Transitioning to an environmentally sustainable economy: Climate reporting is now law

On 17 September 2024 Royal Assent was granted on the climate reporting legislation previously approved by both Houses of Parliament. On 20 September 2024 the first Australian Sustainability Reporting Standards (ASRSs) were approved by the Australian Accounting Standards Board (AASB).

Climate reporting legislation

The climate reporting legislation is contained in Schedule 4 to the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 [the link to the associated Bill is provided here as the Act has not been formally released].

What’s changed from the original Bill?

For those entities impacted by the legislation, as part of the scenario analysis disclosures entities will have to use both a high and a low global warming scenario. This will require entities to report against both a 1.5-degree scenario and a catastrophic warming scenario (being an analysis based on the increase in the global average temperature well exceeding 2 degrees above pre-industrial levels). These temperatures are based on those used in the Climate Change Act 2022.

Who will be impacted and when?

The legislation requires that all entities subject to mandatory climate-related financial disclosures are phased in three groups, over a four-year period, based on size or level of emissions, as set out below.

Entities that are exempt from lodging financial reports under Chapter 2M of the Corporations Act 2001 (the Act) are not required to make the disclosures.

*Group 3 materiality exemption

Group 3 entities (i.e. they do not meet the Group 1 or Group 2 thresholds) would only be required to make climate-related financial disclosures in line with the ASRSs if they face material climate-related risks or opportunities for the financial reporting period. Where they assess that they do not have material risks or opportunities, they will be required to publish a statement disclosing this, as well as explain how they reached this conclusion (which will be required to be audited).

Report location and timing

Climate disclosures would be required to be included in an entity’s annual report, within a separate annual sustainability report containing climate statements, notes and a directors’ declaration about the statements and notes.

Timing for lodgement will be consistent with the current requirements under s319 of the Act for lodging annual reports.

The liability framework

A modified liability framework will temporarily apply to both directors and auditors in relation to disclosures of Scope 3 emissions, scenario analysis, transition plans and climate-related forward-looking statements.

Assurance requirements

Assurance requirements will be subject to similar requirements to those currently in the Act for financial reports and will be required from the entity’s financial statement auditors.

On 17 September 2024, the Auditing and Assurance Standards Board (AUASB) issued an Exposure Draft of a Proposed Australian Standard on Sustainability Assurance ASSA 5010 Timeline for Audits and Reviews of Information in Sustainability Reports Under the Corporations Act 2001 (ED 02/24).  ED 02/24 outlines a proposed timeline for phasing in audit and/or review requirements over time from 1 January 2025, as noted below, with the legislation requiring reasonable assurance of all climate disclosures by years commencing 1 July 2030.

Proposed timeline for Assurance Phasing

* Group 1 – Years commencing 1 January 2025, Group 2 – Years commencing 1 July 2026, Group 3 – Years commencing 1 July 2027.

** Group 3 is to be subject to reasonable assurance across all disclosures by years commencing 1 July 2030.

*** The phasing for assurance on Statements where there are no material climate-related financial risks and opportunities is the same as for ‘Strategy – Risks and Opportunities’.

Comments on ED 02/24 are required by 16 November 2024 with an expectation of a final assurance standard being issued by the end of 2024.

Australian Sustainability Reporting Standards

ASRSs, due to be issued by the AASB shortly, comprise:

• AASB S1 General Requirements for Disclosure of Sustainability-related Financial Information
• AASB S2 Climate-related Disclosures

AASB S1 is a voluntary standard covering all sustainability related disclosure requirements (including climate). AASB S2 is a mandatory standard on climate reporting applying to those entities specified in the climate reporting legislation. AASB S2 will function as a stand-alone standard, as selected elements of AASB S1 are included within an Appendix to the standard.

International compatibility

These Australian standards are based on the International Sustainability Standards – IFRS S1 and IFRS S2 [of the same names noted above]. AASB S1 is essentially the same as IFRS S1 (apart from the voluntary nature of AASB S1). AASB S2 differs from IFRS S2 in two main ways:

• it has no requirement to consider industry-based information; and
• the inclusion of elements of AASB S1 as noted above, for it to function as a stand-alone standard.

Summary of AASB S2 requirements

AASB S2 sets out disclosure requirements for climate-related risks and opportunities that could reasonably be expected to affect an entity’s cash flows, access to finance or cost of capital over the short, medium or long term. These disclosures are divided into four key pillars; governance, strategy, risk management, and metrics and targets, and include required disclosures on scenario analyses and greenhouse gas emissions (Scope 1, 2 and 3).

Who it applies to and when

AASB S2 will apply for years commencing 1 January 2025 and to those entities required to produce a sustainability report in accordance with the timing noted in the climate reporting legislation as noted in the table above. It applies to for-profit and not-for-profit entities.

Transitional relief

The transitional relief in AASB S2 includes:

• No requirement to disclose Scope 3 emissions metrics until the the second period of reporting; and
• No requirement to provide comparative information for any period before the date of application.

What to do now

Companies must determine today if they are impacted by the mandatory reporting requirement and the relevant time timeframe for adoption.

Then consider the other guidance we’ve produced on this topic in helping you to prepare for the transition, such as:

Climate Reporting – the beginning but not the end – 28 June 2024

Is your business ready for mandatory climate reporting – 28 April 2023

Contact your Pitcher Partners representative to find out if, and when, you may be impacted.