Mandatory climate-related financial disclosures: Australia takes key step on its ‘sustainable finance roadmap’

Briefing

03 January 2025

17 MIN READ

1 AUTHOR

Australian legislation requiring certain large entities to make climate-related financial disclosures from 1 January 2025 has commenced.

Overview

2025 will mark the first year of mandatory climate risk reporting in Australia for entities that meet certain thresholds, as part of annual financial reporting requirements.

On 17 September 2024 the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 received Royal Assent, which amends the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) to provide for Australia’s climate-related financial disclosure reporting regime (CRFD). The following day ASIC ‘urged’ businesses to prepare for the new mandatory reporting requirements.¹

Implementation of the CRFD is the first ‘priority’ item in the Australian Government’s Sustainable Finance Roadmap released in June 2024 (Sustainable Finance Roadmap).² The Sustainable Finance Roadmap seeks to improve transparency on climate and sustainability (Pillar 1), amend and enhance Australia’s financial systems capabilities (Pillar 2) and provide for Australian government leadership and engagement on climate change (Pillar 3).

This briefing provides an update on the amendments made to the CRFD since our last two briefings on 29 January 2024 and 5 June 2024 respectively. The steps identified in those briefings on what entities should do now remain equally applicable and are extracted below in Section 3 for ease of reference.

ASIC has released guidance to the effect that it will take a ‘pragmatic and proportionate approach’ to enforcement of the CRFD.³ However, from a practical perspective to the extent reporting entities have not commenced their preparations for implementation of the CRFD, including those in the subsequent Group 2 and 3 reporting periods, it is now incumbent upon all entities to do so.

Section 1 of this article sets out what has changed since our previous publications. We briefly include a summary table in respect of the applicable reporting entities and reporting commencement dates in Section 2. A recap on what the sustainability report must include and the modified liability regime is provided in Section 3. Section 4 provides an update on the Sustainability Standards underpinning the CRFD and Section 5 concludes with ASIC’s guidance for implementation of the CRFD, including its work program for the coming years.

1. What has changed?

Scenario analysis

They key change since our previous briefings is the requirement for disclosure of a ‘scenario analysis’.⁴

The CRFD provides that if the Sustainability Standards (see Section 4) require disclosure of a scenario analysis, then information derived from or otherwise about a scenario analysis is taken ‘not to satisfy’ that requirement unless the scenario analysis is carried out using at least both of the following scenarios:

Greater than 2°C scenario: ‘the increase in the global average temperature well exceeds’ 2°C above pre-industrial levels.⁵ The supplementary explanatory memorandum in respect of the then bill (Supplementary EM)⁶ refers to this as a ‘high global warming scenario’ and clarifies that an increase of 2.5°C or higher above pre-industrial levels is considered to ‘well exceed’ 2°C.
1.5°C scenario: ‘the increase in the global average temperature is limited to’ 1.5°C above pre-industrial levels.⁷ The Supplementary EM refers to this as a ‘low global warming scenario’.

The global goals to hold the increase in global average temperature to ‘well below’ 2°C above pre-industrial levels, and otherwise pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels, are set out in the objects of the Climate Change Act 2022 (Cth).These global goals are derived from the international climate change treaty known as the Paris Agreement.⁸

It is important to note that reporting entities are not limited to the above two temperatures scenarios, particularly given a ‘high temperature’ scenario has the potential to be even greater than 2.5°C in circumstances where the Australian State of the Climate Report 2024 jointly published by CSIRO and the Bureau of Meteorology found Australia’s climate has already reached a temperature increase of 1.5°C since national records began in 1910,⁹ and EU data indicates a similar global temperature trajectory.¹⁰

2. When will it commence?

As the CRFD has come into effect, the mandatory reporting for the first group of applicable entities will commence from 1 January 2025. The thresholds and reporting start dates for each of the reporting groups are set out in the table below, which is a modified version of the table prepared by Treasury at the time of the draft bill.¹¹ We confirm there has been no change this table under the CRFD since we previously published this version in June 2024 (other than in respect of the applicable NGER threshold).

	THREE THRESHOLDS FOR SUSTAINABILITY REPORTING¹²
First annual reporting periods starting on or after	Large entities and their controlled entities meeting at least two of three criteria:			National Greenhouse and Energy Reporting (NGER) reporters	Asset Owners (registered scheme, registrable superannuation entity or retail CCIV)
First annual reporting periods starting on or after	Consolidated revenue¹³	EOFY¹⁴ consolidated gross assets	EOFY employees
1 January 2025 Group 1	$500 million or more	$1 billion or more	500 or more	Above the NGER publication threshold¹⁵	Expressly excluded
1 July 2026 Group 2	$200 million or more	$500 million or more	250 or more	All other NGER reporters	$5 billion assets under management or more¹⁶
1 July 2027 Group 3	$50 million or more	$25 million or more	100 or more	N/A	N/A

3. Recap including ‘what should applicable entities do now’?

Annual sustainability report

Companies which trigger any of the reporting thresholds, commencing with the Group 1 entities, will need to prepare an annual ‘sustainability report’ comprising:

climate statements for the year (as required by the Sustainability Standards);
any notes to the climate statements;
any statements required by the Minister pursuant to a legislative instrument on financial matters concerning ‘environmental sustainability’; and
a directors’ declaration about the statements and notes.

Protected Statements

As previously identified, certain statements in a sustainability report, and in the auditor’s report in respect of its review of the sustainability report, will be ‘protected statements’ during the first three years commencing on the start date if it is a statement made about:

scope 3 greenhouse gas emissions (including ‘financed emissions’ as defined under the Sustainability Standards);
a scenario analysis (within the meaning given by the Sustainability Standards); and/or
a transition plan (within the meaning given by the Sustainability Standards).

ASIC guidance confirms the ‘modified liability period’ will apply to reports prepared for the financial years commencing between 1 January 2025 and 31 December 2027.¹⁷

A ‘forward-looking statement’ will also be a protected statement if:

it is made in a sustainability report for a financial year commencing during the 12 months starting on the start date for the purposes of complying with a Sustainability Standard; or
in an auditor’s report of the aforementioned sustainability report for the purposes of complying with the Corporations Act or auditing standards; and
relates to ‘climate’ and ‘at the time it is made, is about the future’.

The modified liability period for such forward-looking statements applies to reports prepared for the financial year commencing between 1 January 2025 and 31 December 2025.¹⁸

The ‘protection’ is from third party civil actions, suits or proceedings. That is, it does not protect against matters that are criminal in nature, or any action, suit or proceeding brought by ASIC.

Next steps

By way of recap, businesses that have not already done so will need to determine:

Whether they trigger the reporting threshold.
Which reporting group they fall within.
When the reporting process is to commence, including the deadline for submission.
What is their governance process, strategy and risk management plan regarding how to identify, manage and report on climate-related risks and opportunities.
Whether their existing processes and governance will enable them to collect and document the necessary data and assessments to be able to prepare the sustainability report.
Any gaps in their governance, strategy, processes and data, and how to address those gaps.
That their Board is appropriately briefed and understands how the new regime will impact the business, including understanding the requirements of the directors’ declaration, the liability framework and penalties for non-compliance.
That their audit and assurance team have sufficient climate and sustainability expertise where appropriate, both internal and external.
Their processes for legal sign off in respect of the sustainability report, and to the extent external legal sign off is obtained, that the legal team has relevant experience and expertise on sustainability disclosures.

Other considerations include the opportunity that compliance with CRFD presents to:

Address nature – collect data, assess and report on impacts to nature within the entity and associated nature-related risks and opportunities to seek to create internal efficiencies with collection, assessment and reporting on climate-related risks and opportunities. Whilst the current version of the CRFD does not include nature-related risks and opportunities, it is anticipated that future iterations of the sustainability reporting requirements under the Corporations Act could mandate nature reporting. Furthermore, the challenges presented by climate change, nature depletion and loss of biodiversity are interrelated.
Drive value – utilise the information obtained, risk management strategies and transition plans to gain a competitive edge in the market to drive further business opportunities and increase employee, shareholder and stakeholder engagement with the applicable entity.

4. Sustainability Standards

The Sustainability Standards have been published by the Australian Accounting Standards Board (AASB) and commence on 31 December 2024. AASB S2 Climate-related disclosures ‘…requires an entity to disclose information about climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term’ (AASB S2).¹⁹ It applies to both ‘climate-related physical risks’ and ‘climate-related transition risks’.

Scenario analysis under AASB S2

In respect of scenario-analysis, AASB S2 requires disclosure of climate-related scenario analysis including to assess the climate resilience of an entity and inform its identification of climate-related risks.

Transition planning

As for transition planning, an entity is required to disclose ‘any climate-related transition plan the entity has, including information about key assumptions used in developing its transition plan, and dependencies on which the entity’s transition plan relies.’²⁰ The transition plan itself is defined as, ‘[a]n aspect of an entity’s overall strategy that lays out the entity’s targets, actions or resources for its transition towards a lower-carbon economy, including actions such as reducing its greenhouse gas emissions.²¹

It is incumbent upon reporting entities to set emission reduction targets but also to have a plan for achieving those targets, adequate resources and appropriate monitoring, reporting, verification and governance frameworks to track progress against the target. ASIC has consistently cautioned the market that emission reduction targets without adequate plans for implementation is greenwashing.²²

The Treasury is in the process of developing best practice guidance for the disclosure of corporate transition plans as ‘priority 3’ under Pillar 1 of the Sustainable Finance Roadmap. However, corporates will need to wait another year until the end of 2025 for that guidance to become available.

‘Proportionality’ considerations

AASB S2 contains express proportionality considerations in specific circumstances, including by reference to:

information available ‘without undue cost or effort’; and
that approaches be taken that are ‘…commensurate with the entity’s circumstances…’ or ‘…commensurate with the skills, capabilities and resources that are available to the entity….’.

Whilst ASIC is proposing to take a ‘pragmatic and proportionate’ approach to enforcement, as referenced above, it is recommended that entities equally take a pragmatic albeit cautious approach if seeking to rely upon any such qualifications to its reporting in order to avoid a dispute or investigation in respect of its compliance, particularly in the absence of further regulatory guidance on what the above qualifications entail in practice.

ASIC guidance

ASIC has published guidance to the effect that it recognises there will be ‘a period of transition’ as the market builds capacity and implements the changes within its organisation required to give effect to the CRFD. ASIC has therefore stated it ‘…will take a pragmatic and proportionate approach to supervision and enforcement as industry adjusts to the new requirements.’²³

In this context, ASIC has indicated enforcement action would be initially focused on ‘misconduct of a serious nature’, including ‘…causing harm to investors or other primary users of the information.’²⁴

However, it is recommended that organisations be vigilant about ensuring compliance to seek to avoid scrutiny or potential enforcement actions in the first place.

ASIC’s work plan is set out below.²⁵

Timeframe	ASIC forward work plan component
From September 2024	Applications for relief from one or more of the sustainability reporting requirements
From November 2024	Consultation and issuance of new or updated regulatory guidance
From 2026	The first annual climate-related disclosures surveillance program
From 2026	New powers of direction if ASIC considers a sustainability report is incorrect, incomplete or misleading

ASIC recently consulted on its proposal to issue a regulatory guide for entities required to prepare a sustainability report, amongst other matters. It is anticipated that the outcome of the consultation process will be disclosed during 2025.

Separately, ASIC’s surveillance program will review the first round of mandatory climate reporting as those reports become available. ASIC’s report on the surveillance program will be relevant for all reporting groups, including those yet to commence.

The author extends thanks to Alex Rutherford for his assistance on the article.

Footnotes

ASIC, Media Release, ‘ASIC urges businesses to prepare for mandatory climate reporting’, dated 18 September 2024, 24-205MR ASIC urges businesses to prepare for mandatory climate reporting | ASIC, (accessed 21 December 2024).
Australian Government, The Treasury, Sustainable Finance Roadmap | Treasury.gov.au (accessed 21 December 2024).
ASIC, ‘ASIC’s administration of the sustainability reporting regime’, ASIC’s administration of the sustainability reporting regime | ASIC (accessed 21 December 2024).
The Task Force on Climate-related financial disclosures (TCFD) defines scenario analysis as ‘…a tool to enhance critical thinking. A key feature of scenarios is that they should challenge conventional wisdom about the future….and explore opportunities that may significantly alter the basis for “business-as-usual” assumptions’, The Use of Scenario Analysis in Disclosure of Climate-related Risks and Opportunities – TCFD Knowledge Hub (accessed 21 December 2024).
s296D(2B)(a) of the Corporations Act and subparagraph 3(a)(i) of the Climate Change Act 2022 (Cth).
The Senate of the Parliament of the Commonwealth of Australia, Supplementary Explanatory Memorandum for the Amendments to be Moved on Behalf of the Government to the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024, 22 August 2024.
s296D(2B)(b) of the Corporations Act and subparagraph 3(a)(ii) of the Climate Change Act 2022 (Cth).
United Nations, Paris Agreement adopted by 196 Parties at the UN Climate Change Conference (COP21) in Paris, France, on 12 December 2015 – Article 2, paragraph 1(a) provides that ‘…Holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change.’
CSIRO and Bureau of Meteorology, State of the Climate 2024, 24-00239_REPORT_StateoftheClimate2024_241022.pdf (accessed 22 December 2024).
K Bryan, ‘World on track to exceed warming of 1.5C this year, EU agency says’, Financial Times, 7 November 2024.
Australian Treasury, Mandatory climate-related financial disclosures, Policy Position Statement, Mandatory climate-related financial disclosures – Policy position statement (treasury.gov.au) (Policy Position Statement) (accessed 20 May 2024) at [2]; See also Parliament of Australia, Bills Digest No 68, 2023-24, Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024, 14 May 2024, Bills Digest 68, 2023-24 – Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (aph.gov.au) (accessed 20 May 2024) (Bills Digest) at p 12.
Small and medium size business below the size thresholds are exempt. Entities that are already exempt from lodging a financial report under Chapter 2M of the Corporations Act are also exempt from preparing the sustainability report (eg. an entity registered with the Australian Charities and Not-for-profits Commission).
For the financial year, determined in accordance with the accounting standards in force at the relevant time.
End of financial year, determined in accordance with the accounting standards.
The applicable entity is (1) a registered corporation under the National Greenhouse and Energy Report Act 2007 (Cth) (NGER Act) at the end of the financial year or required to make an application to be registered in relation to meeting a threshold under s12(1) of the NGER Act; and (2) its group meets a threshold for the financial year within the meaning of s13(1)(a) of the NGER Act. Section 13(1)(a) of the NGER Act provides that a controlling corporation’s group meets a threshold for a financial year if in that year the total amount of greenhouse gases emitted from the operation of facilities under the operational control of entities that are members of the group has a carbon dioxide equivalence of 50 kilotonnes or more (scope 1 and 2 emissions).
Or such other amount prescribed by the regulations.
ASIC, ‘Modified liability settings’, Modified liability settings | ASIC (accessed 21 December 2024).
Note xvii above.
Australian Sustainability Reporting Standard AASB S2 Climate-related disclosures, AASBS2_09-24 | AASB (accessed 21 December 2024).
AASB S2, Section 14.
AASB S2, Appendix A.
See for instance, ASIC’s intervention on greenwashing misconduct: 2023-2024, Report 791, August 2024, Report REP 791 ASIC’s interventions on greenwashing misconduct: 2023–2024 (accessed 21 December 2024).
Note iii above.
Note iii above.
Note iii above.