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ESG—Australia: Climate-Related Financial Disclosures: Updated Bill
Tuesday, June 11, 2024

On 27 March 2024, the Australian Government published the first reading draft of the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (New Bill), which superseded the previous exposure draft of the Treasury Laws Amendment Bill 2024: Climate-Related Financial Disclosure (Exposure Draft). It was read a second time on 15 May 2024.

This follows the release by the Australian Accounting Standards Board of the draft Australian Sustainability Reporting Standards - Disclosure of Climate-related Financial Information (Draft ASR Standards) published on 23 October 2023.

The New Bill proposes that certain reporting entities under Chapter 2M of the Corporations Act 2001 (Cth) (Corporations Act) be required to prepare and publish annual sustainability reports in accordance with the Draft ASR Standards (Sustainability Reports). The Sustainability Reports will be in addition to the directors’ report, financial report and, where relevant, auditor’s report required to be included in each reporting entity’s annual report. For further information on the contents of Sustainability Reports, see K&L Gates’ previous alert here.

THE NEW BILL

Key Changes

The New Bill modifies a number of provisions previously contained in the Exposure Draft. The key changes include the following:

Topic Exposure Draft New Bill Notes
Start Date for Reporting Requirements Group 1 – from 1 July 2024
Group 2 – from 1 July 2026
Group 3 – from 1 July 2027
Group 1 – from 1 January 2025
Group 2 – from 1 July 2026
Group 3 – from 1 July 2027
The start date for Group 1 reporting entities has been delayed by a minimum of six months for entities with a calendar financial year and a full year for entities with a financial year ending on 30 June. This is a welcome change and provides Group 1 reporting entities with additional time to implement the practices and procedures required to prepare Sustainability Reports.
Limited Immunity

Limited immunity applies between 1 July 2024 and 30 June 2027 (Immunity Period) for statements made in Sustainability Reports relating to scope 3 emissions and scenario analysis.

During the Immunity Period, no actions may be brought in respect of those statements, unless the action is either:

  • Criminal; or
  • A civil action, brought by the Australian Securities and Investments Commission (ASIC) , where:
    • The action has a fault element; or
    • The only remedy sought is an injunction or declaration.

Increased scope: Limited immunity has been extended to:

  • Include forward-looking statements related to climate and for transition plans included in Sustainability Reports; and
  • Statements made about such matters in mandatory disclosures such as product disclosure statements and under the ASX continuous disclosure regime.

Revised Immunity Period: Limited immunity applies for different periods depending upon the type of statement.

The period is three years after the start date (see above) in respect of statements regarding scope 3 greenhouse gas emissions, scenario analysis or transition plans.

However, the immunity period is only 12 months after the start date in respect of a forward-looking statement related to climate.

Actions: During the relevant immunity period, actions may only be commenced by ASIC or if criminal in nature.

These updates bring welcome changes in having limited immunity apply to forward-looking statements and mandatory disclosures.

However, the immunity does not extend to voluntary disclosures such as on websites, in marketing materials and in investor presentations.

The New Bill also removes the previous limit on ASIC’s enforcement powers. ASIC may now make claims attracting a civil penalty including in respect of statements which may amount to misleading or deceptive conduct.

ASIC Directors

During the Immunity Period, ASIC may direct an entity, if it considers a statement in that entity’s Sustainability Report is incorrect, incomplete or misleading, to do any of the following:

  • Confirm that statement is correct or complete to ASIC;
  • Explain the statement to ASIC; or
  • Correct the statement in accordance with the direction.

Before issuing a direction, ASIC must first hold a hearing with the entity and allow it to make oral or written submissions.
 

If ASIC considers that a statement in a Sustainability Report is incorrect, incomplete or misleading, it may direct the entity to do any of the following:

  • Any of those things in the Exposure Draft;
  • Give information or documents that could substantiate or support the statement to ASIC; or
  • Publish corrected statements and provide corrected statements to specified persons.

Before issuing a direction to publish or provide a corrected statement, ASIC must first hold a hearing with the entity and allow it to make oral or written submissions.

ASIC’s powers to direct an entity to do something are now permanent and not applicable only for the Immunity Period.

ASIC’s powers have also been expanded to demand:

  • Supporting documentation; and
  • That a corrected, completed or amended statement be published or given to specified persons.

The New Bill also introduces a new “reasonable time” requirement for compliance with a direction.

Entities should be prepared to respond to ASIC’s enquiries by collating and keeping all information to support all statements made in a Sustainability Report for seven years.

Audit and Assurance Default position: An entity’s Sustainability Report must be audited in full from 1 July 2030. 

Transitional provisions: Between 1 July 2024 and 30 June 2030, the Sustainability Report need only be “reviewed” by an auditor and only in respect of scope 1 and scope 2 greenhouse gas emissions.

Default position: An entity must have its Sustainability Report for a year audited.

Transitional provisions: Sustainability Reports relating to periods commencing before 30 June 2030 must be reviewed or audited in accordance with the auditing standards.

The Auditing and Assurance Standards Board (AUASB) will make auditing standards to determine if Sustainability Reports need to be audited or reviewed before 1 July 2030.

The AUASB is currently consulting on proposed phase-in assurance requirements before 1 July 2030.

Director’s Declaration Directors are required to declare whether, in their opinion, the Sustainability Report complies with the requirements under the Corporations Act and international sustainability reporting standards. Default position: Directors are required to declare whether, in their opinion, the Sustainability Report complies with the requirements under the Corporations Act, including the Draft ASR Standards.

Transitional provisions: During the first three years after the initial start date, the transitional provisions modify this position such that the director is only required to state whether, in their opinion, “the entity has taken reasonable steps to ensure the substantive provisions of the Sustainability Report” comply with the Corporations Act.

The New Bill provides that the Minister may issue legislative instruments to require disclosure on sustainability issues beyond climate-specific statements (e.g. on the environment and nature in general).

The transitional provisions provide welcome relief to directors during the initial three-year period, who may not have the benefit of full audits unless otherwise specified in the new auditing standards.

Directors are no longer required to declare that the Sustainability Report complies with international sustainability reporting standards.

However, directors should be mindful that the precise scope of a Sustainability Report is subject to expansion by ministerial order. 

INQUIRY INTO THE NEW BILL

Senate Economics Legislation Committee Review

On 3 May 2024, the Senate Economics Legislation Committee (Committee) published its findings on its enquiry into the New Bill.

Some of the insights that the Committee received during the various consultations include:

  • Broad support – the proposed climate-related reporting regime received broad support from stakeholders;
  • Delayed commencement – while the Australian Institute of Company Directors (AICD) supported the delayed start date of 1 January 2025, the Australian Securities Exchange advocated for an even longer delay, stating that “rushed implementation would not only negatively impact reporting entities, investors and efficient capital allocation, but may undermine the credibility of the regime and jeopardise Australia’s attractiveness as an investment destination for global capital”;
  • ASIC enforcement – ASIC noted that it is developing regulatory resources to assist entities while they will need to undergo “significant capacity building” to comply with the new regime; and
  • Modified liability – while certain activist groups did not support the expanded modified liability regime, with the Environmental Defenders Office labelling it as a “regressive step that removes important accountability mechanisms”, many submissions supported the expanded modified liability regime (under the New Bill), including the AICD which commented that “removing or reducing the modified liability regime could undermine the aims of mandatory climate reporting”.

The Committee concluded that:

  • The four-year phased-in approach is welcome and appropriate; 
  • The modified liability provisions are critical to allow entities to phase in the new reporting, noting that reporting entities will still be accountable to ASIC; 
  • The reduced compliance burdens for Group 3 entities (for financial years in which they do not have material climate-related financial risks or opportunities) are welcome; and
  • The New Bill should be passed.

ASIC’s Guidance

On 22 April 2024, ASIC Chair Joe Longo welcomed the New Bill, noting the following in his speech:

  • Reporting entities should start putting into place the systems, processes and governance practices that will be required to meet the requirements as soon as possible; 
  • ASIC acknowledges the potential complexities with the new requirements, and entities should expect more clarity as things firm up over time, including new resources released by ASIC;
  • Entities can start by reporting under the Task Force on Climate-Related Financial Disclosures framework, and it may be useful to begin engaging with the International Sustainability Standards Board standards (upon which the ASR Standards are presently based with certain modifications) through the report preparation process to test and analyse capabilities, data availability and requirements against the new standards; and
  • Whilst the reporting requirements will impose costs and new obligations, they also create opportunities, including enabling entities to benefit from greater visibility of the physical and transitional risks.

HOW CAN WE HELP?

While the New Bill may change before enactment, directors of reporting entities should be seeking appropriate advice and taking action to set up or augment the entity’s governance, strategy, personnel and verification processes required to support making these mandatory disclosures. 

Failure to do so in a timely manner may expose directors and reporting entities to adverse market and regulator scrutiny in addition to potential liability.

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