Mandatory climate related financial disclosure is coming

What you need to know

On 12 December 2022, the Australian Treasury released a consultation paper seeking views on the design and implementation of the climate-related financial risks disclosure regime.

Treasury is aiming to align climate risk disclosure requirements with international standards and is seeking feedback on how the reporting requirements should be implemented. 

What you need to do

• Disclosure requirements for climate-related financial risks could be introduced in Australia as early as 2024, so it is important you are ready to meet these obligations (see our previous article here). 
• Review the proposed framework for Australia's mandatory climate-related financial disclosures and consider the implications for your business. 
• If you wish to make submissions on the consultation paper, ensure your submissions are made before 17 February 2023.

In recent years, there have been increasing demands from investors and capital markets for internationally-comparable climate-related disclosures. In response, New Zealand, Canada, the US, UK, Singapore and Switzerland have introduced or are in the process of introducing mandatory climate-related disclosure requirements.  

The Australian Government is seeking to introduce standardised, internationally-aligned reporting requirements for climate-related disclosures in order for Australian businesses to remain competitive in global markets. 

The Australian Government is seeking consultation on: 

Entities and proposed timing 

Treasury proposes a phased approach for the implementation of disclosure requirements commencing with larger listed entities, including financial institutions, possible as early as FY 2024/25.  

The consultation paper seeks views on the timing of future phases of reporting implementation, the cohorts of businesses covered in the subsequent phases and whether non-listed entities should be subject to climate risk disclosure obligations in the initial phase.

International alignment of disclosures 

The consultation paper seeks views on whether Australia should align climate disclosure requirements with the International Sustainability Standards Board's (ISSB) or  the TCFD standards. 

Regulatory framework and periodic reporting 

The consultation paper envisages that climate disclosure requirements will be aligned with the existing financial reporting framework, by either:

• legislating broad climate disclosure obligations and detailing these obligations through standards and guidance; or
• expanding existing material risk disclosure requirements and setting out climate disclosure obligations through guidance and standards. 

Treasury is seeking views on what considerations should inform the design of a new regulatory framework. 

Materiality and assurance of climate risks 

Views from stakeholders are sought regarding:

• materiality in climate reporting and whether materiality should align with the ISSB guidance as a reference point; and  
• the nature of assurance that should be required for climate disclosures.  

Reporting of metrics, offsets and transition plans

The consultation paper seeks views on: 

• requirements to report emissions; 
• whether a common baseline of metrics should be defined; and
• how to ensure entities are providing transparent information about managing climate related risks.

Data and capability to support climate reporting

The consultation paper notes the difficulties in relation to data availability and consistency in assessing and disclosing climate-related risks. 

Input is sought in relation to: 

• capability or data challenges in Australia that should be considered when implementing the new requirements; and 
• how these data gaps may be addressed.

Governance of supporting information for disclosures

Submissions are sought on whether a particular authority should be responsible for providing information (e.g. climate scenarios) for use in climate-related financial disclosures.

Liability

Treasury notes ASIC's advice that forward-looking statements for the disclosure of risks are to be made on 'reasonable grounds'. 

The consultation paper seeks views on:

• the suitability of the 'reasonable grounds' requirement and the disclosure of uncertainties or assumptions in climate reporting; and 
• alternative tests to incentivise disclosure and manage potential liability.

Interaction with other reporting obligations and other implementation issues

Treasury envisages that the climate reporting regime will impact other reporting obligations, such as continuous disclosure obligations and in fundraising documents. 

The consultation paper seeks views on:

• how existing reporting obligations would interact with new climate reporting requirements and suggestions on how these interactions should be addressed
• how much flexibility should there be within the proposed reforms, to focus on other aspects of sustainability reporting such as biodiversity or water quality
• whether or not digital reporting should be mandated for sustainability risk reporting 

Potential structures

The consultation paper proposes three potential structures that would underpin the establishment of climate risk disclosure standards within the financial reporting framework:

1) the Australian Accounting Standard Board (AASB) being responsible for developing and monitoring the standards; 

2) establishing a separate sustainability standards board; or

3) reforming existing financial reporting bodies into a single body. 

Treasury is seeking submissions on which of these potential structures would best support the introduction of climate related risk reporting. 

Authors: Rob Hanley, Partner; Maxine Viertmann, Lawyer; and Lachlan Ward, Graduate.