Updated Bill to Introduce Climate-Related Financial Reporting Regime

Background

The Australian Government released the first reading draft of the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (New Bill) on 27 March 2024, which superseded the previous exposure draft of the Treasury Laws Amendment Bill 2024: Climate-Related Financial Disclosure released on 12 January 2024 (Exposure Draft).

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 as previously reported by K&L Gates.

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 currently required directors’ report, financial report and, where relevant, auditors’ report included in each reporting entity’s annual report. For further information on the contents of Sustainability Reports, see K&L Gates’ previous alert here.

Key Changes

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

• Commencement dates – the start date for reporting by 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 compliant Sustainability Reports.
• Limited immunity – the Exposure Draft previously introduced a limited immunity for statements made in a Sustainability Report between 1 July 2024 and 30 June 2027 relating to Scope 3 greenhouse gas emissions and scenario analysis (Uncertain Statements). During this period, no actions may be brought in respect of the Uncertain Statements in Sustainability Reports, other than where the actions are (1) criminal in nature or (2) brought by the Australia Securities and Investments Commission (ASIC) where either the action has a fault element or ASIC is seeking an injunction or a declaration. The New Bill modifies this limited immunity in three key ways:
  • Repeating Uncertain Statements – the limited immunity will now extend to where the Uncertain Statements of Sustainability Reports are repeated, corrected or amended in some other disclosure or statement required by law (such as, for example, announcements made on the ASX or product disclosure statements), but note that the limited immunity does not extend to voluntary disclosures in other forums (such as, for example, marketing materials that refer to Uncertain Statements of Sustainability Reports).
  • ASIC enforcement powers – ASIC will now be able to bring any action in respect of the Uncertain Statements in the Sustainability Reports, and its enforcement powers are no longer limited.
  • Future protected statements – there is now a 12 months’ safe harbour from civil liability for forward looking statements made in a Sustainability Report.
• Directors’ declaration – during the first three years of the climate-related financial reporting regime, directors will only have to declare that, in their opinion, the entity has taken reasonable steps to ensure that the Sustainability Reports comply with the Corporations Act. After this period, directors will need to declare that the Sustainability Reports comply with the Corporations Act. This is a helpful change from the previous position which required directors to declare compliance from the start without the benefit of an auditor’s report (which could potentially only be required from 1 July 2030).

Next steps

The New Bill was referred to the Senate Economics Legislation Committee which published its report on 3 May 2024 (Draft Bill Report). While it is unclear when the New Bill (either in a similar form or amended based on the Draft Bill Report) will be passed, the change to the commencement date is a strong signal that it is unlikely to clear parliament before 30 June 2024.

RIAA Launches the Sustainability Classifications Initiative – A Benefit for All 

At its conference on 1–2 May 2024, Responsible Investment Association Australasia (RIAA) launched its Sustainability Classifications Initiative. 

The new initiative has been designed to help consumers and advisers compare the varying degrees of consideration given to sustainability factors in certain investment products. For investment product issuers, the Sustainability Classification represents an opportunity to align tailored investment products with sustainability and responsible investment-focussed investors. 

RIAA’s Sustainability Classifications cover three key levels, being ‘Responsible’, ‘Sustainable’, and ‘Sustainable Plus’. The criteria and thresholds required for an investment product to obtain one of these three classifications have been developed to consider responsible investment approaches, claims, processes, stewardship programs and disclosures, focussing on how the investment product takes environmental, social and governance (ESG) factors into consideration and the degree to which sustainability is addressed or targeted. According to Hamish Chamberlayne, head of global equities at Janus Henderson Investors, the Sustainability Classifications are designed to ‘build trust in the marketplace’. 

The Sustainability Classification aligns certified investment products with leading international regulation, including that of the United Kingdom’s Financial Conduct Authority and the United States’ Securities and Exchange Commission. The interoperability of the certification with international standards represents an opportunity for consumers in Australia and globally to more practically seek out ESG-focussed investment products. Guneet Rana, head of responsible investment at Colonial First State, said ‘there is a need for that wholeness of common language for the adviser to communicate with and offer a customer…In the end we want that customer to be able to make an informed choice.’ 

As consumers continue to demand more quality, true-to-label products underpinned by reliable fit-for-purpose investment processes and support by above-market disclosures, initiatives like RIAA’s Sustainability Classifications will be important tools for industry players to communicate their investment products to intended consumer target markets.

ASIC Consultation Opens on Updated Licensing Guidance for Carbon Market Participants 

On 6 May 2024, ASIC released a consultation paper on proposed updates to its regulatory guidance for participants in the carbon market in relation to Australian financial services (AFS) licensing requirements.

The Safeguard Mechanism (Crediting) Amendment Act 2023 (Cth), which commenced on 1 July 2023, introduced legislated baseline targets for the net greenhouse gas emissions of certain large industrial facilities (Safeguard Facilities) and implemented a civil penalty where Safeguard Facilities exceeded their baseline targets. The reforms also allow the Clean Energy Regulator to issue Safeguard Mechanism Credits (SMCs) from January 2025 to Safeguard Facilities that adhere to their baseline targets. 

The consultation paper proposes updates to ASIC’s Regulatory Guide 236 - ‘Do I need an AFS licence to participate in carbon markets?’ (RG 236) to address the implications of the safeguard mechanism reforms to the financial services and markets section of the Corporations Act, as well as changes in the regulatory landscape for carbon markets, particularly Australian carbon credit units, that have occurred since RG 236 was last reissued in May 2015.

Key updates to RG 236 include expanded guidance on:

• The inclusion of SMCs as eligible international emissions units regulated as a financial product under the Corporations Act; and
• When a person may be providing a financial service in relation to regulated emissions units (including SMCs) for the purposes of the Corporations Act.

ASIC invites feedback from safeguard facilities, advisers, intermediaries and participants in the carbon markets on its proposals by 3 June 2024. Updates to RG 236 and as required to Information Sheet 156 - Regulated emissions units: Applying for or varying an AFS licence are expected to be finalised and published in the second half of 2024. 

State Sponsored Greenwashing

The Australian Competition and Consumer Commission (ACCC) alleges that a range of Australia’s biggest companies may be engaging in ‘state-sponsored greenwashing’ by using the Commonwealth Government’s Climate Active Carbon Neutral labelling program (Program) to certify their carbon neutrality credentials despite there being significant issues with the Program. 

The Climate Active label is being used by approximately 700 companies (including large ASX listed entities, banks and telcos) as well as products, buildings and events that pay an annual licence fee to be called carbon neutral with the government’s backing despite the ACCC not approving the Program. 
Under the Program, products can be labelled as ‘Climate Active certified’ if they measure, reduce and report on their emissions in exchange for a licence fee although the metrics are self-verified and reported. 

On 22 April, the ACCC said that while it had not made a final determination on the Program, it had been suspended after several attempts at clarifying its rules. The rules for the Program will be redrafted and then the whole Program will be reviewed. 

Australia Institute climate and energy director Polly Hemming said that the fact companies were using the certification despite the concerns and no formal approval may amount to greenwashing. Ms Hemming said that the Program was encouraging greenwashing and misleading consumers into thinking businesses or products with the stamp were actively taking climate-positive actions when that may not necessarily be the case. 

Dhawura Ngilan: The Role of Investors in Protecting First Nations Heritage

The Australian legislative framework has often been challenged on its ability to protect First Nations cultural heritage and there are allegations it is currently out of step with international legal standards, including the United Nations Declaration of the Rights of Indigenous Peoples.

RIAA has come together with the First Nations Heritage Protection Alliance and UN Global Compact Network to produce Dhawura Ngilan (Remembering Country): A Vision for Aboriginal and Torres Strait Islander Heritage, a comprehensive guide (Guide) on ‘free, prior and informed consent’ (FPIC) and First Nations heritage, for businesses and investors.

Rachel Perkins, prominent Australian film and television director, and Arrernte and Kalkadoon woman, publicised the launch at the RIAA Conference 2024 held in Sydney on 1 May 2024.

The Guide directs the private sector to contribute to a new standard of First Nations-led best practice for cultural heritage management in Australia, setting out practical advice on how to manage portfolios in a way that will identify and eliminate or mitigate negative impacts on Country, heritage sites, knowledge and places as agreed by First Nations communities through a process of FPIC.

Investors can implement Dhawura Ngilan across investment activities, including by:

• Incorporating cultural heritage considerations into a range of responsible investment approaches and considering impacts on cultural heritage through cause, contribution or direct link;
• Using stewardship to incorporate cultural heritage as part of engagement and voting, on behalf of clients and beneficiaries, to monitor performance and hold investee companies accountable for their public commitments and to ensure FPIC;
• Assessing fund managers or specific investments;
• Ensuring boards and management teams have oversight and a governance commitment to the upholding of human rights in interactions between companies, suppliers, investors and asset owners; and
• Incorporating monitoring of fund managers, companies or assets and reporting on cultural heritage into existing monitoring and reporting.

As stewards of capital, investors are best placed to decide where funds are invested and to influence corporate behaviour for their clients or beneficiaries’ best financial interests. Dhawura Ngilan presents an opportunity for the private sector to go beyond legislative standards and actively contribute to First Nations heritage in Australia.

THE VIEW FROM ABROAD

European Union Postpones ESG Corporate Disclosures to 2026 

In its communication to the European Parliament in March 2023, ‘Long-term competitiveness of the EU: looking beyond 2030’, the Commission identified reporting as one of the main burdens for companies, particularly small to medium sized enterprises.

Current EU law requires listed companies to disclose information about the risks and opportunities arising from social and environmental issues. On 29 April 2024, the European Council adopted a directive to postpone the adoption of sector-specific sustainability reporting standards for EU companies and general sustainability reporting standards for non-EU companies by two years to 30 June 2026. This will allow companies to focus on the implementation of the first set of European Sustainability Reporting Standards and limit the reporting requirements to the minimum required. It will also allow more time to develop these sector-specific sustainability standards and standards for non-EU companies. Further details are provided on the European Council's press release. 

The United States Streamlines Environmental Reviews for Clean Energy Projects

The US government has introduced changes to the federal permitting process, aimed at accelerating the development of infrastructure and clean energy projects across the United States. These reforms are designed to enhance the speed and efficiency of the project approvals processes. By expediting these processes, it is hoped that critical infrastructure projects will commence and be completed sooner. 

The key changes introduced for future sustainable projects include:

• Establishment of deadlines – strict timelines for completing environmental reviews of two years for comprehensive environmental impact statements and one year for less extensive assessments;
• Simplification of procedures – environmental documents will be shorter and more understandable to promote greater accessibility by all stakeholders;
• Expansion of categorical exclusions – the use of categorical exclusions has been broadened, which allows for the fastest form or environmental review for projects deemed to have minimal impacts;
• Accelerated job delivery – by streamlining the permitting process, it facilitates quicker launches and completion of projects;
• Economic and job growth – the reforms are expected to stimulate economic growth by creating numerous high-paying jobs, particularly in the growing clean energy and technology sector;
• Enhanced environmental and community outcomes – by focusing on reducing environmental impacts and increasing community involvement, the new process aims to achieve better environmental and community outcomes, thereby reducing potential conflicts and legal challenges; and
• Sustainability and durability – the reforms encourage projects that are expedited, sustainable and durable, which aligns with long-term environmental and social goals.

By focusing on efficiency, environmental protection and enhanced public engagement, the US Government hopes it will facilitate faster development of infrastructure and clean energy projects, which will ultimately contribute to a more sustainable future. 

Access the White House Fact Sheet here.

Additional Authors: Rynier Brandt, Dhivya Kalyanakumar, Bernard Sia, Cathy Ma, Nathan Bodlovich, Harrison Langsford