The draft legislation amends the Australian Securities and Investment Commission Act 2001 and the Corporations Act 2001 (Cth) to introduce standardised, internationally aligned reporting requirements for businesses to ensure they are making high-quality climate-related financial disclosures.

Under the reforms, entities that lodge financial reports under Chapter 2M of the Corporations Act, meet certain minimum size thresholds or have emissions reporting obligations under the National Greenhouse and Energy Reporting (NGER) scheme will be required to make disclosures relating to climate in accordance with sustainability standards made by the Australian Accounting Standards Board (AASB).

Transition period

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As previously announced, the new obligations will be phased in over a period of four years.

Entities that are in group 1 under the reforms will need to prepare an annual sustainability report for the financial year that commences between 1 July 2024 and 30 June 2025 and between 1 July 2025 and 30 June 2026.

A group 1 entity is an entity that meets at least two of the following three criteria:

• The consolidated revenue of the entity (and the entities it controls) is equal to or greater than $500 million.
• The value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $1 billion.
• The entity (and the entities it controls) have at the end of the financial year, 500 or more employees.

A group 2 entity is any of the following:

An entity that meets at least two of the following three criteria:

• The consolidated revenue of the entity (and the entities it controls) is equal to or greater than $200 million.
• The value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $500 million.
• The entity (and the entities it controls) have at the end of the financial year, 250 or more employees.

At the end of the transition period, entities will also be required to report where they meet at least two of three criteria:

• The consolidated revenue of the entity (and the entities it controls) is equal to or greater than $50 million.
• The value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $25 million.
• The entity (and the entities it controls) have at the end of the financial year, 100 or more employees.

The explanatory memorandum (EM) also stated that extensive climate statements will not be required from smaller entities that do not have material risks or opportunities for the financial year.

“If an entity required to prepare a climate statement does not have material climate risks or opportunities for the financial year, the entity’s climate statement will only include a statement to that effect, made in accordance with the sustainability standards that relate to climate,” it stated.

Climate disclosures will be subject to similar assurance requirements to those currently in the Corporations Act, which require entities to undertake mandatory audit and assurance of financial reports.

“The sustainability disclosure report would be audited by the auditor of the financial report supported by technical climate and sustainability experts where appropriate,” the EM said.

“AUASB will develop assurance standards in line with the IAASB final standard. The AUASB will also set out a pathway for phasing in requirements over time, which would commence with assurance of Scope 1 and 2 emissions disclosures from 1 July 2024 onwards and end with assurance of all climate disclosures made from 1 July 2030 onwards.”

Strict liability offences for auditors

The amendments also introduce several new strict liability offences that support the new auditing and assurance requirements.

“The lead auditor of the firm or audit company conducting a review must ensure the audit or review is conducted in accordance with the standards. Contravention of this requirement is both a fault-based offence (with a penalty of two years imprisonment) and one of strict liability,” the government warned.

“Strict liability is appropriate in these circumstances, as it is necessary to strongly deter misconduct that can cause serious detriment to investors and regulators relying on auditors’ declarations.”

The EM said the specialised role of auditors means that it is appropriate for a person to be penalised if they contravene the requirements by not complying with the strict requirements to conduct an audit in line with relevant standards, not retaining audit records as required or not providing the necessary declarations in relation to auditor independence requirements or adherence to codes of professional conduct.

“The strict liability offences mirror similar offences relating to financial record keeping.”

Treasurer Jim Chalmers said the reforms will give investors and companies the transparency, clarity, and certainty they need to invest in new opportunities as part of the net zero transformation.

“This is an important step for improving transparency and will help investors and companies make more informed investment decisions and lay the foundation for a stronger, more robust financial system,” said Dr Chalmers.

“The government is taking a balanced approach with these changes following extensive consultation with industry, investors, academics, and regulators.

“The draft legislation gives companies the opportunity to build capacity to make high-quality climate risk disclosures by providing early visibility of the proposed reporting requirements and expand the breadth of entities required to report over time.”

Consultation for the draft legislation will end on 9 February 2024.