The commencement of Mandatory Disclosure of climate risk reforms could be deferred for a year, due to unforeseen delays with drafting the necessary legislation and accompanying accounting standards.
And the number of companies and reporting entities captured by the landmark scheme could also be dramatically reduced under a streamlined reporting framework.
Spearheaded by Treasurer Jim Chalmers, the Climate-related financial disclosures regime is scheduled to commence from July 1, delivering greater transparency on how corporations are dealing with climate-related opportunities and risks.
It will be mandatory for companies and reporting entities to disclose their greenhouse gas (GHG) emissions – including so-called Scope 3 emissions from customers and suppliers – along with any material risk associated with climate change.
The reforms will bring Australia into line with other major economies and hopefully reduce the level of ‘greenwashing’ undertaken by corporates. The Treasurer released exposure draft legislation on January 12 and is allowing a short period – to February 9 – for final consultation over the design of the reforms.
According to Mr Chalmers, the reforms will “help Australia maximise the economic opportunities of cleaner, cheaper and more reliable energy and manage climate change risks”.
Firstly, the draft legislation must pass the Federal Parliament – and this is where the potential problem lies. While the Opposition has yet to formally respond to the draft legislation, it is expected its sensitive nature will ensure the legislation is referred to a parliamentary committee for greater scrutiny.
Given the delays in parliamentary drafting it is not expected these laws will be passed until June, at the earliest.
The Australian Accounting Standards Board (AASB) will then have to finalise the relevant standards before corporates are able to adjust their reporting systems. The Government, in the exposure draft, is asking for feedback on whether “amending legislation to require a 1 January 2025 commencement date for Group 1 entities would improve the quality of reporting during the transition year”.
While no decision has been taken, this would likely see the start date pushed back 12 months, allowing ‘Group 1’ reporting entities extra time to get their systems in order. Group 1 companies – the largest 700-odd companies in Australia (both listed and private) according to set criteria – will be required to report first.
A Sustainability Report will need to be filed as part of a corporation’s annual results, with company directors signing off on a range of metrics, particularly greenhouse gas (GHG) emissions. As well, reporting entities will have to disclose any material risk to their ongoing operations (for instance, where they fear climate change will make parts of their operations unsustainable).
Given the importance of getting it right, the Government is recommending a staggered introduction of these reforms. It will define Group 1 companies as those which produce annual reports and meet two of the following three criteria:
Group 1 also includes companies with emissions above the publication thresholds under the National Greenhouse and Energy Reporting (NGER) Scheme. Group 2 will comprise companies with at least two of the following three criteria: revenues of $200 million, 250 employees and $500 million in assets.
It will also include all NGER reporters. It was expected that a third group – comprising a larger grouping of companies with at least $50 million in revenue and 100 employees – would report from July 1 2027.
But Treasury is now raising the prospect of this group (which would number in the thousands) having to only provide at a minimum a “materiality assessment” as part of their annual reporting requirements.
This “materiality exemption” would mean a company with, say, $100 million in annual revenue which felt that its business prospects were not susceptible to future climate-related risk would not have to comply with the more onerous reporting requirements.
The most challenging aspect of these reforms is likely to be the reporting of Scope 3 emissions. These are the most difficult emissions to quantify. They represent the GHG emissions from supply chain activities, employee transport, and other non-direct activities.
In order to allay concerns about Scope 3, the exposure draft legislation confirms entities will not have to report Scope 3 in their first year of reporting.
And there will be a special Modified Liability regime for Scope 3, limiting the powers of the regulator – ASIC – to impose penalties against reporting entities for breaches.
This will apply for the first three years of the scheme, in what amounts to another sensible concession aimed at ensuring Australia’s new mandatory disclosure framework receives widespread support.
Contact us for more information about the climate-related financial disclosure reforms, what this means for your public communications and how you are engaging with your stakeholders.
Steve Lewis, Senior Adviser, SEC Newgate Communications – [email protected]
Claire Bremner, Partner and Canberra Office Head, SEC Newgate Communications – [email protected]
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