AICD made a submission to Treasury’s consultation setting out the government’s proposed policy for a mandatory climate reporting framework commencing 1 July 2024. Here we summarise the submission, which outlines concerns about the practical and legal impact of some of the proposals and how directors can prepare.
The government proposes that entities report against the International Sustainability Standards Board (ISSB)’s Climate standard, IFRS S2 (ISSB Climate Standard).
The government proposes that that three cohorts of entities report against the ISSB Climate Standard (as adapted to the Australian market) starting from 1 July 2024 for the largest emitters and corporations. More specifically:
- Cohort 1 entities (reporting from the 2024/25 Reporting Period) which are comprised of Reporting Entities (defined as those required to report under Part 2M of the Corporations Act including Disclosing Entities, Public companies, registered schemes and large private companies) which are National Greenhouse and Energy Reporting Scheme (NGERS) “controlling corporations” which meet the NGER publication threshold; and Reporting Entities that fulfill two of the following three thresholds: (1) over 500 employees; (2) $1 billion+ in consolidated gross assets; (3) $500 million+ consolidated annual revenue.
- Cohort 2 entities (reporting from the 2026/27 Reporting Period) which are comprised of Reporting Entities that fulfill two of the following three thresholds: (1) over 250 employees; (2) $500 million+ in consolidated gross assets; (3) $200 million+ consolidated annual revenue.
- Cohort 3 entities (reporting from the 2027/28 Reporting Period) which are comprised of Reporting Entities which are NGERS controlling corporations; and Reporting Entities that fulfill two of the following three thresholds: (1) over 100 employees; (2) $25 million+ in consolidated gross assets; (3) $50 million+ consolidated annual revenue.
- The government’s proposal sees entities reporting in line with the International Sustainability Standards Board (ISSB)’s Climate Standard (IFRS S2) in their Annual Reports, with the largest emitters, ASX200 equivalent companies and financial institutions required to report from the financial year commencing 1 July 2024.
- To address liability concerns (for which the AICD has been a leading advocate), the government has proposed a three-year period of regulator-only enforcement for certain disclosures from July 2024. This relief is proposed to apply to misleading or deceptive conduct or “similar claims” in respect of scope 3 emission disclosures and forward -looking disclosures such as transition plans and scenario analysis.
- Overall, the AICD considered that Treasury’s proposals were a positive step towards the creation of an effective climate disclosure framework. However, we were concerned about the practical and legal impact of some of the proposals, particularly in respect of the timing and location of disclosures and intersection with existing corporate reporting laws. The AICD’s submission focused on how these legal and implementation issues could be best resolved.
- The AICD also submitted that Cohort 3 was too broad relative to other jurisdictions and that the compliance burden would be excessive relative to the climate impact of these entities. As such, we recommended a significant lifting of relevant thresholds or, alternatively, less onerous disclosure requirements be applied to Cohort 3 entities. We also sought confirmation that reporting would be required on a consolidated group level, rather than on an individual entity basis.
- To find out what directors need to know about the proposed mandatory climate reporting standards, view a free recording of our recent webinar featuring speakers from Treasury and ASIC.
As drafted, the current proposal does not capture charities registered with the Australian Charities and Not-for-Profits Commission (ACNC). However, the AICD is concerned that the current formulation of the thresholds (i.e. reporting being linked to reporting under Part 2M of the Corporations Act i.e. “Reporting Entities”) will mean that non-ACNC registered not-for-profit (NFP) reporting entities which satisfy the size thresholds, will be captured. In our submission we recommended that, in the event that it is intended that NFPs are to be captured, the proposal should be the subject of consultation with the NFP sector.
The climate disclosures are proposed to be located in the financial statements and directors’ reports (incorporating the operating and financial review for listed entities), and to be issued at the same time as the annual report.
Assurance is also proposed to be phased-in, starting with limited assurance over Scope 1 and 2 greenhouse gas disclosures and reasonable assurance over governance disclosures in the first year of reporting.
Given the nascent state of the required disclosures, the government proposes that enforcement for misleading or deceptive conduct or “similar claims” in respect of scope 3 emission disclosures and forward-looking disclosures such as scenario analysis and transition planning be limited to regulator-only actions for a fixed period of three years (Transitional Liability Relief).
For a detailed explanation of what is being proposed by the government, please see this article.
What is the AICD’s position?
The AICD considered that Treasury’s proposals are a positive step towards the creation of an effective climate disclosure framework. However, we noted that the complexity and impact of this “once in a generation change in corporate reporting” will require material changes to the Corporations Act and financial reporting framework. As such, the AICD’s submission focused on practical implementation issues and the legal implications of the proposed regime. Our key points were:
- Liability: The AICD strongly supports the proposal to limit enforcement of scope 3, transitional plan and scenario analysis disclosures to the regulator for a fixed period of three years, following the commencement of the regime (Transitional Liability Relief). However, we submitted that this relief should apply for three years for each reporting cohorts, rather than being a fixed three-year period. We also submitted that it should cover all forward-looking disclosures required under IFRS S2 - not just transition plans and scenario analysis. We also reiterated the need for ASIC to be clear as to its approach to enforcement, and that it adopts a pragmatic stance in light of the emerging nature of climate disclosures and the significant upskilling required.
- Modified Director and Management authorisations: Given the proposal to locate climate disclosures within both the directors’ report and financial report, we consider there is a need for modified Director Declarations and CEO and CFO Declarations (Management Declarations) for financial reports, and amendments to the Directors Resolution authorising the Directors’ Report. In particular, such authorisations should make clear that disclosures are being made on a good faith basis, and the inability to provide an unreserved sign-off on compliance with the ISSB standards.
- Timing: We submitted that the legislation needs to make clear that climate disclosures only need to be made annually, unless (in a listed entity’s case) a continuous disclosure obligation is triggered. We strongly supported Treasury’s proposal that the ASX confirm that continuous disclosure obligations continue to be subject to the existing materiality thresholds, and that it provide guidance on how to manage those obligations in the climate context. We also suggested that organisations be provided with timing relief in their first reporting year, so they can submit a stand-alone climate disclosure report within two months following the issue of their annual report, rather than having to make the requisite climate disclosures as part of the annual report.
- Scope: We submitted that Cohort 3 (which was estimated to cover around 20,000 entities) was too broad relative to other jurisdictions such as the EU. We were concerned that for these entities, the compliance burden would not be commensurate to the policy benefit. Instead, we proposed a significant lifting of relevant thresholds, or, alternatively, that less onerous disclosure requirements be applied to Cohort 3 entities. We also sought confirmation that reporting will be required on a consolidated group, rather than individual entity, basis.
- Application to charities and NFPs: As currently framed, the proposed regime would exclude charities registered with the Australian Charities and Not-for-Profit Commission (ACNC) but would include not-for-profits which were not ACNC registered. Given the ISSB standards were developed for commercial for-profit entities, we recommended that the government undertake a separate consultation with the NFP and charities sector to consider the appropriateness of having the disclosure regime apply to them.
The full submission can be found here.
What happens next?
After announcing its final policy position, the government will issue exposure draft legislation giving effect to the climate reporting framework.
The Australian Accounting Standards Board (AASB) will also be undertaking a consultation process seeking views on the content of the Australian Climate Reporting Standards, including the extent of alignment with the ISSB Climate Standard.
The Australian Climate Standards final, and any amending legislation will need to be finalised relatively quickly, with the regime set to commence from 1 July 2024 (with first reports being published in mid-late 2025).
How can directors prepare?
As host of the Climate Governance Initiative (CGI) Australia, the AICD is preparing a Climate Reporting Guide for directors, which we anticipate releasing in September 2023. In the meantime, directors can prepare themselves by listening to the recording of our 26 July 2023 webinar on climate reporting, and by:
- Identifying gaps between their organisation’s current reporting and what is required under mandatory reporting: To assist directors gauge what may be required, it could be useful to review the climate disclosures of organisations who are current market leaders (albeit noting that ISSB-based reporting is new for all). Directors should also consider the impact of undertaking climate disclosures on their resourcing.
- Reviewing governance structures, such as board committees, to ensure they are fit for purpose and can respond adequately to climate reporting requirements: Directors should take stock of what committees are currently responsible for climate change and whether this is reflected in board committee charters. Directors can also consider whether there is a need for, or benefit in, the introduction of a stand-alone Board Sustainability Committee and what this may look like. For more guidance on this, please see the Climate Governance Initiative (CGI) Australia and HSF Guide on Board Committees.
- Taking stock of current levels of climate competency to identify gaps and lift board climate competency through education. Reviewing the free resources available on CGI Australia’s hub is a good place to start.
- Undertaking an audit of current climate disclosures to test these representations for accuracy and continued relevance so as to reduce greenwashing risk. Directors need to be satisfied that any representation as to future matter has “reasonable grounds.” In the case of long-term targets (such as a net zero target), this means having a realistic and evidence-based roadmap of how to get there, including the setting of short and medium-term targets.
- Considering assurance options for climate disclosures. Having discussions with your financial statement auditor as to whether they have the skills and capacity to provide climate assurance and what pre-conditions are required for assurance, is a good first step.
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