Climate-Related Financial Disclosure Requirements in Australia

Let’s delve into the impact, risks, and some climate-related financial disclosure requirements for Australian businesses in 2024.

As the Australian economy gears up for a transformative shift towards greater climate awareness, businesses are facing new challenges and opportunities. The year 2024 marks a pivotal moment as Australia follows the global trends in sustainability and introduces climate-related financial disclosure requirements. 

In this blog post, we delve into the impact, risks, and some essential considerations for businesses.

1. Australian Sustainability Reporting Standards (ASRS)

The foundation for climate-related financial disclosures lies in the Australian Sustainability Reporting Standards (ASRS), developed based on the sustainability standards released by the International Financial Reporting Standards (IFRS) organization in June 2023. 

The ASRS provides a structured framework for organizations to communicate their climate-related performance. While, at the time this blog was written, the ASRS is still in draft, their aim is to enhance transparency, comparability, and accountability across industries by providing clear guidelines for climate-related financial disclosure. They are meant to facilitate informed decision-making by stakeholders and contribute to a sustainable future.

The suite of standards consists of three essential components:
a. ASRS 1: General Requirements for Disclosure of Climate-related Financial Information

Scope: Developed based on the International Financial Reporting Standards (IFRS) S1 for sustainability-related financial information, ASRS 1 focuses specifically on climate-related financial disclosure.

Materiality: Entities must identify and disclose material climate-related risks and opportunities affecting their business models, strategies, and financial performance.

Metrics and Targets: Reporting covers climate-related metrics such as greenhouse gas emissions (scope 1, 2, and 3) and energy consumption. Clear targets aligned with climate goals are essential.

Assurance: While limited assurance over scope 1 and 2 emissions is initially required, full assurance over sustainability reports becomes mandatory from 2030.

b. ASRS 2: Climate-related Financial Disclosures

Developed using the IFRS S2 for climate-related disclosures as a baseline, ASRS 2 mandates specific reporting obligations for entities.

The scope of this Standard is limited to an entity’s climate-related risks and opportunities in relation to climate change and does not apply to climate-related emissions that are not greenhouse gas (GHG) emissions. Entities must disclose their climate strategy, governance processes, and risk management related to climate change.

The document emphasizes transparency and accountability, benefiting both investors and regulators.

c. ASRS 101: References in Australian Sustainability Reporting Standards

ASRS 101 serves as a service standard, listing relevant versions of non-legislative documents published in Australia and foreign documents referenced in the ASRS Standards.

This ensures consistency and provides a comprehensive framework for referencing external materials.

2. Climate-Related Financial Disclosure Bill 2024

The Climate-Related Financial Disclosure Bill 2024 is a landmark legislation that aims to enhance climate-related financial transparency and accountability in Australia, and seeks to address the urgent need for organisations to disclose their climate-related risks and opportunities. It mandates reporting based on the Australian Sustainability Reporting Standards (ASRS) for listed and unlisted companies, starting from the 2024-25 financial year. 

The proposed amendments under Chapter 2M of the Corporations Act 2001 include a new ‘sustainability report’ for every financial year, which entities will need to prepare in addition to the already required financial statements, notes to financial statements and the director declaration, all of which currently form part of an annual financial report. The phased implementation, categorised into Groups 1, 2, and 3 based on entity size, ensures a gradual transition and diffusion throughout the economy.

2.1. Reporting Obligations

Entities covered by the bill must adhere to the following reporting requirements

a. Annual Financial Reports must now also include, in the form of a Sustainability Report

  • Climate Statements: A summary of the entity’s climate-related risks and opportunities, governance, strategy, metrics, targets, and performance.
  • Notes to Climate Statements: A detailed explanation of the data, methods, assumptions, and sources used to prepare the Climate Statements, as well as any limitations, uncertainties, or changes from previous reports.
  • Other Statements: Any other information that the entity considers relevant or material to its climate-related disclosures, such as its policies, initiatives, commitments, or collaborations on climate action.
  • Director’s Declaration: A statement from the entity’s board of directors that the Climate Statements and the Notes to Climate Statements comply with the Australian Sustainability Reporting Standards and the Climate-Related Financial Disclosure Bill 2024, and that they give a true and fair view of the entity’s climate-related risks and opportunities.
  • Assurance Report: A statement from the entity’s financial auditor on the compliance, accuracy, and reliability of the Climate Statements and the Notes to Climate Statements, in accordance with the Australian assurance standards for climate disclosures.
  • Sustainability Records: While not specifically disclosed or included in the annual report, but nonetheless part of the mandated requirements, entities must also keep records explaining the methods, assumptions, and evidence used in climate statements.

b. Half-Year Financial Reports must be prepared (for Disclosing Entities only)

  • Disclosing entities (large listed companies) must prepare half-year financial reports, which also include climate-related information.
2.2. Implementation Timeline
The phased implementation ensures a gradual transition. Disclosing entities have been grouped based on size, and they are required to commence reporting as follows:

Group 1 Entities: meet at least two of the following three criteria – the consolidated revenue is equal to or greater than $500 million; the consolidated gross assets value is equal to or greater than $1 billion; it has 500 or more employees. They commence reporting from the 2024-25 financial year.

Group 2 Entities: meet at least two of the following three criteria – the consolidated revenue is equal to or greater than $200 million; the consolidated gross assets value is equal to or greater than $500 million; it has 250 or more employees. They commence reporting from the 2025-26 financial year.
Group 3 Entities: meet at least two of the following three criteria – the consolidated revenue is equal to or greater than $50 million; the consolidated gross assets value is equal to or greater than $250 million; it has 100 or more employees. They commence reporting from the 2026-27 financial year.

The implementation process involves several important steps:

Awareness and Education: Businesses need to understand the requirements, seek legal advice, and train their teams given that well designed awareness campaigns can bridge existing knowledge gaps. Needless to say, these need to be conducted in a timely manner to ensure the entity is ready to meet its legal obligations.

Data Collection and Assessment: Robust data collection mechanisms are vital. Businesses must assess their exposure to climate risks and opportunities, understand the data they need to properly assess risk and opportunities, put in place the systems for collection and effectively perform the assessment itself.

Integration into Reporting: Climate disclosures should seamlessly integrate into existing financial and sustainability reports. Given the associated responsibility of the governing body of the business and the liability for noncompliance, consistency, and accuracy are important.

2.3. Auditing Requirements

As evidenced by the requirement for an assurance report, auditing plays a critical role in ensuring the reliability of climate-related disclosures. The main aspects of the auditing requirements are listed below:

  • Assurance Opinion: From 2030, full assurance over sustainability reports will become mandatory. Independent auditors assess the accuracy, completeness, and consistency of climate-related information.
  • Scope: Independent auditors must assess the accuracy, completeness, and consistency of climate-related information in sustainability reports.
  • Materiality Testing: Auditors evaluate whether material climate risks and opportunities have been appropriately disclosed.

3. Meaning and Requirements for Businesses

In the context of these mandatory disclosure requirements, businesses are faced with a set of challenges and opportunities alike.

Sound risk management processes aiming to identify climate risks (physical, transitional, and liability-related) are crucial. Subsequently, businesses must develop and implement adaptation strategies based on scenario analyses. As previously highlighted, the data and the processes employed must be documented and the records must be retained.

Furthermore, while transparent disclosures enhance credibility in front of a wide range of stakeholders, they also attract responsible investors. From this perspective, businesses demonstrating climate resilience gain a competitive edge.

When considering SMEs, it is well known that they often lack the resources necessary for extensive reporting activities. However, they can start by understanding their carbon footprint, setting emission reduction targets, and collaborating with industry peers. As an integral part of the Scope 3 emissions of larger organisations, SMEs are faced with a very material risk to their business should they be unable to understand and adapt to the requirements their customers are facing.

Conclusion

The Australian economy’s shift towards climate-related financial disclosure is inevitable. Businesses that embrace this change proactively will position themselves for success and growth. SMEs, while facing resource constraints, can begin by taking small steps and gradually aligning with the requirements of the ASRS and of the Climate-Related Financial Disclosure Bill.

Let’s build a sustainable future together!

 

Disclaimer: This blog post provides general information and does not constitute legal advice. Consult legal experts for specific guidance tailored to your business context.

Australian Accounting Standards Board (AASB) – Exposure Draft ED SR1

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