Mandatory climate reporting: a game changer for Australian businesses

The recent passage of the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 in the Australian Senate marks a seismic shift in corporate climate reporting. This legislation will fundamentally reshape how businesses approach financial performance, placing climate at the heart of financial risk and opportunity. As companies gear up for the mandatory reporting requirements set to begin on 1 January 2025, it’s crucial to understand what this means for their operations and strategies as well as external disclosure.

Bill amendment

The primary amendment to the Bill is the mandating of two scenarios to be used when scenario analysis is carried out in accordance with the requirements in Australian Sustainability Reporting Standards:

1. A high global warming scenario, which is defined as an increase in the global average temperature that ‘well exceeds’ 2°C above pre-industrial levels.
2. A low global warming scenario, which is defined as an increase in the global average temperature limited to 1.5°C above pre-industrial levels.

Whilst the Bill needs to go back to the House of Representatives to consider the Senate’s amendments, it is expected that the Bill will be passed with no further changes.

Key takeaways for companies

1. Reporting entities:

The legislation applies to specific entities under Chapter 2M of the Corporations Act 200. Companies that meet at least two of the following criteria will be subject to the new reporting requirements:

• Revenue of AU$500 million (US$338.8 million) or more
• Assets of AU$1 billion or more
• 500 or more employees

2. Phased implementation:

Mandatory climate reporting will begin for financial years starting on or after 1 January 2025. Companies must prepare to include their sustainability reports, alongside their annual financial reports, lodged with the Australian Securities and Investments Commission (ASIC) simultaneously.

3. Reporting content:

The sustainability report will primarily focus on climate-related financial disclosures, which will include:

• Climate statements
• Notes to those statements
• Ministerial prescribed statements
• A directors’ declaration confirming the consideration of climate-related risks and opportunities

Companies will need to disclose their Scope 1 and 2 emissions from the outset, with Scope 3 emissions (indirect emissions from the value chain) required starting from their second reporting year. This phased approach allows businesses to utilise existing data from previous disclosures to ease the reporting burden.

4. Directors' declaration requirement:

A significant aspect of the Bill is the mandate for directors to declare any financial risks or opportunities related to climate change, even if they determine there are none. This declaration must be signed and dated by a director, emphasising the importance of climate-related considerations in corporate governance.

5. Future disclosures:

While the current focus is on climate, the legislation allows the minister to mandate additional disclosures related to environmental sustainability. This indicates a potential expansion beyond climate issues in the future. When we look to the Internal Standards, the ISSB have indicated that biodiversity and human capital will be the next areas of focus for reporting.

6. Voluntary disclosures:

Companies can voluntarily include broader sustainability information in their reports, with the AASB planning to issue a voluntary sustainability standards which is aligned to ISSB S1, but this must be clearly marked as separate from legally required disclosures. This offers an opportunity for companies to showcase their sustainability initiatives, particularly where they are already in development and being disclosed.

7. Exemptions from disclosure:

Companies may be exempt from disclosing certain information if it is commercially sensitive or if disclosing it would incur undue cost or effort. However, the criteria for these exemptions may be stringent, especially for larger companies.

Preparing for the changes

As businesses invest in getting ready for the 1 January 2025 start date, it is clear that the way they approach climate reporting will need to be taken as seriously as annual financial reporting. To effectively navigate these changes, companies should:

1. Conduct a gap assessment

Evaluate current governance, risk management, strategy and reporting capabilities against the upcoming requirements. Identify any gaps in underlying processes and disclosures that need to be addressed.

2. Develop an action plan

Create a roadmap to address these gaps, outlining responsibilities and timeframes for compliance. This plan should include strategies for data collection, scenario analysis, and stakeholder engagement.

3. Stay informed

Keep abreast of developments in sustainability reporting standards from the AASB, assurance requirements from the AuASB and regulatory guidance from ASIC. Engaging with industry groups and experts can provide valuable insights and support.

The bigger picture

We acknowledge there will be additional effort for companies to respond to these standards, particularly in the first year, to meet a level of rigour for regulatory requirements and assurance standards — and even more so for those companies that haven’t considered climate risks and opportunities in their business model and value chain.

The introduction of these mandatory climate reporting requirements is not just a regulatory obligation; it’s a strategic imperative and key step in preparing the businesses and the broader economy for climate transition. By integrating climate considerations into their core business strategies, companies can better position themselves to navigate the risks and opportunities presented by climate change, ultimately driving sustainable growth and resilience in an increasingly uncertain world.

The standards offer an opportunity for those companies that can best demonstrate integration of climate risks and opportunities, and resilience to high and low emissions scenarios to improved access to capital and increased attractiveness to investors.

As Australia moves towards a future where climate risk is a central consideration in financial reporting, businesses must rise to the challenge, ensuring they are not only compliant but also leaders in sustainability. The time to act is now. Embrace this opportunity to transform your reporting practices and contribute to a more sustainable future.

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